BANGKO MABUHAY (A RURAL BANK), INC. ANNUAL REPORT 2017 · Inc. thru the Purchase of all its assets...

BANGKO MABUHAY (A RURAL BANK), INC.

ANNUAL REPORT 2017

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1. Corporate Policy

a. Bank’s Vision and Mission Statements

Corporate Mission

Consistent with the statement “the bank works as the engine of economy Bangko Mabuhay (A Rural Bank),

Inc., is committed to contribute to the national development through effective financial intermediation,

optimization of its resources and professionalism in the banking industry.

Corporate Vision

In attaining its financial strength, the bank envisions to be a leader in the rural banking industry. The bank

also aims to expand its products and services, being constantly guided by its corporate vision and

commitment to continuous improvement and development not only its services, but also the human

resources as well.

b. Introduction of the Bank’s Brand

Bangko Mabuhay (A Rural Bank), Inc. is a private, stock corporation engaged in the business of savings and

mortgage banking. It provides the public with financial services such as loans, deposit, bills payment and

remittance. Originally incorporated in 1972 bearing the name “Rural Bank of Tanza (Cavite), Inc.”, the Bank

started as a one unit bank in Tanza, Cavite until it established three (3) branches within the Province of

Cavite in the mid-90s, at the same time, adopted its business name “Bangko Mabuhay”.

In 2013, the Monetary Board of the Bangko Sentral ng Pilipinas (BSP) approved the agreement of

consolidation between the Bank and Rural Bank of Teresa (Rizal) Inc. (RB Teresa) to create a new

consolidated bank to be known as Bangko Mabuhay (A Rural Bank), Inc. The Securities and Exchange

Commission (SEC) approved the registration of consolidation in January, 2015. On March 23, 2015, the BSP

granted the authority to operate the consolidated bank which commenced operation on April 1, 2015.

In line with the Bank‟s strategic plan to expand its branch network, the Bank acquired Rural Bank of Mendez,

Inc. thru the Purchase of all its assets and Assumption of all liabilities (P&A) in 2016.With over 60 thousand

customer accounts and eleven (11) business locations in the Provinces of Cavite, Rizal and Occidental

Mindoro, the Bank offers a wide array of retail banking services – deposit products including checking and

savings deposit, time deposit and Automated Teller Machine (ATM) accounts; loans such as microfinance,

consumer, and real estate mortgage loans; and other services namely bill payment and remittance service.

c. Business model of the Bank

Bangko Mabuhay‟s business model is driven by the targeted market‟s financial services needs as summarized in the table below showing the bank‟s products and services and corresponding target market:


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A. Deposit Products Site of Product Availability

Target Market

1. Regular savings account Head Office Branches Branch-lites

Individuals SSS Pensioner Microfinance clients SMEs Salary loan clients

2. ATM savings account Head Office Branches

Individuals Private Company employees Microfinance clients

3. Mabuhay Special Savings 4. Regular Time Deposit

Head Office Branches

Individuals and juridical entities

5. Long Term Non-Negotiable Time Deposit


Individuals

6. Checking Account Head Office Branches

Individuals SMEs Corporate clients

B. Loan Products

1. Microfinance Head Office Branches Branch-lites

Micro-entrepreneurs

2. SME/business Loan Head Office Branches

Small and medium enterprises (individuals or juridical entities)

3. Corporate Loan Head Office Branches

Corporate clients

4. Salary Loan Head Office Branches

Private Company employees Government employees

5. Housing Loan Head Office Branches

Individual – for residential purpose

6. Other consumer/purpose loans Head Office Branches

Individuals

7. Other Purpose Loan Head Office Branches

Individuals

C. Remittance Service (1) Western Union (2) TransFast (3) G-Cash Remit (4) BDO Remit (5) Uniteller


OFW families/beneficiaries Individuals for domestic money transfer

D. Bills payment (1) BayadCenter

Head Office Molino Branch Indang Branch Naic Branch Mendez Branch Alfonso Branch Manggahan Branch-lite

Customers of Various Utility Companies and other bills payment merchants

E. SSS Collecting and Paying Agent


SSS members and pensioners


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2. Financial Summary/ Financial Highlights

2017 2016

Profitability

Total net interest income 109,749,106 105,373,705

Total Non-interest income 51,680,632 57,963,314

Total Non-interest expense 123,266,736 120,309,827

Pre-provision profit 38,163,002 43,027,192

Provision for credit losses 6,963,856 7,472,425

Net Income 24,304,896 25,953,357

Selected Balance Sheet Data

Liquid Assets 988,730,749 852,501,462

Gross Loans 519,218,886 520,747,550

Total Assets 1,674,841,485 1,560,484,985

Deposits 1,360,678,227 1,256,253,311

Total Equity 268,367,009 259,729,113

Selected Ratios

Return on equity 9.23 10.52

Return on assets 1.51 1.76

Past Due Ratio 19.41 19.74

Capital Adequacy Ratio 17.50 16.14

Headcount

Officers 19 18

Staff 156 150

3. Financial Condition and Results of Operation

a. Review of Bank’s operations and result of operations for the financial year

The Bank‟s total assets rose 7.33% to P 1.675 Billion, while deposits increased by 8.36% to P1.361 Billion. Equity grew by 3.35% to P 268 Million. On the other hand, loan portfolio dipped 0.38% to P 519 Million. Past Due ratio stood at 19.41% in 2017 and 19.74 in 2016, still higher than industry level. Net interest income increased 4.15% to P 110 Million, while non-interest income fell 10.84% to P 52 Million. Non-interest expense rose 2.46% to P 123 Million. As a result, the Bank experienced a 6.35% drop in net income to P 24 Million.

b. Highlight of major activities during the year that impact operations In November, 2017, the Bank relocated its Branch from Galicia, Mendez, Cavite to Bgy. Luksuhin-Ibaba, Alfonso, Cavite. The accounts of the said relocated branch were transferred in another branch in Mendez, Cavite. The new branch site was previously operated by the Bank as a microbanking office (MBO). The said MBO will be relocated to another site within one year from the date of its temporary closure. Such move would result into expansion of operation of the Bank.


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c. Major strategic initiatives of the bank

The Bank, with its expansion of operation through consolidation and acquisition of other rural banks as its strategic plan in 2015 and 2016 thereby increasing its branch network from four to eight branches, initiated to improve its Core Banking System through the migration from decentralized to centralized bank operating systems in 2017. In December 2017, the said migration of system was first implemented at Head Office and will be eventually deployed to branches in 2018.

MB Philippines, Inc. (MBPHIL), the bank‟s Core Banking System provider for more than 20 years, has developed MBPHIL EXPRESS-O which will replace the existing system and is designed to centrally manage all banking operations at the Head office of the bank for speedy and efficient processing of banking transactions.

d. Challenges, opportunities, and responses during the year, if any

In order to push the banking industry towards full adoption of EMV technology at a much faster pace, the BSP has given its supervised financial institutions until 30 June 2018 to fully comply with the EMV requirement. Failure to do so will subject BSP Supervised Financial Institutions (BSFIs) to monetary sanctions provided under relevant provisions of BSP Regulations. In view thereof, the Bank is currently coordinating its EMV migration activities with BancNet, Inc, the Bank‟s ATM service provider, in order to comply with the BSP requirements and meet the deadline. As of December 31, 2017, the number of the Bank‟s ATM cardholders is 3,733.

4. Risk Management Framework Adopted

The Bank's risk management framework, aligned with BSP Circular No. 971 series of 2017, seeks to ensure that there is an effective process in place to manage risk across the Bank. The Risk Management program is driven by a formal approach and aligned with the organization‟s profile and strategic objectives, through formalizing roles within the organization, active committees, policies and procedures, reporting, communication, and technology. This program also produces various risk mitigation activities within the business units. The resulting strategic, financial, and operational risk mitigation activities are implemented to: 1) strengthen the organization; 2) reduce the potential for unexpected losses; and 3) manage the volatility experienced by the Bank.

a. Overall risk management culture and philosophy

Risk management is integral to all aspects of the Bank's activities and is the responsibility of all staff. Managers have a particular responsibility to evaluate their risk environment, to put in place appropriate controls and to monitor the effectiveness of those controls. The risk management culture emphasizes careful analysis and management of risk in all business processes. The Bank‟s risk management approach reflects its values, influences the culture and guides its operations, as such, is captured in policy statements, Board and management directives, operating procedures, training programs, and is demonstrated in daily activities by management and staff. The Bank‟s Risk Management Framework consists of structured and consistent risk management processes that are applied across the organization under the following principles:

i. The Bank is in the business of business of taking risks and therefore, risk must be managed and

controlled if it is measured consistently and accurately.


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ii. The Bank recognizes that an effective risk management system is a critical component of bank

management and a foundation for its safe and sound operation.

iii. The Risk Management process is a top-down process and shall continually operate at all levels within

the Bank. It is important to emphasize that each individual within the Bank has a role and must

participate in the process.

iv. The Bank shall promote a culture of risk awareness aligned on the expectations of Bank‟s regulatory

supervisors.

v. All bank‟s activities shall be in accordance with applicable legal and regulatory provisions of the

Philippines as well as to the Bank‟s internal policies and procedures.

vi. Policies and practices that generate incentives for inappropriate actions shall be avoided. These

include, but are not limited to overemphasis on short term performance results that ignore long term

risks, ineffective segregation of duties that allow misuse of assets or concealment of poor results, etc.

vii. It is the Bank‟s firm policy that liquidity will never be compromised for profitability.

b. Risk appetite and strategy

The Bank faces a broad range of risks doing business as a financial intermediary. These risks include its day‐to‐day operational activities which can be significant. These risks are managed through detailed processes that emphasize the importance of integrity, maintaining high quality staff, and accountability. In terms of operational issues, the Bank has a low appetite for risk. The Bank makes resources available to control operational risks to acceptable levels. The Bank recognizes that it is not possible or necessarily desirable to eliminate some of the risks inherent in its activities. Acceptance of some risk is often necessary to foster innovation within business practices. The Bank‟s Risk Appetite Statement considers the most significant risks to which the Bank is exposed and provides an outline of the approach to managing these risks. All strategic plans and business plans for functional areas must be consistent with this Statement. The Risk Appetite Statement is treated as a live and evolving document where its intent is challenged and discussed on a frequent basis. i. Strategic Risks. The Bank aspires to be among the country's top twenty rural bank measured by asset

size. This requires on‐going development and innovation in its operations through strategic plan. The Bank has a low appetite for threats to the effective and efficient delivery of its strategic plan. It recognizes that the actual or perceived inability to deliver strategic plan could have a significant impact on its ability to achieve its objectives as well as its reputation. The Bank's Board meets regularly to discuss actual performance vis-à-vis plan. A framework is in place to ensure the Bank‟s strategic plan is managed and reported on a consistent basis.

ii. Liquidity Risks. The Bank has a very low appetite for liquidity risks because these have significant

impact on the Bank‟s reputation. iii. Credit Risk. The Bank has a low appetite for credit risks. Risk tolerances for the Bank‟s credit activities

are approved by the Board. Performance against these measures is monitored and reported to the Board and Senior Management on a monthly basis.

iv. People and Culture Risks. The Bank's significant people and culture‐related risks include the

following:


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• Calibre of People – The Bank relies on motivated and high quality staff to perform its functions. It

aims to create an environment where employees are empowered to the full extent of their abilities. The appetite for losses to the value of the Bank's collective competencies, knowledge and skills is very low.

• Conduct of People – The Bank expects employees to conduct themselves with a high degree of

integrity, to strive for excellence in the work they perform and the outcomes they achieve, and to promote the public interest. The appetite for behaviors which do not meet these standards is very low. The Bank takes very seriously any breaches of its Code of Conduct.

• Work Health & Safety (WHS) – The Bank aims to create a safe working environment for all its staff,

where people are protected from physical or psychological harm. It has a very low appetite for practices or behaviors that lead to staff being harmed while at work.

v. Operational Risks. The Bank's appetite for specific operational risks is detailed below. Risks are

carefully analyzed in all the Bank's operational activities, including to ensure that the benefit of the risk control measures exceeds the costs of these measures.

(i) Information Technology Information Technology (IT) risks cover both daily operations and

on‐going enhancements to the Bank's IT systems. These include:

• Processing – Prolonged outage of the Bank‟s Core System: The Bank has a very low appetite

for risks to the availability of systems which support its critical business functions including those which relate to inter‐bank settlements, banking operations and financial markets operations. Maximum recovery times have been identified and agreed with each business area.

Information Security – Cyber‐attack on Bank‟s systems or networks: The Bank has a very low

appetite for threats to Bank assets arising from external malicious attacks. To address this risk,

the Bank aims for strong internal control processes and the development of robust technology

solutions.

On‐going Development - The implementation of new technologies creates new opportunities,

but also new risks. The Bank has a low appetite for IT system‐related incidents which are

generated by poor change management practices.

(ii) Fraud and Corruption. The Bank has no appetite for any fraud or corruption perpetrated by its staff. The Bank takes all allegations of suspected fraud or corruption very seriously and responds fully and fairly as set out in the Code of Conduct.

(iii) Physical Security. The Bank strives to provide a highly‐secure environment for its people and

assets by ensuring its physical security measures meet high standards. The Bank has a very low appetite for the failure of physical security measure.

(iv) Compliance. The Bank is committed to a high level of compliance with relevant law, regulation,

industry codes and standards as well as internal policies and sound corporate governance principles. Identified breaches of compliance will be remedied as soon as practicable. The Bank has no appetite for deliberate or purposeful violations of law or regulatory requirements.

(v) Information Management. The Bank is committed to ensuring that its information is authentic,

appropriately classified, properly conserved and managed in accordance with regulatory and business requirements. It has a very low appetite for the compromise of processes governing the


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use of information, its management and publication. The Bank has no appetite for the deliberate misuse of its information.

c. Bank-wide risk governance structure and risk management process

The Bank's risk management framework, aligned with BSP Circular No. 971 series of 2017, seeks to ensure that there is an effective process in place to manage risk across the Bank. Risk management is integral to all aspects of the Bank's activities and is the responsibility of all staff. Managers have a particular responsibility to evaluate their risk environment, to put in place appropriate controls and to monitor the effectiveness of those controls. The risk management culture emphasizes careful analysis and management of risk in all business processes. Risks are identified, assessed and managed at both an enterprise level („top‐down') and business level

(„bottom‐up'). The Risk Management Committee, which is chaired by a non-executive director, has oversight of these processes. This Committee meets at least once a month and provides a report on its activities to the Executive/ Credit Committee and the Audit Committee, and as well as the Board of Directors.

d. Money Laundering and Terrorist Financing Prevention Program

The Money Laundering and Terrorist Financing Prevention Program of the Bank, though its governing principles and standards, is primarily designed to protect the Bank, its employees, products, services and operations from being used for money laundering and terrorist financing purposes.

The Bank is committed to develop and implement an effective money laundering and terrorist financing prevention program, take appropriate action on detected or potential suspicious activity, comply with applicable anti-money laundering laws and regulations, and promote AML awareness among its employees.

5. Corporate Governance

This section comprehensively discusses the bank‟s corporate governance framework and corporate culture adopted by the bank. The following minimum information should be discussed in this section:

a. Overall corporate governance structure and practices

The Board of Directors is the highest authority in the matters of governance and managing the business of the Bank. The directors hold their office charged with the duty to exercise sound and objective judgment for the best interest of the bank. The Board is responsible to promote and adhere to the principles and best practices of corporate governance to foster the long-term success of the bank in fulfilling its mission and vision. The Board of Directors is composed of 11 members. The Board is assisted in its governance function by four (4) Board Committees on Executive/Credit, Audit, Corporate Governance, and Risk Management. All board committees report regularly to the BOD on their activities as follows:

Executive/ Credit Committee

The Executive/ Credit Committee safeguards the quality of the Bank‟s loan portfolio by applying prudent

risk acceptance criteria considering borrower‟s overall risk dimension amidst prevailing industry and

economic conditions. The Committee regularly meets to discuss, approve and endorse new credit

applications and to be promptly apprised with developments relating to watch listed and classified loan


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accounts. In addition to credit risk acceptance, the Bank‟s Credit Committee formulates credit policies

and also handles credit administrative support which includes credit investigation, insurance, securities

documentation and custodianship and disposal of non-performing assets.

Audit Committee

The Audit Committee is tasked primarily with assisting the Board in fulfilling its oversight responsibilities. The Committee reviews the Bank‟s financial information, its systems of internal controls and risk management, the audit process, and compliance with significant applicable legal, ethical and regulatory requirements. It monitors the Bank‟s compliance with approved internal policies and controls, as well as statutory regulations, emphasizing an accounting system that is compliance with prescribed Accounting Standards. The Committee facilitates free and open communication among Management, Compliance, Risk Management, Internal Audit, the external auditors, BSP examiners and the Committee. It enjoys sufficient authority to promote independence and to ensure broad audit coverage, adequate consideration of audit reports, and appropriate action on audit recommendations. It is also empowered, among others, to appoint, compensate and oversee external audit engagements, review and comment on internal and external audit reports; and resolve financial reporting disputes between management and the auditor.

Corporate Governance Committee

The Corporate Governance Committee assists the Board of Directors in fulfilling its corporate governance responsibilities. It reviews and evaluates the qualifications of all persons nominated to the Board as well as those nominated to other positions requiring appointment by the Board of Directors. The committee is responsible for ensuring the Board‟s effectiveness and due observance of corporate governance principles and guidelines. It oversees the periodic performance evaluation of the board and its committees and executive management; and also conducts an annual self-evaluation of its performance. The corporate governance committee decides whether or not a director is able to and has been adequately carrying out his/her duties as director based on its own assessment or the assessment of external facilitators, bearing in mind the director‟s contribution and performance (e.g. competence, candor, attendance, preparedness and participation).

Risk Management Committee

Risk Management Committee is responsible for the development and oversight of the bank's risk management program. The members of the risk oversight committee must possess a range of expertise as well as adequate knowledge of bank's risk exposures to be able to develop appropriate strategies for preventing losses and minimizing the impact of losses when they occur. It oversees the system of limits to discretionary authority that the Board delegates to management, ensures that the system remains effective, that the limits are observed and that immediate corrective actions are taken whenever limits are breached. The risk oversight committee has access to external expert advice, particularly in relation to proposed strategic transactions, such as mergers and acquisitions.

b. Selection process for the Board and Senior Management

The Board recognizes that its Members as well as the Senior Management must have the appropriate skill set, as well as the necessary experience and commitment, to effectively contribute towards the growth of the Bank. The Directors and Senior Management are expected to remain fit and proper for the duration of their terms. They should possess unquestionable credibility to make decisions objectively and resist undue influence.


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The Director shall treat board directorship as a profession and shall have a clear understanding of his/her duties and responsibilities as well as his/her role in promoting good governance.

c. Board’s Over-All Responsibility

The Board of Directors, composed of eleven (11) directors, is primarily responsible for defining the Bank's vision and mission. The Board has the fiduciary responsibility to the Bank and all its shareholders including minority shareholders. It approves and oversees the implementation of strategies to achieve corporate objectives. It likewise approves and oversees the implementation of the risk governance framework, the systems of checks and balances, establishment of a sound corporate governance framework. The Board of Directors approves the selection of the Chief Executive Officer and key members of Senior Management and control functions and oversees their performance.

d. Role and Contribution of Executive, Non-executive, and Independent Directors, and of the Chairman

of the Board

The President & General Manager is an executive director who is responsible in the general supervision, administration and management of the Bank. There are ten (10) non-executive directors who are responsible for oversight function on the business and affairs of the Bank, and one (1) of whom is an independent director. To meet the criteria of independence, an independent director is not involved in the day-to-day management of the Bank, does not participate in any of its business dealings, and is not an owner of more than 2% of the outstanding shares, among others. The Chairperson of the Board, who provides leadership in the board of directors, is responsible for:

effective functioning of the board of directors, including maintaining a relationship of trust with members

of the board of directors;

Overseeing the meeting agenda focuses on strategic matters including discussion on risk appetites,

and key governance concerns;

Ensuring a sound decision making process;

Encouraging and promoting critical discussion to ensure that dissenting views can be expressed and

discussed within the decision-making process;

Ensuring members of the board of directors receives accurate, timely, and relevant information;

Ensuring the conduct of proper orientation for first time directors and provides training opportunities for

all directors; and

Ensuring conduct of performance evaluation of the board of directors at least once a year.


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e. Board composition

Name of Director Type of directorship

No. of years served as director

Number shares held

Percentage of ownership

Edwin S. Fojas Chairman/ Executive

32 103,414 5.48%

Raymundo A. Del Rosario Non-executive 27 157,630 8.35%

Joselito C. Fojas Non-executive 4 4,497 0.24%

Elena J. Malabanan Non-executive 30 158,597 8.40%

Emmanuel P. Santos Non-executive 5 295,552 15.65%

Misael P. Santos Non-executive 1 10,798 0.57%

Purificacion N. Garcia Non-executive 27 81,808 4.33%

Marcus Ashley C. Arayata Non-executive 5 30,931 1.64%

Anita F. Carbonel Non-executive 7 2,970 0.16%

Maria Criselda M. Fojas Non-executive 4 7,434 0.39%

Roberto U. Teo Independent 1 1 -

f. Board qualification

Name of Director Relevant Qualifications/ experience

Age Nationality

1. Edwin S. Fojas AB- BSC Masters in Business Management

66 Filipino

2. Raymundo A. Del Rosario B.S. Commerce 68 Filipino

3. Joselito C. Fojas BS Industrial Engr.; Masters in Business Management

66 Filipino

4. Elena J. Malabanan BS-Medicine 79 Filipino

5. Emmanuel P. Santos BS-Medicine 56 Filipino

6. Misael P. Santos BS-Medicine Filipino

7. Purificacion N. Garcia B.S.-Education 80 Filipino

8. Marcus Ashley C. Arayata A.B. –Political Science 39 Filipino

9. Anita F. Carbonel BS-Medicine 70 Filipino

10. Maria Criselda M. Fojas Bachelor of Laws 30 Filipino

11. Roberto U. Teo BSC Chemical Engineering/ Masters in Business Management

68 Filipino


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g. List of board-level committees including membership and function

Board Level Committees Membership Function

Executive/ Credit Committee Edwin S. Fojas –Chairperson Members: Raymundo A. Del Rosario Emmanuel P. Santos Joselito C. Fojas

The Committee shall meet frequently as necessary and, acting as a loan committee, shall have the power to examine and approve or disapprove loans application.

Audit Committee Roberto U. Teo –Chairperson Members: Joselito C. Fojas Maria Criselda M. Fojas

-Oversee the financial reporting Framework -Monitor and evaluate the adequacy and effectiveness of the internal control system -Oversee the internal audit function and external audit function - Oversee implementation of corrective actions -Investigate significant issues /concerns raised

Corporate Governance Marcus Ashley C. Arayata – Chairperson Members: Joselito C. Fojas Maria Criselda M. Fojas

-Oversee the nomination process for members of the Board of Directors and for positions appointed by the Board of Directors - Oversee the continuing education program for the Board of directors - Oversee the performance evaluation process - Oversee the design and operation of the remuneration and other incentives policy

Risk Management Committee Emmanuel P. Santos - Chairperson Members: Elena J. Malabanan Anita F. Carbonel

-Oversee the risk management framework - Oversee adherence to risk appetite -Oversee the risk management function


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h. The Board of Directors was elected by the Stockholders in their annual meeting held on February 18, 2017.

The term of the directors is for one (1) year. The Board met 24 times in 2017. Hereunder is the report of

Directors‟ attendance at board and committee meetings during the election year up to December 31, 2017,

including the number of board and committee meetings and percentage attended by each director.

Name of Directors Board

number of meetings Attended

Audit Committee number of meetings Attended

Corporate Governance Committee Number of Meetings Attended

Risk Management Committee Number of Meetings Attended

Executive/ Credit Committee Number of Meetings Attended

No. % No. % No. % No. % No. % Edwin S. Fojas 22 90 29 76

Raymundo A. Del Rosario 22 90 21 55

Joselito C. Fojas 24 100 4 100 35 92

Elena J. Malabanan 24 100 12 100 12 100

Emmanuel P. Santos 24 100 12 100 31 82

Misael P. Santos 21 100

Purificacion N. Garcia 24 100

Marcus Ashley C. Arayata 19 90 8 80

Anita F. Carbonel 24 100 12 100

Maria Criselda M. Fojas 22 90 4 100 10 80

Roberto U. Teo 20 95 3 100

Total of Meetings Held During the Year

24 4 12 12 38

i. List of executive officers/senior management

Name Position Nationality Age Relevant qualifications/ experience

Edwin S. Fojas President & General Manager

Filipino 66 AB- BSC/ Masters in Business Management

Imelda D. Montenegro

Assistant General Manager/Comptroller

Filipino 54 BSC – Accounting

Basil A. Perea Compliance Officer Filipino 55 BSC - Accounting

j. Performance assessment program

The Assessment and Evaluation System of the Bank involves assessment of the activities or accomplishments of the Board, Committees and Individual Directors, Officers and Staff. The performance assessment program consists of the following steps:

Step 1 – Identification of Criteria and Expected Activities Step 2 – Methodology and Assessment Approach Step 3 – Assessment Timetable Step 4 – Corporate Governance and Operational Improvement Program Step 5 – Documentation Step 6 – Directives, Desired Actions and Areas of Improvements


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The Board of Directors, as a whole, in coordination with the Compliance Officer, conducts the self-assessment, assessment of committees and compliance officer; the Audit Committee assesses/evaluates the Internal Auditor; Senior Management is evaluated by the Corporate Governance Committee, while the other officers and staff are evaluated by the Assistant General Manager or by their respective supervisors. Management reports to the Board of Directors the results of the performance evaluation of officers and staff and shall provide recommendations based on the results of the rating. The recommendations maybe in the form of merit increase, promotions or both.

The Board of Directors, President and Supervisors document all its assessment activities for future reference. This is to ensure a common understanding of the corporate governance and operational improvement program, including improvement of bank personnel. It is also to assign clear accountability for its effective implementation both the program and the timetable for its implementation should be appropriately documented. The Board of Directors, President and Supervisors provide/set instructions to the ratee so as to improve the results of the assessment/ evaluation and of the Bank‟s operations as a whole. Such specific actions and recommendations commensurate with the issues identified and resulting assessment on the quality of corporate governance, operational activities and personnel improvement thru training will be part of the recommendation.

k. Orientation and Education Program

The Directors and Senior Management maintain professional integrity and continuously seek to enhance their skill, knowledge and understanding of the activities that the bank is engaged in or intends to pursue as well as the developments in the banking industry including regulatory changes through continuous education or training. Directors and Senior Management attend corporate governance seminar conducted by BSP accredited training providers, prior to, or at least immediately after, assumption of office.

l. Retirement and Succession Policy

The normal retirement date of Senior Management is upon his/her attainment of age sixty (60). However, the Board may approve extension of tenure of the President/ General Manager to remain active after his/her normal retirement date but not beyond 80 years old. On the other hand, the Bank does not impose mandatory retirement age for the Directors. Moreover, independent directors may only serve as such for a maximum cumulative term of nine (9) years, after which, the independent director shall be perpetually barred from serving as independent director in the Bank, but may continue to serve as regular director. The nine (9) year maximum cumulative term for independent directors shall be reckoned from 2012.

Succession Policy provides Bank‟s succession plan to identify and develop internal personnel with the potential to fill key or critical organization positions. The Bank‟s Succession Plan involves planning for smooth continuation and to manage gaps that will arise when individuals in key positions leave or are promoted.

m. Remuneration and Incentive Policy

Bangko Mabuhay provides rewarding careers by maintaining competitive compensation and benefits program for employees. The remuneration policy of the Bank applies to all employees including its senior officers. The relative value of each job and corresponding pay levels are determined by a competency-based job evaluation system. The Human Resources Department regularly reviews compensation policies and recommends changes through the Corporate Governance Committee for endorsement to the Board of Directors for approval.


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On top of the salaries, the Bank‟s employees, including its senior management, also receive other compensation and benefits such as:

Profit-sharing as provided by the Bank‟s By-laws

Performance-based incentives/merit bonus

13th month pay

Overtime pay

Leaves (Vacation, sick ,maternity, paternity, solo parent, and special leave for women)

Medical benefits (hospitalization and out-patient benefits for employees)

Financial assistance loans for officers and employees

Rice subsidy

Retirement benefits based on tenure and salary

i. Remuneration Policy and Structure for Executive and Non-Executive Directors

Executive and non-executive directors receive a per diem of P 7,500 for actual attendance at meetings. In no case, shall the total yearly compensation exceed 10% of the net income before tax of the Bank during the preceding year. The said directors also participate in the profit sharing as provided in the Bank‟s By-laws.

ii. Remuneration Policy for Senior Management

The Corporate Governance Committee determines and recommends the salaries of the President/General Manager and other two senior officers, namely, the Assistant General Manager and the Compliance Officer for endorsement to the Board of Directors for approval. The said senior officers are the top three (3) highest paid officers of the Bank.

n. Policies and procedures on related party transactions

The Bank recognizes that transactions between and among related parties create financial, commercial and economic benefits to individual institutions and to the entire group where said institutions belong. In this regard, it is the Policy of the Bank that related party transactions (RPT) are done on an arm‟s length basis. Towards this end, the Bank exercises appropriate oversight and implement effective control systems for managing said exposures as these may potentially lead to abuses that are disadvantageous to the bank and its depositors, creditors, fiduciary clients, and other stakeholders. The Board manages conflicts of interest or potential conflicts of interest and is responsible in:

Evaluating on an ongoing basis existing relations between and among businesses and counterparties to ensure that all related parties are continuously identified, RPTS are monitored, and subsequent changes in relationships with counterparties (from non-related to related and vice versa) are captured. Related parties, RPTs, and changes in relationships shall be reflected in the relevant reports to the board of directors and regulators/supervisors.

Evaluating all material RPTs to ensure that these are not undertaken on more favorable economic terms (e.g., price, commissions, interest rates, fees, tenor, collateral requirement) to such related parties than similar transactions with nonrelated parties under similar circumstances and that no corporate or business resources of the BSFI are misappropriated or misapplied, and to determine any potential reputational risk issues that may arise as a result of or in connection with the transactions. In evaluating RPTS, the Committee takes into account, among others, the following:

- The related party's relationship to the Bank and interest in the transaction;


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- The material facts of the proposed RPT, including the proposed aggregate value of such transaction;

- The benefits to the Bank of the proposed RPT; - The availability of other sources of comparable products or services; and - An assessment of whether the proposed RPT is on terms and conditions that are comparable

to the terms generally available to an unrelated party under similar circumstances. The Bank shall have in place an effective price discovery system and have exercised due diligence in determining a fair price for RPTs.

All RPTs that are considered material based on Bank's internal policies are be approved the board of directors which:

Ensures that appropriate disclosure is made, and/or information is provided to regulating and supervising authorities relating to the Bank's RPT exposures, and policies on conflicts of interest or potential conflicts of interest. The disclosure shall include information on the approach to managing material conflicts of interest that are inconsistent with such policies; and conflicts that could arise as a result of the Bank's affiliation or transactions with other related parties.

Directs Management to report to the board of directors on a regular basis, the status and aggregate exposures to each related party as well as the total amount of exposures to all related parties.

Ensures that transactions with related parties, including write-off of exposures are subject to periodic independent review or audit process.

Oversees the implementation of the system for identifying, monitoring, measuring, controlling, and reporting RPTs, including the periodic review of RPT Policies and procedures.

The details of material RPTs are discussed under Note 30 in the accompanying Notes to the Financial Statements.

o. Self-Assessment Function

i. Internal Audit and Compliance Functions

The internal audit function, with strict accountability for confidentiality and safeguarding records and information, is authorized full, free, and unrestricted access to any and all of the Bank‟s records, physical properties, and personnel pertinent to carrying out any engagement. It also has the authority to directly access and to communicate with any officer or employee, to examine any activity or entity of the bank, as well as to access any records, files or data whenever relevant to the exercise of its assignment. All employees are requested to assist the internal audit activity in fulfilling its roles and responsibilities. The internal audit activity also has free and unrestricted access to the Board. The compliance function remains sufficiently independent of the operations that it conducts compliance testing and evaluation to enable him/her to perform his/her duties in a manner, which facilitates impartial and effective professional judgments and recommendations. The compliance function has no operational responsibilities. The compliance function reports directly to the Board of Directors on a monthly basis. The head of compliance reports on a regular basis to senior management on compliance matters. The report refers to the compliance risk assessment that has taken place during the reporting period, including any changes in the compliance risk profile based on relevant measurements such as performance indicators, summary of any identified breaches and/or deficiencies and the corrective measures recommended to address them, and report on corrective measures already taken.


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ii. Review of Effectiveness and Adequacy of the Internal Control System

The Audit Committee provides assistance to the Board of Directors in reviewing the assurance reports of the Internal Audit Department covering the results of assessment on the adequacy and effectiveness of internal controls, risk management and governance processes, and in overseeing the financial management processes, the systems of internal accounting and financial controls, the performance and independence of the external and internal auditor, and annual independent audit of the Bank‟s financial statements. Internal control and risk management are further strengthened with the Board of Directors‟ approval of the Audit Committee recommendations arising from periodic review of Internal Audit, management reports and consultation with the Bank‟s frontline and support units.

p. Dividend policy

Prior to the declaration of dividends, the Board of Directors ensures compliance with the minimum capital requirements and risk-based capital ratios even after the dividend distribution. The Board of Directors has the power to declare and approve cash dividend, while the stockholders have the right to approve stock dividends. The net amount available for dividends is the amount of unrestricted or free retained earnings and undivided profits reported in the Financial Reporting Package (FRP) as of the calendar year-end immediately preceding the date of divided declaration. For the years ended, December 31, 2017 and 2016, the Bank did not declare cash dividend in line with Bank‟s strategic plan to continuously build up capital due to consolidation initiatives.

q. Corporate Social Responsibility

Every graduation month for elementary and high school levels in the Municipality of Tanza, Cavite, Bangko Mabuhay awards the highest honor graduates of each schools, public or private, with medal, token cash in form of savings deposit account and testimonial luncheon as part of the Bank‟s corporate social responsibility by inspiring young achievers of the community.

r. Consumer Protection Practices

i. Role and Responsibility of the Board and Senior Management

The Board of Directors of the Bank is ultimately responsible for ensuring that consumer protection practices are embedded in the Bank‟s business operations. The Board and Senior Management are responsible for developing the Bank‟s consumer protection strategy and establishing an effective oversight over the Bank‟s consumer protection programs. The Board is primarily responsible for approving and overseeing the implementation of the Bank‟s consumer protection policies as well as the mechanism to ensure compliance with said policies. While Senior Management is responsible for the implementation of the consumer protection policies approved by the Board, the latter shall be responsible for monitoring and overseeing the performance of Senior Management in managing the day to day consumer protection activities of the Bank.


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ii. Consumer Protection Risk Management System of the Bank

As part of the Bank‟s consumer protection risk management system, the bank has put in place appropriate management controls and take reasonable steps to ensure that in handling complaints/requests, i t identifies and remedies any recurring or systemic problems, and identifies weaknesses in the Bank‟s internal control procedures or process by:

Analyzing complaints/requests data;

Analyzing causes of complaints/requests;

Considering whether such identified weaknesses may also affect other processes or products, including those not directly complained of/requested; and

Correcting, whether reasonable to do so, such causes taking into consideration the concomitant costs and other resources.

iii. Consumer Assistance Management System

In order that financial consumers are provided with accessible, affordable, independent, fair, accountable, timely and efficient means for resolving complaints with their financial transactions. Bangko Mabuhay shall establish the Consumer Assistance Management System (CAMS) for complaint handling and redress. CAMS shall provide guidelines on receiving, recording, evaluating, resolving, monitoring, reporting and giving feedback to consumers. The Consumer Assistance Group is responsible in handling consumer concerns. The said Group is composed of the Consumer Assistance Group Head, who is concurrently the Assistant General Manager; Consumer Help In-charge in the person of Department Heads and Branch Managers; and, the front-liner who is designated as Consumer Help Officer.

The Assistant General Manager heads the Consumer Assistance Group. Each Manager/Supervisor is in-charge of the Department‟s/Branch‟s/MBO‟s designated consumer help officer who handles consumer concerns. There are alternates for the in-charge and help officer of each team to ensure presence of consumer help officer during banking hours. Group Head is be responsible for the i) overseeing and evaluating the effectiveness of CAMS; and ii) reporting to the Board and Senior Management.

The Consumer Help In-Charge is responsible for handling complaint/request which is escalated by the Consumer Help Officer. On a daily basis, this officer shall review the register of consumer concern and reports the same to the Group Head. The complex complaint/request may further be escalated by the In-charge to the Group Head or Senior Management for proper disposition.

The Consumer Help Officer is a front-liner who: i) receives and acknowledges consumer concerns; ii)

records concerns in a Register/database; iii) makes an initial review and investigation of concerns; iv) handles simple complaint/request or escalates complex complaint/request to the Consumer help-in-charge; and reports to the Unit Consumer Help In-Charge.


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6. Corporate Information

a. Organizational structure

Name of Officer Position

1. Edwin S. Fojas President & General Manager

2. Imelda D. Montenegro Assistant General Manager/ Comptroller

3. Basil A. Perea Compliance Officer

4. Airene G. Punzalan Cashier

5. Marites T. Luis Accounting Manager

6. Marites L. Monzon Loans Manager

7. Ma. Concepcion P. Perea Credit Risk Manager

8. Jarold G. Sambo IT Manager

9. Marilyn P. Alcasid Microfinance Manager

10. Eileen P. Dones Internal Audit Manager

11. Ma. Renelinda C. Tria Branch Manager - Mamburao

12. Agnes A. Vargas Branch Manager - Molino

13. Cezarina E. Morales Branch Manager - Naic

14. Nemelyn V. Villeta Branch Manager - Indang

15. Joel Trapago Branch Manager – Teresa

16. Joseph C. Dampitan Branch Manager – Tanay

17. Shree May M. Casaysayan Branch Manager - Mendez

18. Ruel B. Andaya Branch Manager - Alfonso

b. List of major stockholders (with 2% and up of stockholdings) of the bank, including nationality,

percentage of stockholdings and voting status

Name of Stockholder Nationality Percentage of Ownership

Voting Status

Emmanuel P. Santos Filipino 15.65% Voting

Elena J. Malabanan Filipino 8.40% Voting

Raymundo A. Del Rosario Filipino 8.35% Voting

Heirs of Lily C. Fojas Filipino 8.30% Voting

Edwin S. Fojas Filipino 5.48% Voting

Heirs of Raul J. Fojas Spanish 4.79% Voting

Jovencio S. Fojas, Jr. Filipino 4.69% Voting

Myrna S. Fojas Filipino 4.69% Voting

Macario S. Fojas Filipino 4.69% Voting

Purificacion N. Garcia Filipino 4.33% Voting

Leticia P. Santos Filipino 4.25% Voting

Cynia J. Fojas Filipino 3.05% Voting

Heirs of Romeo O. Ner Filipino 2.80% Voting

Sergio J. Fojas Filipino 2.62% Voting


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c. List and description of products and services offered

The Bank‟s products and services are as follows:

Deposit Loans Remittance Bills Payment Others

Regular savings, ATM savings, special savings, checking account, regular time deposit, long term non-negotiable time deposit SME, microfinance, salary/consumption, corporate loans Western Union, G-Cash Remit, BDO Remit, Uniteller Utility bills, etc. (Bayad Center) SSS collecting and paying (pension) agent

d. Bank website

The Bank‟s website is at: www.bangkomabuhay.com

e. List of banking units as of December 31, 2017:

Bank Office Location Contact Numbers

1. Head Office Bangko Mabuhay Building, A. Soriano Highway, Bgy. Daang Amaya III, Tanza, Cavite

(046) 489-20-01 to 04

2. Molino Branch Bangko Mabuhay Building, Zapote-Paliparan Road, Bgy. Molino III, Bacoor City, Cavite

(046) -477-01-50; (046)-477-01-04

3. Indang Branch Bangko Mabuhay Building, De Ocampo St.,, Poblacion, Indang, Cavite

(046)-415-07-93; (046)-862-10-65

4. Naic Branch Bangko Mabuhay Building, P. Poblete St., Bgy. Gombalza, Naic, Cavite

(046)-412-05-98 (046)-412-06-51

5. Mamburao Branch San Jose St., Bgy. 7, Mamburao, Occidental Mindoro

(043)711-19-56 (0922)-878-58-55


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6. Teresa Branch No. 56 Pres. M.L. Quezon St., Poblacion, Teresa, Rizal

(02)-650-31-21

7. Tanay Branch Near Tanay Public Market, SitioPasipit, Bgy. Plaza Aldea, Tanay, Rizal

(02)-635-74-58 (02)-213-34-64

8. Mendez Branch No. 145 J.P. Rizal St., Poblacion, Mendez, Cavite

(046)-413-01-64 (046)-413-02-51

9. Alfonso MBO Bgy. LuksuhinIbaba, Alfonso, Cavite

(046)-404-57-75

10.DasmariñasMicrobanking Office (MBO)

Camerino Avenue corner San Juan St., Bgry. Zone 1, Dasmariñas City, Cavite

(046)-424-12-68 (046)-432-03-24

11. Manggahan MBO No. 36 Grepps Building, CM Delos Reyes St., Bgy. Manggahan, Gen. Trias City, Cavite

(046)-509-50-23


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STATEMENTS OF FINANCIAL POSITION

As of December 31, 2017 and 2016 (Amounts in Philippine Pesos)

Notes 2017 2016

ASSETS

Cash and Other Cash Items 7 P 24,422,366 P 21,794,886

Due from Bangko Sentral ng Pilipinas 8 46,228,845 42,348,632

Due from Other Banks 9 545,093,724 492,457,261

Held to Maturity Financial Assets – Net 10 373,493,929 288,502,388

Loans and Receivables – Net 11 528,307,634 543,627,762

Premises, Furniture, Fixtures and Equipment – Net 12 48,937,363 50,362,464

Investment Properties – Net 13 79,285,949 93,922,927

Goodwill 14 12,252,898 12,508,898

Deferred Tax Asset 29 11,047,066 9,664,766

Other Assets – Net 15 5,771,711 5,295,001

TOTAL ASSETS P 1,674,841,485 P 1,560,484,985

2017 2016

LIABILITIES AND EQUITY Deposit Liabilities 17 P 1,360,678,227 P 1,256,253,311

Bills Payable 18 20,000,000 20,000,000

Other Financial Liabilities 19 3,349,099 8,266,506

Accrued Expenses and Other Liabilities 20 22,447,150 16,236,055

TOTAL LIABILITIES 1,406,474,476 1,300,755,872

EQUITY Paid- In Capital – Common 21.1 188,879,800 188,879,800

Additional Paid-In Capital 21.2 26,811,831 26,811,831

Surplus 52,675,378 44,037,482

TOTAL EQUITY 268,367,009 259,729,113

TOTAL LIABILITIES AND EQUITY P 1,674,841,485 P 1,560,484,985

See Accompanying Notes to the Financial Statements


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BANGKO MABUHAY (A RURAL BANK), INC. STATEMENTS OF PROFIT OR LOSS AND COMPREHENSIVE INCOME

FOR THE YEARS ENDED DECEMBER 31, 2017 and 2016 (Amounts in Philippine Pesos)

Notes 2017 2016

INTEREST INCOME 22 P 120,432,943 P 116,873,783

INTEREST EXPENSE 23 10,683,837 11,500,078

NET INTEREST INCOME 109,749,106 105,373,705

NON-INTEREST INCOME

Service charges, fees and commissions 24 21,467,782 19,854,454

Gain on assets sold/ exchanged 26,721,844 33,500,944

Miscellaneous Income 25 3,491,006 4,607,916

51,680,632 57,963,314

NON-INTEREST EXPENSE

Compensation/Fringe Benefits 26 66,386,114 61,190,127

Fees and Commission Expense 237,111 124,235

Taxes and Licenses 34.1 13,160,030 12,141,891

Depreciation/Amortization 27 10,068,062 9,132,067

Other Administrative Expenses 28 32,552,049 32,980,331

Impairment Losses 16 863,370 4,741,176

123,266,736 120,309,827

(LOSSES)/RECOVERIES ON FINANCIAL ASSETS

Provision for Credit Losses 16 (6,997,910) (7,495,226)

Recovery on Charged Off Assets 34,054 22,801

(6,963,856) (7,472,425)

PROFIT BEFORE TAX 31,199,146 35,554,767

TAX EXPENSE 29 6,894,250 9,601,410

NET PROFIT P 24,304,896 P 25,953,357

Basic Earnings Per Share 31 P 12.87 P 13.74

OTHER COMPREHENSIVE INCOME - -

TOTAL COMPREHENSIVE INCOME P 24,304,896 P 25,953,357



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STATEMENTS OF CHANGES IN EQUITY

As of December 31, 2017 and 2016 (Amounts in Philippine Pesos)


Notes

Common Stock

Additional Paid-in Capital

Surplus Total Equity

Balances at January 1, 2017

188,879,800 26,811,831 44,037,482

P 259,729,113

Total Comprehensive Income - - 24,304,896

24,304,896

Excess of Cost of Treasury shares over Proceeds from its Sale 21.3 - - (15,667,000)

(15,667,000)

Balances at December 31, 2017 188,879,800 26,811,831 52,675,378

P 268,367,009

Notes

Common Stock

Additional Paid-in Capital

Surplus Total Equity

Balances at January 1, 2016

188,879,800 26,811,831 18,084,125

P 233,775,756

Total Comprehensive Income - - 25,953,357

25,953,357

Balances at December 31, 2016 188,879,800 26,811,831 44,037,482

P 259,729,113


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STATEMENTS OF CASH FLOWS

For the Years Ended December 31, 2016 and 2017

(Amounts in Philippine Pesos)

NOTES 2017 2016

CASH FLOWS FROM OPERATING ACTIVITIES

Profit before income tax P 31,199,146 P 35,554,767 Adjustments for:

Depreciation and amortization 27 10,068,062 9,132,067

Provision for impairment and credit losses 16 7,861,280 12,236,401 Gain on assets sold/exchanged (26,721,844) (33,500,944) Decrease (increase) in the amounts of: Loans & Receivables 11 8,322,218 (44,323,252)

Deferred Tax Asset 29 (1,382,300) (2,248,568)

Goodwill 14 256,000 (12,508,898)

Other Assets 15 (1,158,136) (932,561) Increase (Decrease) in the amounts of: Deposit Liabilities 17 104,424,916 154,765,621 Other Financial Liabilities 19 (4,917,407) 5,603,370

Accrued Expenses and Other Liabilities 20 6,211,095 1,688,598

Cash Generated from operations 134,163,030 125,466,601

Income Taxes Paid 29 (6,894,250) (9,601,409)

Net cash provided by operating activities P 127,268,780 P 115,865,192

CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of: NOTES 2017 2016 Investment Properties 13 P 52,387,022 P 43,824,205 Furniture, Fixtures and Equipment 12 2,443 551,371


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Acquisitions of: Investment Properties 13 (15,174,858), (30,202,566) Held to Maturity financial assets 10 (84,991,541) (76,154,638) Furniture, Fixtures and Equipment 12 (4,680,690) (4,452,762)

Net cash (used in) investing activities (52,457,624) (66,434,390)

CASH FLOWS FROM FINANCING ACTIVITIES

Net borrowings (payments) of bills payable 18 - (10,000,000)

Purchase of Treasury Shares 21.3 (25,000,000) -

Proceeds from Sale of Treasury Shares 21.3 9,333,000 -

Net Cash provided by financing activities (15,667,000) (10,000,000)

Net Increase in Cash and Cash Equivalents P 59,144,156 P 39,430,802

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR

Cash and other cash items P 21,794,886 P 18,803,690

Due from Bangko Sentral ng Pilipinas 42,348,632 38,791,175

Due from other banks 492,457,261 459,575,112

Total P 556,600,779 P 517,169,977

CASH AND CASH EQUIVALENTS AT END OF YEAR

Cash and other cash items 24,422,366 21,794,886

Due from Bangko Sentral ng Pilipinas 46,228,845 42,348,632

Due from other banks 545,093,724 492,457,261

Total P 615,744,935 P 556,600,779

OPERATIONAL CASH FLOWS FROM INTEREST 2017 2016

Interest received P 119,351,416 P 116,617,076

Interest paid 10,799,259 11,366,067

See accompanying Notes to the Financial Statements


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NOTES TO FINANCIAL STATEMENTS

(In Philippines Peso)

1. Corporate Information 1.1 Incorporation and Operations Bangko Mabuhay (A Rural Bank), Inc. was organized from the consolidation of Rural Bank of Tanza (Cavite), Inc. and Rural Bank of Teresa (Rizal), Inc.. The consolidation was approved by the Monetary Board of the Bangko Sentral ng Pilipinas (BSP) and the Philippine Deposit Insurance Corporation (PDIC) under the Strengthening Program for Rural Banks (SPRB) in 2013. The consolidated bank was incorporated and registered with Securities & Exchange Commission (SEC) on January 21, 2015 with Registration Number CS201500594. On March 23,2015, the BSP granted Bangko Mabuhay the Certificate of Authority to operate as a rural bank which commenced the operation of the consolidated bank on April 1, 2015. The Bank‟s Head Office is located at Bangko Mabuhay Building, A. Soriano Highway, Bgy. Daang Amaya III, Tanza, Cavite. As at December 31,2017 and 2016, the Bank has ten (10) and eleven (11) branches, respectively. 1.2 Purchase of Assets and Assumption of Liabilities At the special meeting of the stockholders of the Bank held on May 16, 2015, stockholders owning at least two thirds (2/3) of the outstanding capital stock approved the purchase of all assets and assumption of all liabilities (P&A) of Rural Bank of Mendez, Inc. (RB Mendez). This was in line with the Bank‟s strategic plan to acquire said rural bank in order to expand its operations in upland part of Cavite Province. On the other hand, at least two thirds (2/3) of the outstanding capital stock of RB Mendez approved the P&A on May 23, 2015 in order to cede the operation and management of the said Bank. The said P&A transaction was approved by the BSP and the Philippine Deposit and Insurance Corp. (PDIC), and it took effect on October 1,2016. Effective upon closure of the transaction of the P&A on October 1,2016, the banking license to operate a rural bank of Rural Bank of Mendez, Inc. was deemed revoked. On October 11,2016, Rural Bank of Mendez, Inc. surrendered its Certificate of Authority to the BSP. From thereon, Rural Bank of Mendez, Inc. will wind up its corporate affairs through dissolution of the corporation. By virtue of the P&A, RB Mendez‟s Main Office and Galicia Branch were converted into Bangko Mabuhay branches which commenced operation on October 3,2016. In November, 2017, Galicia Branch was relocated to Alfonso, Cavite. The accounts of the said Branch were transferred to Mendez Branch. 1.3 Approval of the Financial Statements

The financial statements of the Bank as of and for the year ended, December 31,2017 (including the comparative financial statements as of and for the year ended, December 31, 2016) were authorized for issue by the Bank‟s Board of Directors (BOD) on March 24, 2018.


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2. Summary of Significant Accounting Policies

The significant accounting policies that have been used in the preparation of these financial statements are summarized below and in the succeeding pages. These policies have been consistently applied to all years presented, unless otherwise stated.

2.1 Basis of Preparation

(a) Statement of Compliance with Philippine Financial Reporting Standards

The financial statements of the Bank have been prepared in accordance with the Philippine Financial Reporting Standards (PFRS). PFRS are adopted by the Financial Reporting Standards Council (FRSC), from the pronouncements issued by the International Accounting Standards Board, and approved by the Philippine Board of Accountancy (BOA). The financial statements have been prepared using the measurement bases specified by PFRS for each type of asset, liability, income and expense. The measurement bases are more fully described in the accounting policies that follow.

(b) Presentation of Financial Statement

The financial statements of the Bank have been prepared in accordance with Philippine Accounting Standards (PAS) 1, Presentation of Financial Statements. The Bank presents statement of comprehensive income separate from the statement of profit or loss.

(c) Functional and Presentation Currency

These financial statements are presented in Philippine pesos, the Bank‟s functional and presentation currency, and all values represent absolute amounts except when otherwise indicated. Items include in the financial statements of the Bank are measured using its functional currency. Functional currency is the currency of the primary economic environment in which the Bank operates.

2.2 Adoption of New and Amended PFRS

(a) Effective 2017 that are relevant to the Bank The Bank adopted for the first time the following amendment and annual improvements to PFRS which are mandatorily effective for annual periods beginning or after January 1, 2017:

(i) PAS 7 (amendments, Statement of Cash Flows – Disclosure initiative (effective from January 1, 2017). The amendments are designed to improve the quality of information provided to users of financial statements about changes in an entity‟s debt and related cash flows (and non-cash changes). They require an entity to provide disclosures that enable users to evaluate changes in liabilities arising from financing activities. An entity applies its judgment when determining the exact form and content of the disclosures needed to satisfy this requirement. Moreover, they suggest a number of specific disclosures that may be necessary in order to satisfy the above requirement, including (a) changes in liabilities arising from financing activities caused by changes in financing cash flows, foreign exchange rates of fair values, or obtaining or losing control of subsidiaries or other business; and, (b) a reconciliation of the opening and closing balances of liabilities arising from financing activities in the statement of financial position identified immediately above.


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(ii) PAS 12 (Amendments), Income Taxes – Recognition of Deferred Tax Assets for Unrealized Losses (effective January 1, 2017). The focus of the amendments is to clarify how to account for deferred tax assets related to debt instruments measured at fair value, particularly where changes in the market interest rate decrease the fair value of a debt instrument below cost. The amendments provide guidance in the following areas where diversity in practice previously existed: (a) existence of a deductible temporary difference; (b) recovering an asset for more than its carrying amount; (c) probable future taxable profit against which deductible temporary difference are assessed for utilization; and, (d) combined versus separate assessment of deferred tax asset recognition for each deductible temporary difference.

(b) Effective 2017 that are not Relevant to the Bank

The following new PFRS, amendments and annual improvements to existing standards are mandatorily effective for annual periods beginning on or after January 1, 2017, but are not relevant to the Bank‟s financial statements: Annual improvements to PFRSs Disclosure of Interest in Other Entities – Clarification on 2014-2016 Cycle (Amendments) the scope of the standard

(c) Effective 2016 that are relevant to the Bank

The Bank adopted for the first time the following amendments and annual improvements to PFRS, which are mandatorily effective for annual periods beginning on or after January 1, 2016: PAS 1 (Amendments) Presentation of Financial Statements – Disclosure Initiative PAS 16 and 38 Property, Plant and Equipment, and (Amendments) Intangible assets – Clarifications of Acceptable Methods of Depreciation And Amortization PAS 16 and 41 Property, Plant and Equipment, and Agriculture – Bearer Plants (Amendments) Annual Improvements Annual improvements to PFRS (2012-2014 Cycle) Discussed below and in the succeeding pages are the relevant information about these amendments and improvements.

(i) PAS 1 (Amendments), Presentation of Financial Statements – Disclosure Initiative. The amendments encourage entities to apply professional judgment in presenting and disclosing information in the financial statements. Accordingly, they clarify that materiality applies to the whole financial statements and an entity shall not reduce the understandability of the financial statements by obscuring material information with immaterial information or by aggregating material items that have different natures or functions. Moreover, the amendments clarify that an entity‟s share in other comprehensive income of associates and joint ventures accounted for using equity method should be presented based on whether or not such other comprehensive income item will subsequently be reclassified to profit or loss. They further clarify that in determining the order of presenting the notes and disclosures, an entity shall consider the understandability and comparability of the financial statements. The amendments did not have a significant impact in the Bank‟s financial statements as these merely clarify existing requirements.

(ii) PAS 16 (Amendments). Property, Plant and Equipment, and PAS 38 (Amendments), Intangible

Assets – Clarification of Acceptable Methods of Depreciation and Amortization. The amendments in PAS 16 clarify that a depreciation method that is based on the revenue generated by an activity that includes the use of an asset is not appropriate for property, plant and equipment. In addition, amendments to PAS 38 introduce a rebuttable presumption that an amortization method that is based


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on the revenue generated by an activity that includes the use of an intangible asset is not appropriate, which can only be overcome in limited circumstances where the intangible asset is expressed as a measure of revenue, or where it can be demonstrated that revenue and the consumption of the economic benefit of an intangible asset are highly correlated. The amendments also provide guidance that the expected future reductions in the selling price of an item that was produced using the asset could indicate an expectation of technological or commercial obsolescence of an asset, which may reflect a reduction of the future economic benefits embodied in the asset. The amendments did not have a significant impact in the Bank‟s financial statements as these merely clarify existing requirements.

(iii) Annual Improvements to PFRS (2012-2014 Cycle) Among the improvements, PAS 19

(Amendments), Employee Benefits – Discount Rate: Regional Market Issue is relevant to the Bank but management does not expect these to have material impact on the Bank‟s financial statements. The amendments clarify that the currency and term of the high quality corporate bonds which were used to determine the discount rate for post-employment benefit obligations shall be made consistent with the currency and estimated term of the post-employment benefit obligations.

(d) Effective in 2016 that are not relevant to the Bank

The following new PFRS, amendments and annual improvements to existing standards are mandatorily effective for annual periods beginning on or after January 1, 2016, but are not relevant to the Bank‟s financial statements: PFRS 11 (Amendments) Joint Arrangements – Accounting for Acquisitions of Interests In Joint Operators PFRS 10, PFRS 12 and PAS 28 Consolidated Financial Statements, Disclosures of Interests in (Amendments) Other Entities, and Investments in Associates and Joint Ventures – Applying the Consolidation Exception PFRS 14 Regulatory Deferral Accounts PAS 16 (Amendments) Property, Plant and Equipment and PAS 41 (Amendments),

Agriculture – Bearer Plants PAS 27 (Amendments) Separate Financial Statements – Equity Method in Separate Financial Statements Annual Improvements to Non current assets held for sale and discontinued operations – PFRS (2012-2014 Cycle) Changes in Methods of Disposal FFRS 5 (Amendments) PFRS 7 (Amendments) Financial Instruments Disclosures – Applicability of the

Amendments to PFRS 7 to Condensed Interim Financial Statements

PFRS 7 (Amendments) Financial Instruments Disclosures – Servicing Contracts

PAS 34 (Amendments) Interim Financial Reporting – Disclosure of Information “Elsewhere in the Interim Financial Report”

(e) Effective Subsequent to 2017 but not Adopted Early

There are PFRS and amendments to existing standards effective for annual periods subsequent to 2017, which are adopted by the Financial Reporting Standards Council (FRSC). Management will adopt


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the relevant pronouncements, presented below and in the succeeding pages, in accordance with their transitional provisions, and, unless otherwise stated, none of these are expected to have significant impact on the Bank‟s financial statements.

(i) PFRS 9 (2014). Financial Instruments (effective January 1, 2018). This new standard on financial instruments will eventually replace PAS 39 and PFRS 9 (2009, 2010 and 2013 versions). This standard contains, among others, the following:

Three principal classification categories for financial assets based on the business model on how an entity is managing the financial instruments;

An expected loss model in determining impairment of all financial assets that are not measured at fair value through profit or loss (FVTPL), which generally depends on whether there has been a significant increase in credit risk since initial recognition of a financial asset; and,

A new model on hedge accounting that provides significant improvements principally by aligning hedge accounting more closely with the risk management activities undertaken by entities when hedging their financial and non-financial risk exposures.

In accordance with the financial asset classification principle of PFRS 9 (2014), a financial asset is classified and measured at amortized cost if held within a business model whose objective is to hold financial assets in order to collect the contractual cash flows that represent solely payments of principal and interest (SPPI) on the principal outstanding. Moreover, a financial asset is classified and subsequently measured at fair value through other comprehensive income if it meets the SPPI criterion and is held in a business model whose objective is achieved by both collecting contractual cash flows and selling the financial assets. All other financial assets are measured at FVTPL In addition, PFRS 9 (2014) allows entities to make election to present subsequent changes in the fair value of equity instrument that is not held for trading in other comprehensive income. The accounting of embedded derivatives in host contracts that are financial assets is simplified by removing the requirement to consider whether or not they are closely related, and, in most arrangements, does not require separation from the host contract. For liabilities, the standard retains most of the PAS 39 requirements which include amortized cost accounting for most financial liabilities, with bifurcation of embedded derivatives. The amendment also requires changes in the fair value of an entity‟s own debt instruments cased by changes in its own credit quality to be recognized in other comprehensive income rather than in profit or loss. The Bank does not expect to implement and adopt any version of PFRS 9 until its effective date. In addition, Management is currently assessing the impact of PFRS 9 on the financial statements of the Bank and it will conduct a comprehensive study of the potential impact of this standard prior to its mandatory adoption date to assess the impact of all changes.

(ii) PFRS 15, Revenue from Contracts with Customers (effective from January 1, 2018). This standard will replace PAS 18, Revenue, and PAS 11, Construction Contracts, the related interpretations on revenue recognition. IFRIC 13, Customer Loyalty Programmes, IFRIC 15, Agreement for the Construction of Real Estate, IFRIC 18, Transfer of Assets from Customers and Standing Interpretations Committee 31, Revenue – Barter Transactions Involving Advertising Services, effective January 1, 2018. This new standard establishes a comprehensive framework for determining when to recognize revenue and how much revenue to recognize. The core principle in the said framework is for an entity to recognize revenue to depict the transfer of promised goods or services to the customer in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Management is currently assessing the impact of this standard on the Bank‟s financial statements.

he amendments in Transfers of Investment Property (Amendments to IAS 40) are:

(iii) Paragraph 57 has been amended to state that an entity shall transfer a property to, or from, investment property when, and on ly when, there is evidence of a change in use . A change of use occurs if property meets, or ceases to meet, the definition of investment property. A change in management’s intentions for the use of a property by itself does not constitute evidence of a change in use.


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(iv) PAS 40 (Amendments) Transfers of Investment Property. Paragraph 57 has been amended to state that an entity shall transfer a property to, or from, investment property when, and only when, there is evidence of a change in use. A change of use occurs if property meets, or ceases to meet, the definition of investment property. A change in management’s intentions for the use of a property by itself does not constitute evidence of a change in use.

(v) PFRS 16, Leases (effective from January 1, 2019). The new standard will eventually replace PAS 17 – Leases.

For lessees, it requires to account for leases “on-balance sheet” by recognizing a “right of use” asset and a lease liability. The lease liability is initially measured as the present value of future lease payments. For this purpose, lease payments include fixed, non-cancellable payments for lease elements, amounts due under residual value guarantees, certain type of contingent payments and amounts due during optional periods to the extent that extension is reasonably certain. In subsequent periods, the “right-of-use” asset is accounted for similarly to a purchased asset and depreciated or amortized. The lease liability is accounting for similarly as financial liability using the effective interest method. However, the new standard provides important reliefs or exemptions for short-term leases and leases of low value assets. If these exemptions are used, the accounting is similar to operating lease accounting under PAS 17 where lease payments are recognized as expenses on a straight-line basis over the lease term or another systematic basis (if more representative of the pattern of the lessee‟s benefit). For lessors, lease accounting is similar to PAS 17‟s. In particular, the distinction between finance and operating leases is retained. The definitions of each type of lease, and the supporting indicators of a finance lease, are substantially the same as PAS 17‟s. The basic accounting mechanics are also similar, but with some different or more explicit guidance in few areas. These include variable payments, sub-leases, lease modifications, the treatment of initial direct costs and lessor disclosures. Management is currently assessing the impact of this new standard in its financial statements.

2.3 Business Combinations

Business acquisitions are accounted for using the acquisition method of accounting. Goodwill acquired in a business combination is initially measured at cost being the excess of the cost of a business combination over the Bank‟s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities of the acquired entity or net assets. Subsequent to initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. Impairment losses on goodwill are not reversed (see Note 2.16) Negative goodwill which is the excess of the Bank‟s interest in the net fair value of net identifiable assets acquired over acquisition cost is charged directly to profit or loss. For the purpose of impairment testing, goodwill is allocated to cash-generating units or groups of cash generating units that are expected to benefit from the business combination in which the goodwill arose. The cash-generating units or groups of cash-generating units are identified according to operating segment. If the business combination is achieved in stages, the acquirer is required to remeasure its previously held equity interest in the acquiree at its acquisition-date fair value and recognize the resulting gain or loss if any, in profit or loss or other comprehensive income, as appropriate. Any contingent consideration to be transferred by the Bank is recognized at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration that is deemed to be an asset or


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liability is recognized in accordance with PAS 37, Provision, Contingent Liabilities and Contingent Assets, either in profit or loss or as a change to other comprehensive income. Contingent consideration that is classified as equity is not remeasured, and its subsequent settlement is accounted for within equity.

2.4 Financial Assets

Financial assets are recognized when the Bank becomes a party to the contractual terms of the financial instrument. For purposes of classifying financial assets, an instrument is considered as an equity instrument if it is non-derivative and meets the definition of an equity for the issuer in accordance with the criteria under PAS 32. All other non-derivative financial instruments are treated as debt instruments. (a) Classification, Measurement, and Reclassification of Financial Assets Financial assets, other than those designated and effective as hedging instruments, are classified into following categories: financial assets at fair value through profit or loss (FVTPL), loans and receivables, held-to-maturity (HTM) investments, and available-for-sale (AFS) securities. Financial assets are assigned to the different categories by management on initial recognition, depending on the purpose for which the investments were acquired. Except for derivative financial instruments and financial assets designated at FVTPL, the designation of financial assets is re-evaluated at the end of each reporting period and at which date, a choice of classification or accounting treatment is available, which is subject to compliance with specific provisions of applicable accounting standards. Regular purchases and sales of financial assets are recognized on their settlement date. All financial assets that are not classified as at FVTPL, are initially recognized at fair value, plus any directly attributable transaction costs. Financial assets carried at FVTPL are initially recorded at fair value and the related transaction costs are recognized in profit or loss. A more detailed description of the four categories of financial assets is as follows:

(i) Financial Assets at FVTPL

This category includes financial assets that are either classified as held for trading or that meets certain conditions and are designated by the Bank to be carried at FVTPL upon initial recognition. All derivatives fall into this category, except for those designated and effective as hedging instruments. Financial assets at FVTPL are measured at fair value, and changes therein are recognized in profit or loss. Financial assets (except derivatives and financial instruments originally designated as financial assets at FVTPL) may be reclassified out of fair value through profit or loss category if they are no longer held for the purpose of being sold or repurchased in the near term. As of December 31, 2017 and 2016, the Bank has no Financial Assets at FVTPL.

(ii) Loans and Receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the Bank provides money or services directly to a debtor with no intention of trading the receivables. Included in this category are financial assets arising from direct loans to customers, securities purchased under reverse repurchase agreements (SPURRA), unquoted debt securities, sales contract receivables and all receivables from customers and other banks. The Bank‟s financial assets categorized as loans and receivables are presented as Cash and Other Cash Items, Due from BSP, from Other Banks, Loans and Other Receivables, and Other Resources (specifically petty cash fund and foreign currency notes and coins on hand) in the


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statement of financial position. For purposes of reporting cash flows, cash and cash equivalents include cash and other cash items, due from BSP and other banks and SPURRA.

Loans and receivables are subsequently measured at amortized cost using the effective interest method, less impairment losses, if any.

(iii) Held to Maturity (HTM) Investments

This includes non-derivative financial assets with fixed or determinable payments and a fixed date of maturity. Investments are classified as HTM if the Bank has the positive intention and ability to hold them until maturity. Investments intended to held for an undefined period are not included in this classification. If the Bank were to sell other than an insignificant amount of HTM investments, the whole category would be tainted and reclassified to AFS securities under PFRS, and the Bank will be prohibited from holding investments under HTM category for the next two financial reporting years after the year the tainting occurred. The tainting provision under PFRS will not apply if the sales or reclassification of HTM investment are so close to maturity or the financial asset‟s call date that changes in market rate of interest would not have a significant effect on the financial asset‟s fair value; occur after the Bank has collected substantially all of the financial asset‟s original principal through scheduled payments or prepayments; or are attributable to an isolated event that is beyond the control of the Bank, is nonrecurring and could not have been reasonably anticipated by the Bank. The Bank currently holds government bonds designated into this category. Subsequent to initial recognition, the HTM investments are measured at amortized cost using the effective interest method, less impairment losses, if any.

(iv) Available for Sale (AFS) Securities

This category includes non-derivative financial assets that are either designated to this category or do not qualify for inclusion in any of the other categories of financial assets. All financial assets within this category are subsequently measured at fair value. Gains and losses from changes in fair value are recognized in other comprehensive income and are reported as part of the Revaluation Reserves account in equity, except for interest and dividend income, impairment losses and foreign exchange differences on monetary assets, which are recognized in profit or loss. When the financial asset is disposed of or is determined to be impaired, the cumulative fair value or losses recognized in other comprehensive income is reclassified from equity to profit or loss and is presented as reclassification adjustment within other comprehensive income even though the financial assets has not been derecognized. As of December 31, 2017 and 2016, the Bank has no AFS Securities.

(b) Impairment of Financial Assets

The Bank assesses at each reporting date whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or group of financial assets is impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a loss event) and that loss event (events) has (have) an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated.


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Objective evidence that a financial asset or group of assets is impaired includes observable data that comes to the attention of the Bank about certain loss events, including, among others: (i) significant financial difficulty of the issuer of debtor; (ii) a breach of contract, such as a default or delinquency in interest or principal payments; (iii) it is probable that the borrower will enter bankruptcy or other financial reorganization; (iv) the disappearance of an active market for that financial asset because of financial difficulties; or (v) observable data indicating that there is a measurable decrease in the estimated future cash flows from a group of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial assets in the group. (i) Carried at Amortized Cost – Loans and Receivables and HTM Investments

The Bank first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and collectively for financial assets that are not individually significant. If the Bank determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, the Bank includes the asset in a group of financial asset with similar credit risk characteristics and collectively assesses them for impairment. Financial 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 of impairment. If there is objective evidence that an impairment loss on loans and other receivables or HTM investments carried at amortized cost has been incurred, the amount of the loss is measured as the difference between the asset‟s carrying amount and the present value of estimated future cash flows (excluding future credit loss that have not been incurred) discounted at the financial asset‟s original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognized in profit or loss. If loans and other receivables or HTM investments have a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract. As a practical expedient, the Bank may measure impairment on the basis of an instrument‟s fair value using an observable market price. The calculation of the present value of the estimated future cash flows of a collateralized financial asset reflects the cash flows that may result from foreclosures less costs for obtaining and selling the collateral, whether or not the foreclosure is probable. For the purpose of a collective evaluation of impairment, financial assets are grouped on the basis of similar credit risk characteristics (i.e., on the basis of the Bank‟s grading process that considers asset type, industry, geographical location, collateral type, past due status and other relevant factors). Those characteristics are relevant to the estimation of future cash flows for groups of such assets by being indicative of the debtor‟s ability to pay all amounts due according to the contractual terms of the assets being evaluated. Future cash flows in a group of financial assets that are collectively evaluated for impairment are estimated on the basis of the contractual cash flows of the assets in the Bank and historical loss experience for assets with credit risk characteristics similar to those in the Bank. 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 for groups of assets should reflect and be directionally consistent with changes in related observable data from period to period (for example, changes in unemployment rates, property prices, payment status, or other factors indicative of changes in the probability of 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 difference between loss estimates and actual loss experience. When a loan is uncollectible, it is written off against the related provision for loan impairment. Such loans are written off after all the necessary procedures, including approval from the management


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and the BOD, have been completed and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off decreases the amount of the provision for loan impairment in profit or loss. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be objectively related to an event occurring after the impairment was recognized (such as an improvement in the debtor‟s credit rating), the previously recognized impairment loss is reversed by adjusting the allowance account. The reversal shall not result in a carrying amount of the financial asset that exceeds what the amortized cost would have been had the impairment not been recognized at the date of the impairment is reversed. The amount of reversal is recognized in profit or loss.

(c) Items of income and expense related to Financial Assets

All income and expense, including impairment losses relating to the financial assets are recognized in the statement of profit and loss.

(d) Derecognition of Financial Assets

The financial assets are derecognized when the contractual rights to receive cash flows from the financial instruments expire or when the financial assets and all substantial risks and rewards of ownership have been transferred to another party. If the Bank neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Bank recognizes its retained interest in the asset and an associated liability for amounts it may have to pay. If the Bank retains substantially all the risks and rewards of ownership of a transferred financial asset, the Bank continues to recognize the financial asset and also recognizes a collateralized borrowing for the proceeds received.

2.5 Offsetting Financial Instruments

Financial assets and financial liabilities are offset and the resulting net amount is reported in the statement of financial position when there is legally enforceable right to set-off the recognized amounts and there is an intention to settle on a net basis, or realize the asset and settle the liability simultaneously. The right of set-off must be available at the end of the reporting period, that is, it is not contingent on future event. It must also be enforceable in the normal course of business, in the event of default, and in the event of insolvency or bankruptcy; and must be legally enforceable for both entity and all counterparties to the financial instruments.

2.6 Financial Liabilities

Financial liabilities include Deposit Liabilities, Bills Payable and Accrued Expenses and Other Liabilities (excluding tax-related payables and post-employment benefit obligation) and are recognized when the Bank becomes a party to the contracture terms of the instrument. All interest-related charges are recognized as Interest Expense in the statement of profit or loss. Deposit liabilities and bills payable are recognized initially at their fair value, which is the issuance proceeds (fair value of consideration received) net of direct issue costs, and are subsequently measured at amortized cost using effective interest method for maturities beyond one year, less settlement payments. Any difference between proceeds net of transaction costs and the redemption value is recognized in the profit or loss over the period of borrowings. Accrued expenses and other liabilities are recognized initially at their fair value and subsequently measured at amortized cost, using effective interest method for maturities beyond one year, less settlement payments.


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Financial liabilities are derecognized from the statement of financial position only when the obligations are extinguished either through discharge, cancellation or expiration. The difference between the carrying amount of the financial liability derecognized and the consideration paid or payable is recognized in the profit or loss.

2.7 Other Assets

Other assets pertain to other resources controlled by the Bank as a result of past events. These are recognized in the financial statements when it is probable that the future economic benefits will flow to the Bank and the asset has a cost or value that can be measured reliably.

2.8 Bank Premises, Furniture, Fixtures and Equipment

Land is stated at cost. Bank premises, furniture, fixtures and equipment are carried at acquisition cost less accumulated depreciation and amortization and any impairment losses. The cost of an asset comprises its purchase price and directly attributable cost of bringing the asset to working condition for its intended use. Expenditures for additions, major improvements and renewals are capitalized; expenditures for repairs and maintenance are charged to expense as incurred. Depreciation is computed on a straight-line basis over the estimated useful lives of the assets as follows:

Building 20 years Furniture, fixtures and equipment 2-5 years Transportation equipment 5-8 years Leasehold improvements are amortized over the term of the lease or the estimated useful life of the improvements of 5 years, whichever is shorter. An asset‟s carrying amount is written down immediately to its recoverable amount if the asset‟s carrying amount is greater than its estimated recoverable amount. Fully depreciated and fully amortized assets are retained in the accounts until they are no longer in use and no further charge for depreciation and amortization is made in respect of those assets. The residual values, estimated useful lives and method of depreciation and amortization of Bank premises, furniture, fixtures and equipment (except land) are reviewed and adjusted if appropriate, at the end of each reporting period. An item of bank premises, furniture, fixtures and equipment, including the related accumulated depreciation, amortization and impairment loss, is derecognized upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and carrying amount of the item) is included in profit or loss in the year the item is derecognized.

2.9 Investment Properties Investment properties pertain to land and buildings or condominium units acquired by the bank, in settlement of loans from defaulting borrowers through foreclosure or dacion in payment. These properties are held by bank either to earn rental income or for capital appreciation or for both, but not for sale in the ordinary course of business, use n the supply of services or for administrative purposes. Investment Properties are stated at cost, less accumulated depreciation and any impairment losses. The cost of an investment property comprises its purchase price and directly attributable costs incurred such as legal fees, transfer taxes and other transaction costs.


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Investment properties except land are depreciated over a period of ten (10) years. Depreciation and impairment loss are recognized in the same manner as in bank premises, furniture, fixtures and equipment. Investment properties, including the related accumulated depreciation and any impairment losses, are derecognized upon disposal or when permanently withdrawn from use and no future economic benefit is expected from its disposal. Any gain or loss on the retirement or disposal of investment properties is recognized in profit or loss under the Gain or Loss on sale of properties under Miscellaneous Income or Expenses in the statement of profit or loss, in the year of retirement or disposal.

2.10 Intangible Assets

Intangible assets include goodwill, acquired branch licenses and computer software included as parts of other resources which were accounted for under the cost model. The cost of the asset is the amount of cash or cash equivalents paid or the fair value of the other considerations given to acquire an asset at the time of its acquisition. Acquired computer software licenses are capitalized on the basis of the costs incurred to acquire and install the specific software. Capitalized costs are amortized on a straight-line basis over the estimated useful life/lives of these intangible assets are considered finite. In addition, intangible assets are subject to impairment testing as described in Note 2.16. Costs associated with maintaining computer software and those costs associated with research activities are recognized as expense in profit or loss as incurred. Goodwill represents the excess of the cost of acquisition over the fair value of the net assets acquired and branch licenses at the date of acquisition. Goodwill and branch licenses are classified as intangible assets with indefinite useful life, and thus, not subject to amortization but to an annual test for impairment (see Note 2.16). For purposes of impairment testing, goodwill and branch licenses are allocated to cash-generating units and are subsequently carried at cost less any allowance for impairment losses. When an intangible asset is disposed of, the gain or loss on disposal is determined as the difference between the proceeds and the carrying amount of the asset and is recognized in profit or loss.

2.11 Provisions and Contingencies

Provisions are recognized when present obligations will probably lead to an outflow of economic resources and they can be estimated reliably even if the timing and amount of the outflow may still be uncertain. A present obligation arises from the presence of a legal or constructive commitment that has resulted from past events, for example, legal disputes or onerous contracts. Provisions are measured at the estimated expenditure required to settle the present obligation, based on the most reliable evidence available at the end of the reporting period, including the risks and uncertainties associated with the present obligation. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. When time value of money is material, long-term provisions are discounted to their present values using a pre-tax rate that reflects market assessments and the risks specific to the obligation. The increase in the provision due to passage of time is recognized as interest expense. Provisions are reviewed at the end of each reporting period and are adjusted to reflect the current best estimate. In those cases where the possible outflow of economic resource as a result of present obligations is considered improbable or remote, or the amount to be provided for cannot be measured reliably, no liability is recognized in the financial statements. Similarly, possible inflows of economic benefits to the Bank that do not yet meet the recognition criteria of an asset are considered contingent assets, hence, are not recognized in the financial statements. On the other hand, any reimbursement that the Bank is virtually


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certain to collect from a third party with respect to the obligation is recognized as a separate asset not exceeding the amount of the related provision.

2.12 Equity

Capital stock represents the nominal value of the common and preferred shares that have been issued. Additional paid-in capital includes any premium received on the issuance of capital stock. Any transaction costs associated with the issuance of shares are deducted from additional paid-in capital. Appropriated surplus pertains to appropriations made by the Bank for a portion of the Bank‟s income from trust operations in compliance with BSP regulations. Unappropriated surplus includes all current and prior period results of operations as disclosed in the statement of profit or loss, less appropriated surplus and dividends declared. Revaluation reserves compromise remeasurements of post-employment defined benefit plan and unrealized fair value gains (losses) on mark-to-market valuation of AFS securities, net of amortization of fair value gains or losses on reclassified financial assets.

2.13 Related Party Transactions and Relationships

Related party transactions are transfers of resources, services or obligations between the Bank and its related parties, regardless whether a price is charged. Parties are considered to be related if one party has the ability to control the other party or exercises significant influence over the party in making financial and operating decisions. These parties include: (a) individuals owning, directly or indirectly through one or more intermediaries, control or controlled by, or under common control with the Bank; (b) associates;(c) individuals owning, directly or indirectly, an interest in the voting power of the Bank that gives them significant influence over the Bank and close members of the family of any such individual; and (d) the Bank‟s funded retirement plan. In considering each possible related party relationship, attention is directed to the substance of the relationship and not merely on the legal form.

2.14 Revenue and Expense Recognition

Revenue is recognized to the extent that it is probable that the revenue can be reliably measured; it is probable that future economic benefits will flow to the Bank; and the costs and expenses incurred and to be incurred can be measured reliably. Cost and expenses are recognized in profit or loss upon utilization of the assets or services or at the date these are incurred. In addition, the following specific recognition criteria must also be met before revenue is recognized:

a) Interest Income and Expense

Interest income and expense are recognized in the statement of profit or loss for all financial instruments using the effective interest method.

The effective interest method is a method of calculating the amortized cost of a financial asset or a financial liability and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or


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receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the Bank estimates cash flows considering all contractual terms of the financial instrument (for example, prepayment options) but does not consider future credit losses. The calculation includes all fees and points paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premium or discounts.

Once a financial asset or a group of similar financial assets has been written down as a result of an impairment loss, interest income is recognized using the rate of interest used to discount future cash flows for the purpose of measuring the impairment loss.

b) Service Charges, Fees and Commissions

Service charges, fees and commissions are generally recognized on an accrual basis when the service has been provided. Other service fees are recognized based on the applicable service contracts, usually on a time-appropriate basis.

2.15 Leases

The bank accounts for its leases as follows:

a) Bank as Lessee

Leases, which do not transfer to the bank substantially all the risks and benefits of ownership of the assets are classified as operating leases. Operating lease payments (net of any incentive received from a lessor) are recognized as expense in profit or loss on a straight-line basis over the lease term. Associated costs, such as insurance and repairs and maintenance, are expensed as incurred.

b) Bank as Lessor

Leases, which do no transfer to the lessee substantially all the risks and benefits of ownership of the asset, are classified as operating leases. Lease income from operating leases is recognized in profit or loss on a straight line basis over the lease term.

The bank determines whether an arrangement is, or contains, a lease based on the substance of the arrangement. It makes an assessment of whether the fulfillment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset.

2.16 Impairment of Non-financial Assets

The bank‟s premises, furniture, fixtures and equipment, investment properties, goodwill, branch licenses, computer software, other properties held for sale and other non-financial assets are subject to impairment testing. Intangible assets with an indefinite useful life or those not yet available for use are tested for impairment at least annually. All other individual assets or cash-generating units are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. For purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). As a result, assets are tested for impairment either individually or at the cash-generating unit level.


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An impairment loss is recognized for the amount by which the asset or cash-generating unit‟s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of fair value, reflecting market conditions less costs to sell and value in use, based on an internal discounted cash flow evaluation. In determining value in use, management estimates the expected future cash flows from each cash-generating unit determines the suitable interest rate in order to calculate the present value of those cash flows. Discount factors are determined individually for each cash-generating unit and reflect management‟s assessment of respective risk profiles, such as market and asset-specific risk factors. Impairment loss is charged pro rata to the other assets in the cash generating unit. All assets are subsequently reassessed for indications that an impairment loss previously recognized may no longer exist. An impairment loss is reversed if the cash generating unit‟s recoverable amount exceeds its carrying amount.

2.17 Employee Benefits

The Bank provides post-employment benefit to employees through a defined benefit plan and defined contribution plan, and other employee benefits which are recognized as follows:

a) Post-employment Defined Benefit Plan

A defined benefit plan is a post-employment plan that defines an amount of post-employment benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, year of service and salary. The legal obligation for any benefits from this kind of post-employment plan remains with the Bank, even if plan assets for funding the defined benefit plan have been acquired. Plan assets may include assets specifically designated to a long-term benefit fund, as well as qualifying insurance policies. The Bank‟s defined benefit post-employment plan covers all regular full-time employees. The post-employment plan is tax-qualified, non-contributory and administered by a trustee bank.

The liability recognized in the statement of financial position for define benefit post employment plans is the present value of the Defined Benefit Obligation (DBO) at the end of the reporting period less the fair value of the plan assets. The DBO is calculated every three years by independent actuaries using the projected unit credit method. The present value of the DBO is determined by discounting the estimated future cash outflows using the applicable PDST-R2 government bond rate for the valuation date. Remeasurements, comprising of actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions and the return on plan assets (excluding amount included in net interest) are reflected immediately in the statement of financial position with a charge or credit recognized in other comprehensive income in the period in which they arise. Net interest is calculated by applying the discount rate at the beginning of the period, taking account of any changes in the net defined benefit liability or asset during the period as a result of contributions and benefit payments. Net interest is reported as part of Interest Expense account in the statement of profit or loss. Past-service costs are recognized immediately in profit or loss in the period of a plan amendment or curtailment.

b) Post-employment Defined Contribution Plan

A defined contribution plan is a post-employment plan under which the Bank pays fixed contributions into an independent entity (e.g. Social Security and Philhealth). The Bank has no legal or constructive obligations to pay further contributions after payment of the fixed contribution. The contributions recognized in respect of defined contribution plans are expensed as they fall due.


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Liabilities and assets may be recognized if underpayment or prepayment has occurred and are normally of a short-term nature. Past-service costs are recognized immediately in profit or loss in the period of a plan amendment or curtailment.

c) Profit Sharing Plan

The Bank recognizes a liability and an expense for profit sharing, based on a formula that is provided in the By-Laws and in accordance with banking regulations.

2.18 Income Taxes Tax expense recognized in profit or loss comprises the sum of deferred tax and current tax not recognized in the other comprehensive income or directly in equity, if any. Current tax assets or liabilities comprise those claims for, or obligations to, fiscal authorities relating to the current or prior reporting period, that are uncollected or unpaid at the reporting period. They are calculated according to the tax rates and tax laws applicable to the fiscal periods to which they relate, based on the taxable profit for the year. All changes to current tax assets or liabilities are recognized as a component of tax expense in profit or loss. Deferred tax is accounted for using the liability method, on temporary differences at the end of each reporting period between the tax base of assets and liabilities and their carrying amounts for financial reporting purposes. Under the liability method, with certain exceptions, deferred tax liabilities are recognized for all taxable temporary differences and deferred tax assets are recognized for all deductible temporary differences and the carry forward of unused tax losses and unused tax credits to the extent that it is probable that taxable profit will be available against which the deductible temporary differences can be utilized. Unrecognized deferred tax assets are reassessed at the end of each reporting period and are recognized to the extent that t has become probable that future taxable profit will be available to allow such deferred tax assets to be recovered. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period when the asset is realized or the liability is settled provided such tax rates have been enacted or substantively enacted at the end of the reporting period. The carrying amount of deferred tax assets is reviewed at the end of each reporting period and reduced to the extent that it is probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilized. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Bank expects, at the end of the reporting period, to recover or settle the carrying amount of its asset and liabilities. Most changes in deferred tax assets or liabilities are recognized as a component of tax expense in profit or loss, except to the extent that it relates to items recognized in other comprehensive income or directly in equity. In this case, the tax is also recognized in other comprehensive income or directly in equity, respectively. Deferred tax assets and deferred tax liabilities are offset if the Bank has a legally enforceable right to set off current tax assets against current tax liabilities and the deferred taxes relate to the same entity and the same taxation authority.


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2.19 Earnings Per Share

Basic earnings per share (EPS) is determined by dividing net profit by the weighted average number of common shares subscribed and issued during the period, after retroactive adjustment for any stock dividend declared in the current period. The diluted EPS is also computed by dividing net profit by the weighted average number of common shares subscribed and issued during the period. However, net profit attributable to common shares and the weighted average number of common shares outstanding are adjusted to reflect the effects of potentially dilutive convertible preferred shares as approved by the Securities and Exchange Commission. Convertible preferred shares are deemed to have been converted to common shares at the issuance of preferred shares. As of December 31, 2017 and 2016, the Bank has no convertible preferred shares.

2.20 Events After the End of the Reporting Period Any post-year-end event that provides additional information about the Bank‟s financial position at the end of the reporting period (adjusting event) is reflected in the financial statements. Post-year-end events that are not adjusting events, if any, are disclosed when material to the financial statements.

3. Significant Accounting Judgments and Estimates

The preparation of the Bank‟s financial statements in accordance with PFRS requires management to make judgments and estimates that affects the amounts reported in the financial statements and related notes. Judgments and estimates are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Actual result may ultimately differ from these estimates.

3.1 Critical Management Judgments in Applying Accounting Policies

In the process of applying the Bank‟s accounting policies, management has made the following judgments, apart from those involving estimation, which have the most significant effect on the amounts recognized in the financial statements:

a) Classifying Financial Assets at HTM Investments

In classifying non-derivative financial assets with fixed or determinable payments and fixed maturity, such as bonds, as HTM investments, the Bank evaluates its intention and ability to hold such investments up to maturity. Management has confirmed its intention and determined its ability to hold the investments up to maturity.

If the Bank fails to keep these investments at maturity other than for the allowed specific circumstances as discussed in the succeeding paragraph, it will be required to reclassify the entire class to AFS securities. The investments would therefore be measured at fair value and not at amortized cost. However, the tainting provision will not apply if the sales or reclassifications of HTM investments are so close to maturi ty or the financial asset‟s call date that changes in the market rate of interest would not have a significant effect on the financial asset‟s fair value; occur after the Bank has collected substantially all of the financial asset‟s original principal through scheduled payments or prepayments; or are attributable to an isolated event that is beyond the control of the Bank, is nonrecurring and could not have been reasonably anticipated by the Bank.


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b) Classifying of Acquired Properties

The Bank classifies its acquired properties (foreclosed properties) as Bank Premises, Furniture, Fixtures and Equipment if used in operations, or as other properties held for sale presented as part of Investment Properties if the bank expects that the properties will be recovered through sale rather than use. Acquired properties are initially booked at the carrying amount of loan (i.e. outstanding loan balance adjusted for any unamortized premium or discount less allowance on PAS 39 provisioning requirement, which take into account the fair value of the collateral) plus booked accrued interest less allowance for credit losses, plus transaction costs incurred upon acquisition such as non-refundable capital gains tax and documentary stamp tax paid in connection with the foreclosure of acquired real estate property.

c) Distinguishing Operating and Finance Lease

The bank has entered into various lease agreements. Critical judgment was exercised by management to distinguish each lease agreement as either an operating or finance lease by looking at the transfer or retention of significant risk and rewards of ownership of the properties covered by the agreements. Failure to make the right judgment will result in either overstatement or understatement of assets and liabilities. As of December 31, 2017 and 2016, the Bank has determined that all its leases are operating leases.

d) Recognition of Provisions and Contingencies

Judgment is exercised by management to distinguish the difference between provisions and contingencies. Policies on recognition and disclosure of provisions and contingencies are discussed in Note 2.11 and relevant disclosures are presented in Note 33. In dealing with the Bank‟s various legal proceedings, its estimate of the probable costs that may arise from claims and contingencies has been developed in consultation and coordination with the bank‟s internal and outside counsels acting in defense for the Bank‟s legal cases and are based upon the analysis of probable results. Although the Bank does not believe that its dealing on these proceedings will have material adverse effect on the Bank‟s financial position, it is possible that future results of operations could be materially affected by changes in the estimates or in the effectiveness of the strategies conducted relating to those proceedings.

3.2 Key Sources of Estimation Uncertainty

The following are the key assumptions concerning the future, and other key sources of estimation uncertainty at the end of the reporting period, that have a significant risk of causing a material adjustment to the carrying amounts of resources and liabilities within the next reporting period:

a) Evaluating Impairment of Financial Assets (HTM Investments and Loans and Other Receivables) The Bank reviews its HTM investments and loans and other receivable to assess impairment at least on a quarterly basis. In determining whether an impairment loss should be recorded in profit or loss, 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 the portfolio before the decrease can be identified with an individual item in that portfolio. This evidence may include observable data indicating that there has been an adverse change in the payment status of borrowers or issuers in a group, or national or local economic conditions that correlate with defaults on assets in the group, including, but not limited to, the length of the Bank‟s relationship with the customers, the customer‟s current credit status, average age of accounts, collection experience and historical loss experience.


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Management uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the portfolio when scheduling its future cash flows. The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. The carrying value of loans and other receivables and the analysis of the related allowance for impairment on such financial assets are shown in Notes 11 and 16. There are no impairment losses recognized on HTM investments in 2017 and 2016. b) Estimating Useful Lives of Bank Premises, Furniture, Fixtures and Equipment; and Investment Properties The Bank estimates the useful lives of bank premises, furniture, fixtures and equipment, investment properties except land, branch licenses, and computer software based on the period over which the assets are expected to be available for use. The estimated useful lives of bank premises, furniture, fixtures and equipment, investment properties and computer software are reviewed periodically and are updated if expectations differ from previous estimates due to physical wear and tear, technical or commercial obsolescence and legal or other limits on the use of the assets.

The carrying amounts of bank premises, furniture, fixtures and equipment and investment properties are analyzed in Notes 12 and 13, respectively. Based on management assessment, there is no change in the estimated useful lives of these assets during the year. Actual results, however, may vary due to changes in estimates brought about by changes in factors mentioned above. c) Determining Realizable Amount of Deferred Tax Assets The Bank reviews its deferred tax assets at the end of each reporting period and reduces the carrying amount to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilized d) Determination of Fair Value of Investment Properties The Bank‟s investment properties are composed of parcels of land and buildings and improvements which are held for capital appreciation or held-for-lease, and are measured using cost model. For investment properties with appraisal conducted prior to the end of the current reporting period, management determines whether there are significant circumstances during the intervening period that may require adjustments or changes in the disclosure of fair value of those properties. The estimated fair value of investment properties is determined on the basis of the appraisals conducted by professional appraiser applying the relevant valuation methodologies. A significant change in key inputs and sources of information used in the determination of the fair value disclosed for those assets may result in adjustment in the carrying amount of the assets reported in the financial statements if their fair value will indicate evidence of impairment.

e) Estimating Impairment Losses of Non-financial Assets Except for intangible assets with indefinite useful lives (i.e. goodwill and acquired branch licenses), PFRS requires that an impairment review be performed when certain impairment indications are present. The Bank‟s policy on estimating the impairment of non-financial assets is discussed in detail in Note 2.16. Though management believes that the assumptions used in the estimation of fair values reflected in the financial statements are appropriate and reasonable, significant changes in these assumptions may materially affect the assessment of recoverable values and any resulting impairment loss could have a material adverse effect on the results of operations.


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Allowance for impairment recognized on investment properties and other properties held for sale are shown in Notes 13 and 16. However, there is no impairment loss recognized in goodwill and bank premises, furniture, fixtures and equipment.

f) Valuation of Post-Employment Benefits The determination of the Bank‟s obligation and cost of post-employment benefit plan is dependent on the selection of certain assumptions used by actuaries in calculating such amounts. Those assumptions are described in Note 26.2 and include, among others, discount rates, expected rate of salary increases and employee turnover. A significant change in any of these actuarial assumptions may generally affect the recognized expense and the carrying amount of the post-employment benefit obligation in the next reporting period. The amounts of post-employment benefit obligation and expense and an analysis of the movements in the estimated present value of DBO, as well as the significant assumptions used in estimating such obligation, are presented in Note 26.2.

4. Carrying Amounts and Fair Values by Category of Financial Assets and Financial Liabilities

The following table summarized the carrying values and fair values of those financial assets and financial liabilities in the statements of financial position: December 31, 2017

Financial Assets: Carrying Value Fair Value

Cash and other cash items 7 P 24,422,366 P 24,422,366 Due from BSP 8 46,228,845 46,228,845 Due from other banks 9 545,093,724 545,093,724 HTM Investments 10 373,493,929 373,493,929 Loans and Receivable 11 528,307,634 528,307,634

P 1,517,546,498 P 1,517,546,498

Financial Liabilities

Deposit Liabilities 17 P 1,360,678,227 P 1,360,678,227 Bills Payable 18 20,000,000 20,000,000 Other Financial Liabilities 19 3,349,099 3,349,099

P 1,384,027,326 P 1,384,027,326

December 31, 2016: Financial Assets: Notes Carrying Value Fair Value

Cash and other cash items 7 P 21,794,886 P 21,794,886 Due from BSP 8 42,348,632 42,348,632 Due from other banks 9 492,457,261 492,457,261 HTM Investments 10 288,502,388 288,502,388 Loans and Receivable 11 543,627,762 543,627,762

P 1,388,730,929 P 1,388,730,929


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Financial Liabilities

Deposit Liabilities 17 P 1,256,253,311 P 1,256,253,311 Bills Payable 18 20,000,000 20,000,000 Other Financial Liabilities 19 8,266,506 8,266,506

P 1,284,519,817 P 1,284,519,817

5. Risk Management Objectives, Policies and Procedures 5.1 Risk Management

To ensure that corporate goals and objectives and risk strategies are achieved, the Bank utilizes a risk management process that is applied throughout the organization in executing business activities. The Bank‟s activities are principally related to the use of financial instruments and are exposed to credit risk, liquidity risk and market risk. Forming part of a coherent risk management system are the risk concepts, statistical and analytical methodology and market analysis, which are being employed by the Bank. These tools support the key risk process that involves identifying, measuring, controlling and monitoring risks. 5.2 Risk ManagementStructure

a. Board of Directors (BOD). The BOD has the vested corporate powers to exercise and conduct business and control the Bank‟s properties. The BOD approves broad risk management strategies and policies and ensures that risk management initiatives and activities are consistent with the Bank‟s overall objectives.

b. Credit Committee (Crecom). This is a board level committee, which reviews the bank-wide credit strategy, profile and performance. It approves the credit-risk taking activities based on the Bank‟s established approving authorities and likewise reviews and endorses credit-granting activities, including the internal credit risk rating system. All credit proposals, except the microfinance, pass through this committee for final approval. The Crecom reviews the Bank‟s loan portfolio in line with the Bank‟s policy of not having significant unwarranted concentrations of exposure to individual counterparties, in accordance with BSP‟s rules and regulations on maintaining a financial exposure to any single person or group of connected persons within the statutory single borrower‟s limit.

c. Risk Management Committee (RMC). This board level committee oversees the effectiveness of the Bank‟s overall risk management strategies, practices and policies. The RMC reviews and approves principles, policies, strategies, process, and control frameworks pertaining to risk management and recommends to the BOD. The RMC evaluates the Bank‟s risk exposures and estimates the impact on the Bank, evaluates the magnitude, direction and distribution of risks across the Bank and uses this as basis in the determination of risk tolerances that it subsequently recommends to the BOD for approval. It reports to the BOD the Bank‟s overall risk exposures and the effectiveness of its risk management practices and processes recommending further policy revisions as necessary.


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d. Audit Committee (AC). The Audit Committee assists the BOD in fulfilling its oversight responsibilities for financial reporting process, the Bank‟s process for monitoring compliance with laws and regulations and the code of conduct. It retains oversight responsibilities for operational risks, the integrity of the Bank‟s financial statements, compliance, legal risk and overall policies and practices relating to risk management. It is tasked to discuss with Management the Bank‟s major risk exposures and ensures accountability on part of Management to monitor and control such exposures including the Bank‟s risk assessment and risk management policies. The Committee discusses with Management and the independent auditor the major issues regarding accounting principles and financial statement presentation, including any significant changes in Bank‟s selection or application of accounting principles; and major issues as to the adequacy of the Bank‟s internal controls; and the effects of regulatory and accounting initiatives, as well as off-balance sheet structures, on the financial statements of the Bank. e. Corporate Governance Committee (CGC). This board level committee is responsible for ensuring the BOD‟s effectiveness and due observance of corporate governance principles and guidelines. It reviews and assesses the adequacy of the Corporate Governance Charter and recommends changes as necessary. It oversees the implementation of the Bank‟s compliance program and ensures compliance issues are resolved expeditiously. It assists the Board members in assessing whether the Bank is managing its compliance risk effectively and ensures regular review of the compliance program. f. Internal Audit Department (IAD). The Department provides an independent assessment of Bank‟s Management and effectiveness of existing internal control systems through adherence testing of processes and controls across the organization. The Internal Audit Department audits risk management processes throughout the Bank annually or in a cycle depending on the latest audit rating. It employs a risk-based audit approach that examines both the adequacy of the procedures and the Bank‟s compliance with procedures. It discusses the results of all assessments with management, and reports its findings and recommends to the Audit Committee, which in turn, conducts the detailed discussion of the findings and recommendations during its regular meetings. The IAD‟s activities are suitably designed to provide the Bank with reasonable assurance that significant financial and operating information is materially complete, reliable and accurate; internal resources are adequately protected; and employee performance is in compliance with the Bank‟s policies, standards, procedures, and applicable laws and regulations. g. Compliance Department (CD). The Compliance Department is responsible for reviewing legal or regulatory matters that could have significant impact on the Bank‟s financial position, the Bank‟s compliance with applicable laws and regulations, and inquiries received from regulators or government agencies. It also reviews the effectiveness and adequacy of the system for monitoring compliance with laws and regulations and the results of Management‟s investigation and follow-up (including disciplinary action) for any instances of non-compliance. 5.3 Credit Risk Credit risk refers to the potential loss of the Bank‟s earnings or capital arising from an obligor/s, customer/s or counterparty/s failure to perform and/or meet the terms or any contract with the Bank. Credit risks may last for the entire tenor and set at the full amount of a transaction and in some cases may exceed the original principal exposures. The risk may arise from lending, investments and other activities undertaken by the Bank. The RMC manages the Bank‟s credit risk at the product and portfolio levels. The Bank has a structured and standardized credit rating and approval process according to the borrower or business


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and/or product segment. For large credit transactions, the Bank has established procedures for credit evaluation, risk assessment and well-defined concentration limits, which are set for each type of borrower. a. Credit Concentration Excessive concentration of lending plays a significant role in the weakening of asset quality. The Bank mitigates this risk by diversifying its loan portfolio across various sectors, economic activities, and borrowers. The Bank believes that good diversifications across economic sectors and geographic areas, among others, will enable the Bank to ride through business cycles without causing undue deterioration in its asset quality. The RMC reviews the Bank‟s loan portfolio in line with the Bank‟s policy of not having significant concentrations of exposures to specific industries or group of borrowers. Management of concentration of risks is by client/counterparty and by industry sector. i. Maximum exposure to credit risk As of December 31, 2017 and 2016, the maximum credit exposure or the single borrower‟s limit (SBL) to any client or counterparty (25% of Bank‟s net worth) amounted about P 67.092 Million and P 64.932 Million, respectively. The Top Twenty (20) borrowers are compliant with the regulatory SBL. The table below summarizes the top 20 borrowers of the Bank (amounts in millions):

2017 2016

Aggregate Exposure P 198.164 P 193.347

Percentage of Exposure to Total Loan Portfolio 38% 37%

Percentage to Total Equity 74% 74% ii. Credit Concentration by Industry

The Bank monitors concentrations of credit risk by industry sector. An analysis of concentrations of credit risk (at amortized cost) by industry as of December 31, 2017 and 2016 is shown below:

2017 % 2016 %

Other Service activities P 102,356,781 19.71 P 98,653,045 18.94

Wholesale and Retail Trade

111,632,447 21.50

134,116,511

25.75

Real estate activities 176,931,182 34.08 125,434,901 24.09

Transportation 25,603,934 4.93 56,289,999 10.81

Construction 40,660,005 7.83 32,185,473 6.18

Household Consumption 12,966,523 2.50 16,685,503 3.20


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Education 17,201,531 3.31 17,601,975 3.38

Agriculture, hunting, forestry 24,914,772 4.80 23,537,761 4.52

Health and Social Works 4,535,924 0.87 3,129,694 0.60 Accommodations and Food Service Activities 2,415,787 0.47 13,112,688 2.52

P 519,218,886 100% P 520,747,550 100%

b. Collateral and Other Credit Enhancements

Collaterals are taken into consideration during the loan application process as collaterals offer an alternative way of collecting from the client if a default occurs. The percentage of loan value attached to the collateral offered is part of the Bank‟s lending guidelines. Such percentage takes into account safety margins for interest rate exposure and price volatility. Collaterals are valued according to existing credit policy standards and following the latest appraisal report, serve as the basis for the amount of the secured loan facility. The Bank is not permitted to sell or re-pledge the collateral in the absence of default by the owner of the collateral. It is the Bank‟s policy to dispose foreclosed assets in an orderly manner. The proceeds of the sale of the foreclosed assets included under Investment Properties are used to reduce or repay the outstanding claim. As part of the Bank‟s risk control on security/collateral documentation, standard documents are made for each security type and deviation from the pro-forma documents are subject to Legal Counsel‟s approval prior to acceptance.

The table below provides the collateral profile of the outstanding loan portfolio of the Bank:

2017 % 2016 %

Real Estate Mortgage P 450,775,809 86.82 P 433,885,055 83.32

Chattel Mortgage 1,966,216 0.38 2,504,887 0.48

Holdout Loans 2,529,665 0.49 1,183,055 0.23

Deed of Assignment 297,963 0.05 744,311 0.14

Unsecured 63,649,233 12.26 82,430,242 15.83

P 519,218,886 100 P 520,747,550 100

c. Internal Credit Risk Rating System

In October, 2014, the BSP issued the Circular No. 855 in order to provide guidelines on sound credit risk management practices, which among others, include the adoption by the bank of sound and appropriate risk measurement methodologies to control and monitor the quality of credit, such as the Internal Credit Risk Rating System. The Bank has developed and formulated the Internal Credit Risk Rating System. The tables below show the Credit Risk Rating System of the Bank as of December 31, 2017 and 2016: 2017:

Pass Especially Mentioned Substandard Doubtful Loss

Total

Agrarian Reform

P 213,370

P 213,370

Other Agri

15,156,417 1,206,436 797,087 7,541,462

24,701,402

Microfinance

45,388,294 1,446,163 406,829 805,293 4,114,225

52,160,804


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2016:

The following is brief description of the Bank‟s risk grades:

o Pass – These are loans and other credit accommodations that do not have a greater-than-normal credit risk

o Especially mentioned – These are loans and other credit accommodations that have potential

weaknesses that deserve management‟s close attention.

o Substandard – These are loans and other credit accommodations that have well-defined weakness/es, that may jeopardize repayment/liquidation in full, either in respect of the business, cash flow or financial position, which may include adverse trends or developments that affect willingness or repayment ability of the borrower.

o Doubtful – These are loans and other credit accommodations that exhibit more severe weaknesses

than those classified as “Substandard”, conditions and values make collection or liquidation highly improbable.

o Loss – These loans and other credit accommodations which are considered uncollectible or

worthless.

SME

191,845,098 50,892,200 47,140,020 3,775,933 2,943,602

296.596.853

Private Corp.

2,773,916 11,229,279 16,958,022 - -

30,961,217

Housing

33,798,907 - 16,131,544 129,090 -

50,059,541

Consumption

7,793,052 654,318 591,326 12,641 3,915,186

12,966,523

Other Loan

39,165,892 3,675 9,413,741 148,505 2,827,363

51,559,176

Total

P 335,921,576 64,225,635 91,847,918 5,668,549 21,555,208

P 519,218,886

Percentage to loan portfolio

64.70% 12.37% 17.69% 1.09% 4.15%

Pass Especially Mentioned Substandard Doubtful Loss

Total

Agrarian Reform

P 591,688 - - - 712,796

P 1,304,484

Other Agri

8,303,385 2,953,500 2,677,046 700,000 7,599,345

22,233,276

Microfinance

43,012,386 1,489,818 1,420,946 435,506 4,759,521

51,118,177

SME

157,592,293 45,554,686 33,034,028 6,074,036 6,137,902

248,392,945

Private Corp.

10,479,991 42,883,565 26,130,883 9,194,063 -

88,688,502

Housing

15,942,926 5,259,677 2,830,736 129,090 -

24,162,429

Consumption

11,043,873 470,815 894,150 15,388 4,261,277

16,685,503

Other Loan

40,998,775 7,680,388 9,507,689 6,468,039 3,507,343

68,162,234

Total

P 287,965,317 106,292,449 76,495,478 23,016,122 26,978,184

P 520,747,550

Percentage to loan portfolio

55.30% 20.41% 14.69% 4.42% 5.18%

100.00%


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54

It is the Bank‟s policy to maintain accurate and consistent risk ratings across credit portfolio. This facilitates a focused management of the applicable risk and the comparison of credit exposures across all lines of business, geographic regions and products. The rating system is supported by a variety of financial analytics, combined with processed market information to provide the main inputs for measurement of counterparty risk. The risk ratings are assessed and updated regularly.

d. Impairment Assessment On a quarterly basis, the Bank conducts an impairment assessment exercise to determine expected losses on its loan portfolio. The main considerations for the loan impairment assessment include whether any payments of principal or interest are overdue by more than 90 days or if there are any known difficulties in the cash flows of counterparties or breach of the original terms of the contract. The table below shows the aging analysis of the past due loans and receivables per class that the bank held. Under PFRS 7, a financial asset is past due when a counterparty has failed to make payment when contractually due. Hereunder, are the tables of aging of non-performing past due loans as of December 31 2017 and 2016: 2017:

≤ 30 days 31 to 90

days

91 to 180 days

181 to 1 year

> 1 year

Total

Agrarian/Other Agri P 289,862 572,685 244,906 - 8,551,919

P 9,659,372 Microfinance 1,516,697 1,057,476 1,142,080 1,532,877 1,439,239

6,688,369

SME 7,893,550 11,834,065 8,157,382 14,909,645 6,719,534 49,514,176 Private Corp-Non Fin. 4,531,939 - - - -

4,531,939

Consumption 3,084 345,369 290,647 210,424 3,672,712

4,522,236

Other Purpose 4,666,303 11,362,943 4,626,047 2,218,146 2,990,377

25,863,816

Total P 18,901,435 25,172,538 14,461,062 18,871,092 23,373,781

P 100,779,908

2016:

≤ 30 days 31 to 90

days

91 to 180 days

181 to 1 year

> 1 year

Total

Agrarian/Other Agri P 5,239,944 - - - 6,782,905

P 12,022,849 Microfinance 2,901,715 527,610 432,466 1,009,817 2,592,804

7,464,412

SME 16,582,696 - - 74,763 22,444,388 39,101,847 Private Corp-Non Fin. 27,432,799 - - - -

27,432,799

Consumption 69,080 19,016 30 121,847 5,015,351

5,225,324

Other Purpose 7,906,464 - 117,001 81,077 3,467,169

11,571,711

Total P 60,132,698 546,626 549,497 1,287,504 40,302,617

P 102,818,942


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The Bank adopted the regulatory guidelines in setting up allowance for credit losses, as prescribed in Appendix 18 of the Manual of Regulations for Banks (MORB), for which the Bank duly notified the BSP of its adoption, through the Central Point of Contact Department I. In addition, a general loan loss provision equivalent to one percent (1%) of the outstanding balance of loans for which no specific provisions are made and/or for which the estimated loan losses are less than one percent (<1%), less loans which are considered non-risk under existing laws, rules and regulations.

Under Appendix 18, the bank assesses the loans and other credit accommodations (i.e. accounts receivable, sales contract receivable, accrued interest receivables and advances) with unpaid principal and/or interest and provides allowance for credit losses (ACL) based on the number of days of missed payments as follows: For unsecured loans and other credit accommodations:

No. of Days Unpaid/with Missed Payment Classification ACL

31-90 days Substandard 10%


121-180 days Doubtful 50%

181- days and over Loss 100%

For secured loans and other credit accommodations:


31-180 days* Substandard 10%


Over 1 year – 5 years Doubtful 50%

Over 5 years Loss 100%

When there is imminent possibility of foreclosure and expectation of loss, ACL shall be increased to 25%. Provided, that where the quality of physical collaterals or financial guarantees securing the loans and advances are determined to be insufficient, weak or without recoverable values, such loans and advances shall be treated as if these are unsecured. Loans and other credit accommodations that exhibit the characteristics for classified accounts described under Subsection X178.17 of MORB shall be provided with allowance for credit losses as follows:

Classification ACL

Especially Mentioned 5%

Substandard – Secured 10%

Substandard – Unsecured 25%

Doubtful 50%

Loss 100%

Unsecured loans and other credit accommodations classified as “Substandard” in the last two (2) internal credit reviews which have been continuously renewed /extended without reduction in principal and is not in process of collection, shall be downgraded to “Doubtful” classification and provided with a 50% allowance for credit losses. Loans and other credit accommodations under litigation which have been classified as “Pass” prior to the litigation process shall be classified as “Substandard” and provided with 25% allowance for credit losses. Loans and other credit accommodations that were previously classified as “Pass” but were subsequently restructured shall have a minimum classification of “Especially Mentioned” (EM) and provided with a 5%


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allowance for credit losses, except for loans which are considered non-risk under existing laws, rules and regulations. Classified loans and other credit accommodations that were subsequently restructured shall retain their classification and provisioning until the borrower has sufficiently exhibited that the loan will be fully repaid. For microfinance loans and consumer loans such as salary loans with unpaid principal and/or interest shall be classified and provided with ACL based on the number of days of missed payments as follows:


1-30 days EM 2%


61-90 days Doubtful 50%

91 days and over/2nd

restructuring Loss 100%

It is the policy of the Bank to ensure the adequacy of impairment provision for the entire loan portfolio through quarterly review of the impairment after considering results of the credit review, levels of classified loans, delinquency reports, historical losses and market conditions. As of December 31, 2017 and 2016, Management believes that the impairment provision (see Note 16) is adequate.

5.4 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 Bank‟s market risk is very minimal because the Bank‟s investments are placed in government securities. 5.5 Interest rate risk

The bank‟s loans earn fixed annual interest rates ranging from 6% to 28% for term loans and 70% per annum (p.a.) for microfinance loans, both in 2017 and 2016. The shortest term of loan is one (1) month while the longest term is ten (10) years. The Bank‟s interest rate is consistent with the market rate. The Bank‟s HTM investments earn fixed interest rates ranging from 1% to 8%, both in 2017 and 2016. The Bank‟s savings deposit liabilities include demand deposits, ATM savings deposit, and regular savings deposit that earn 0.10% p.a. and 0.25% p.a. in 2017 and 2016, respectively. Special savings deposits have interest rates ranging from 0.12% p.a. to 2.00% p.a. in 2017 and 0.27% to 2.15% p.a. in 2016. Annual interest rate of regular time deposit ranges from 0.12% p.a. to 2.25% p.a. in 2017 and 0.27% to 2.40% in 2016, while for long term non-negotiable time deposit earned fixed annual interest rates from 2% p.a. to 3% p.a. in 2017 and 2.15% p.a. to 3.15% p.a. in 2016. In order to manage its interest rate risk, the Bank places its excess funds in high yield government securities and other short-term time deposits. The Bank has fixed interest rates and believes that interest rate risk is very minimal. 5.6 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. The Bank‟s RMC is responsible for formulating the Bank‟s liquidity risk management policies. Liquidity management is among the most important activities conducted within the bank. The Bank manages its


ANNUAL REPORT 2017

57

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. 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 other banks are made on a short-term basis with almost all being available on demand or within one month. The Bank uses liquidity forecast models that estimate the Bank‟s cash flow need based on the Bank‟s actual contractual obligations and under normal circumstances and extraordinary circumstances. The following table shows an analysis of assets and liabilities analyzed according to whether they are to be recovered or settled within one year and beyond one year from statement of condition date: Maturity Analysis of Assets and Liabilities: As of December 31, 2017: 0 to 3

Months >3 to 12 Months

Beyond 1 year

Total

Financial Assets: Cash and other cash items P 24,422,366 - - P 24,422,366 Due from Bangko Sentral ng Pilipinas 46,228,845 - - 46,228,845 Due from other banks 535,093,724 - 10,000,000 545,093,724 Held-to-Maturity (HTM) financial 159,192,692 51,110,000 163,191,237 373,493,929

Loans and Receivables 41,656,711 60,212,326 417,349,849 519,218,886

806,594,338 111,322,326 590,541,086 1,508,457,750 Financial Liabilities Deposit Liabilities 1,078,375,311 38,857,138 243,445,778 1,360,678,227

Bills Payables

20,000,000 - -

20,000,000

Other Financial Liabilities

3,349,099 - -

3,349,099

1,102,402,788 38,107,292 243,445,778

1,383,955,858

Asset-Liability Gap

(295,808,450) 73,215,034 347,095,308

P 124,501,892

Cumulative Gap P

(295,808,450) (222,593,416) 124,501,892

As of December 31, 2016: 0 to 3

Months >3 to 12 Months

Beyond 1 year

Total

Financial Assets: Cash and other cash items P 21,794,886 - - P 21,794,886 Due from Bangko Sentral ng Pilipinas 42,348,631 - - 42,348,631 Due from other banks 473,432,652 9,024,609 10,000,000 492,457,261 Held-to-Maturity (HTM) financial 107,000,000 - 181,502,388 288,502,388

Loans and Receivables 114,835,536 55,736,506 373,055,720 543,627,762

759,411,705 64,761,115 564,558,108 1,388,730,928 Financial Liabilities Deposit Liabilities 1,005,727,508 60,487,629 190,038,174 1,256,253,311

Bills Payables

20,000,000 - -

20,000,000

Other Financial Liabilities

8,266,506 - -

8,266,506

1,033,994,014 60,487,629 190,038,174

1,284,519,817

Asset-Liability Gap

(274,582,309) 4,273,486 374,519,934

P 104,211,111

Cumulative Gap P

(274,583,309) (270,308,823) 104,211,111


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58

6. Capital Management and Regulatory Capital

The primary objectives of the Bank‟s capital management are to ensure that the Bank complies with regulatory capital requirements and that the Bank maintains strong credit ratings and healthy capital ratios in order to support its business and to maximize shareholder‟s value. The Bank considers paid in capital and surplus as its capital. 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 established by the Basel Committee on Banking Supervision (“Bank for International Settlements rules/ratios”) and adopted by the BSP in supervising the Bank. The Bank had complied in full with all its regulatory capital requirements. Regulatory Capital Adequacy Framework In May, 2010, the BSP issued Circular No. 688 to provide guidelines implementing the revised risk-based capital adequacy framework for stand-alone thrift banks, rural banks and cooperative banks. The said Circular took effect on January 1, 2012. As one of the principal objectives of supervision of banks is the protection of depositors, it is essential to ensure that capital recognized in capital adequacy measures is readily available for those depositors. The risk based capital adequacy ratio (CAR) of the bank, expressed as a percentage of qualifying capital to risk-weighted assets, shall not be less than 10%. As of December 31, 2017 and 2016, the Bank is compliant with the regulatory capital adequacy ratio. Qualifying capital consists of Tier 1 (core plus hybrid) capital and Tier 2 (supplemental) capital elements, net of required deductions from capital. Tier 1 capital is composed of paid-up common stock, surplus including current year profit and surplus reserves less required deductions such as unsecured credit accommodations to DOSRI, deferred income tax, and goodwill. Tier 2 capital includes preferred stock, revaluation increment as authorized by the Monetary Board, unsecured subordinated debt and general loan loss provision. Risk-weighted assets is the sum of (1) credit risk weighted assets and (2) operational risk-weighted assets. Credit risk-weighted assets are determined by assigning risk weight to amounts of on-balance sheet assets and to credit equivalent amount of off-balance sheet items. The risk weights vary from nil to 150% depending on the type of exposure, with the risk weights of off-balance sheet exposure being subjected further to credit conversion factors. On the other hand, operational risk charge is equivalent to 12% of average gross income over the previous three (3) years of positive annual gross income. (Figures from any year in which annual gross income is negative or zero should be excluded from both the numerator and denominator when calculating the average gross income) The resultant operational risk capital charge is to be multiplied by 125% before multiplying 10 (i.e. the reciprocal of the minimum capital ratio of 10%) to arrive at the total operational risk- weighted assets.

The Bank‟s CAR as reported to BSP as of December 31, 2017 and 2016 is shown in the table below: Amounts in Millions of Pesos, except for ratios 2017 2016 a) TIER 1 Capital 245.139 219.398 b) TIER 2 Capital 2.618 3.079

c) Total Qualifying Capital (a+b) 247.757 222.477

d) Risk weighted assets 1,415.917 1,378.644 e) TIER 1 Capital Adequacy Ratio (a / d) 17.31 15.91


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59

f) Total Capital Adequacy Ratio (c / d) 17.50 16.14

7. Cash and Other Cash Items

This account consists of: 2017 2016 Cash in Vault P 18,282,751 P 14,577,486 Cash in ATM 5,631,500 7,203,100 Checks and other cash items 508,115 14,300

P 24,422,366 P 21,794,886

Cash in vault refers to the total amount of cash in the bank‟s vault under the custody of the cashiers and tellers, including automated teller machines. Checks and other cash items refer to the total amount of checks and other cash items received after the selected clearing cur-off time until the close of the year-end regular banking day. Cash and other cash items are included in the computation of cash and cash equivalents for cash flow statement purposes.

8. Due from Bangko Sentral ng Pilipinas (BSP)

The “Due from BSP” account represents the demand deposit account (DDA) with BSP which the Bank is maintaining primarily to meet reserve requirements and to serve as a clearing account for interbank claims. Effective in 2012, BSP Circular No. 753 provides that the required reserves shall be kept in form of deposit placed in the Bank‟s DDA with the BSP (see note 17). Due from BSP is a non-interest bearing deposit. Further, this account is included in the computation of cash and cash equivalents for cash flow statement purposes.

9. Due from Other Banks

This account represents deposits with local banks. Due from other banks amount is included in the computation of cash and cash equivalents for cash flow statement purposes.

Annual interest rates on due from other banks range from 0% to 5% p.a. in 2017 and 0% to 6% p.a. in 2016. As of December 31, 2017 and 2016, the interest income earned on due from other banks amounted to P4,485,750 and 4,434,404, respectively, and were included as part of interest income in the statements of profit and loss.

The breakdown as to classification and maturities profile of due from other banks follows:

As of December 31, 2017: 0 – 3 mos. >3mos-

1yr. >1yr. Total

Type of Deposit Demand Deposit P 31,091,346

P 31,091,346

Savings Deposit 267,081,187 267,081,187

Time Deposit 236,921,191 - 10,000,000 246,921,191

P 535,093,724

-

10,000,000

P

545,093,724


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60

As of December 31, 2016: 0 – 3 mos. >3mos-

1yr. >1yr. Total

Type of Deposit Demand Deposit P 19,182,932

-

-

P 19,182,932

Savings Deposit 234,922,513 - - 234,922,514

Time Deposit 219,327,207 9,024,609 10,000,000 238,351,815

P 473,432,652 9,024,609 10,000,000

P 492,457,261

.

10. Held-to-Maturity (HTM) Financial Assets

This account consists of government securities purchased from commercial banks, quoted in an active market and stated at amortized cost. Discount and premium recognized are amortized based on effective interest method. The balance of this account is composed of the following:

As of December 31, 2017:

Retail

Treasury Bonds

Treasury Bills

NFA Bonds

Ten-Year Agrarian Reform Bonds

Unamortized

Premium/ (Discount)

Amortized Cost

Acquired from

UCPB P - - 106,000,000 - - P 106,000,000

Metro Bank 66,500,000 84,110,000 - - (1,304,587) 149,305,413

Land Bank - - - 81,991,700 (7,458,338) 74,533,362

EastWest Bank 1,000,000 - 20,000,000 - 192,692 21,192,692

Allied Bank 10,462,462 - - - - 10,462,462

PVB 10,000,000 - - - - 10,000,000

Security Bank 2,000,000 - - - - 2,000,000

Totals

P 89,962,462 84,110,000 126,000,000 81,991,700 (8,570,233) P 373,493,929


Retail

Treasury Bonds

Treasury Bills

NFA Bonds


Unamortized

Premium/ (Discount)

Amortized Cost

Acquired from

UCPB P - - 107,000,000 - - P 107,000,000

Metro Bank 51,500,000 - - - (111,122) 51,388,878

Land Bank - - - 93,880,456 (7,566,620) 86,313,836

EastWest Bank 1,000,000 - 20,000,000 - 337,212 21,337,212

Allied Bank 10,462,462 - - - - 10,462,462

PVB 10,000,000 - - - - 10,000,000

Security Bank 2,000,000 - - - - 2,000,000

Totals

P 74,962,462 - 127,000,000 93,880,456 (7,340,530) P

288,502,388


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61

Annual interest rates on these financial assets range from 0.05% to 8 % p.a. in 2017 and 2016. Interest earned for the years ended December 31 2017 and 2016 amounted to P 9,071,598 and P 7,940,586, respectively, and were included as part of interest income in the statements of profit and loss.

Maturity profile of HTM investments follows:

December 31, 2017

Retail

Treasury Bonds

Treasury Bills

NFA Bonds


Unamortized

Premium/ (Discount) Amortized Cost

Short Term (one year or less)

- 84,110,000

106,000,000

- - P 190,110,000

Long Term (over 5 years)

P 89,962,462 - 20,000,000 81,991,700 (8,570,233) 183,383,929

Totals P 89,962,462 84,110,000 126,000,000 81,991,700 (8,570,233) 373,493,929

December 31, 2016

Retail

Treasury Bonds

Treasury Bills

NFA Bonds


Unamortized

Premium/ (Discount) Amortized Cost

Short Term (one year or less)

-

-

107,000,000

-

- P 107,000,000

Long Term (over 5 years)

P 74,962,462 20,000,000 93,880,456 (7,340,530) 181,502,388

Totals P 74,962,462 - 127,000,000 93,880,456 (7,340,530) 288,502,388

11. Loans and Receivables

Loans and receivables consist of the following as of December 31:

2017 2016

Receivables from customers:

Loans and Discounts P 519,280,236 P 520,805,565

Unamortized discount (61,350) (58,015)

Amortized Cost ( See Note 11.1) 519,218,886 520,747,550

Other Receivables:

Accrued interest receivable (See Note 11.3) 3,465,242 3,170,168

Sales contract receivable (See Note 11.2) 49,912,965 64,537,527

Accounts receivable (See Note 11.4) 21,265,718 19,199,153

74,643,925 86,906,848

Total Loans and Receivables 593,862,811 607,654,398

Allowance for credit losses ( See Note 11.5) (65,555,177) (64,026,636)

Loans and Receivables - net P

528,307,634 P 543,627,762


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62

Interest earned from loans and discounts for the years 2017 and 2016 amounted to P 100,328,658 and P 97,571,992, respectively, and were included as part of interest income in the statements of profit and loss. Loans and discounts bear annual interest rates ranging from 6% to 70 % per annum, in 2017 and 2016. As of December 31, 2017 and 2016, loan receivables amounting P 20 Million are pledged as collateral to secure borrowings under rediscounting privileges (see Note 18). Further, as of December 31, 2017 and 2016, housing loans amounting to P 8,880,740 and P 6,270,327, respectively, are secured by real estate mortgage and further guaranteed by the Home Guaranty Corporation.

11.1 Loans and discounts

Profile of loans and discounts (at amortized cost) follows: a. As to status and Past Due Ratio:

2017 2016 Current Loan P 418,438,977 P 417,928,608

Past Due

79,421,058

79,539,081 Items in Litigation 21,358,851 23,279,861

Total Past Due 100,779,909 102,818,942

P 519,218,886 P 520,747,550

Past due ratio 19.41% 19.74%

Under BSP Regulations, as a general rule, loans shall be considered past due when any principal and/or interest or installment due, or portions thereof, are not paid at their contractual due date, in which case, the total outstanding balance thereof shall be considered as past due. However, the said Regulation allows the banks to provide a cure period policy on loan products other than microfinance of thirty (30) days within which to allow the obligors or borrowers to catch up on their late payment without being considered as past due. For microfinance that feature high frequency payments, the cure period is for seven (7) days. The cure period policy shall be based on verifiable collection experience and reasonable judgment that support tolerance of occasional payment delays; provided however, that the observance of a cure period policy shall not preclude the timely adverse classification of an account that has developed material credit weakness/es, and that banks shall regularly review the reasonableness of its cure period policy.

In view thereof, the BOD has approved the Bank‟s cure period policy of 30 days for loans other than microfinance and 7 days for microfinance. As of December 31, 2017, allowance for credit losses on loans and discounts includes specific and general loan loss reserves which amounted to P 47,587,452 and P 2,618,259, respectively. As of December 31, 2016, allowance for credit losses on loans and discounts is composed of specific and general loan loss reserves which amounted to P 49,397,727 and P 3,079,264, respectively. The specific and general loan loss reserves, as discussed under Note 5.3.d, represent management estimates of probable losses on loans and discounts following the guidelines set forth by the BSP Circular No. 855.


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63

b. As to loan products/purpose:

2017 % 2016 %

Agrarian Reform and Other Agricultural P 24,914,772 4.80 P 23,537,761 4.52

Microfinance 52,160,804 10.04 51,118,177 9.82

Small and Medium Enterprise 296,596,853 57.12 248,392,944 47.70

Private Corporations 30,961,217 5.96 88,688,503 17.03

Individuals for Housing Purposes 50,059,541 9.64 24,162,429 4.64

Individuals for Consumption Purposes 12,966,523 2.50 16,685,503 3.20

Individuals for Other Purposes 51,559,176 9.93 68,162,233 13.09

P 519,218,886 100. P 520,747,550 100 c. Microfinance profile as at December 31, follows:

No. of Accts. 2017

No. of Accts.

2016

i. Classified as to type of client Workers in the informal sector 5,897 P 52,160,804

5,508

P

51,118,177

ii. Classified as to purpose

Microenterprises and small businesses, 5,881 49,856,664

5,491

48,802,594

Microfinance Plus 16 2,304,140 17 2,315,583

Total 5,897 52,160,804 5,508 51,118,177 iii. Classified as to Interest Rate (per annum) Over 50% 5,897 52.160.804

5,508

51,118,177 iv. Classified as to Size of Loans

P 3,001 to P 5,000 2,275 6,974,168 1,689 2,630,793

P 5,001 to P 10,000 1,264 6,205,804 1,385 7,472, 644

P 10,001 to P 20,000 1,205 10,769,988 1,226 11,546,543

P 20,001 to P 50,000 981 18,433,772 1,017 18,913,526

P 50,001 to P 100,000 130 5,323,288 149 6,309,056 P 100,001 to P 150,000 26 2,149,644 25 1,930,032 P 150,001 to P300,000 16 2,304,140 17 2,315,583

Total 5,897 52,160,804 5,508 51,118,177

v. Classified as to Security

Secured - - - -

Unsecured 5,897 52,160,804 5,508 51,118,177

Total 5,897 52,160,804 5,508 51,118,177


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64

vi. Classified as to Term of Loan

Over 3 months to 6 months 5,872 50,430,197 5,472 48,821,063

Over 6 months to 12 months 25 1,730,607 36 2,297,114

Total 5,897 52,160,804 5,508 51,118,177

vii. Re-payment Schedules

Weekly 5,897 52,160,804 5,508 51,118,177

viii. Loan Releases

New Clients 3,136 32,703,000 2,940 31,275,000

Repeat Loans 5,858 141,254,000 5,184 131,293,000

Total 8,994 173,957,000 8,124 162,568,000

ix. Additional Information: Funds Generated 1. Deposit Component 5,897 P 25,464,615

5,508

P

25,103,609

2. Borrowings

Land Bank of the Philippines P 20,000,000 P 20,000,000

e. Maturity Profile of Loans and Discounts Hereunder is the maturity profile of the Bank‟s loans and discounts as at December 31:

2017 2016

Within one year P 78,223,446 P 130,975,438 Beyond one year 440,995,440 389,772,112

P 519,218,886 P 520,747,550

11.2 Sales Contract and Receivable (SCR)

Sales Contract and Receivable (SCR) represents the balance due from the buyer of investment properties on installment basis. At the time of sale of said acquired asset on installment, the Bank still retains the title of the sold property and will only be transferred to the buyer upon full payment of the agreed selling price. This account consists of as at December 31:

2017 2016

Performing

P 33,944,201 P

49,409,470

Non-performing 15,968,764 15,128,057

Total

P 49,912,965 P

64,537,527


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SCR is considered non-performing in case of non-payment of any amortization due. According to BSP Regulations, an SCR which has been classified “Substandard” and considered non-performing due to non-payment of any amortization due may only be upgraded restored to unclassified and/or performing status after a satisfactory track record of at least three (3) consecutive payments of the required amortization of principal and/or interest has been established. As of December 31, 2017 and 2016, the allowance for losses on sales contract receivable amounted to P 11,398,756 and P 6,746,380, respectively.

Sales contract receivable (SCR) bears annual interest rate of 20% per annum in the bank‟s financial statements. Interest earned for the years 2017 and 2016, amounted to P 6,546,937 and P 6,926,800, respectively, and are included as part of interest income in the statement of profit and loss.

Maturity profile of the Bank‟s SCR as at December 31, follows:

2017 2015

Within one year P 14,579,987 P 37,659,353

Beyond one year 35,332,978 26,878,174

P 49,912,965 P 64,537,527

11.3 Accrued Interest Receivable

Accrued interest receivable consists of the following as at December 31:

2017 2016

Due from other banks P 454,299 P 410,674

HTM Investments 2,434,084 1,406,182

Loans and discounts 576,859 1,353,312

P 3,465,242 P 3,170,168

11.4 Accounts Receivables

Accounts Receivables consist of the following as at December 31: 2017 2016

Receivable from BancNet – Acquirer transactions 6,717,700 6,461,800

Cash bond with CIS Bayad Center, Inc. 4,177,983 4,497,401

Advances to MB Phils Inc. for Core Banking System development 1,621,218 1,107,284 Receivable from New Bay Phils., Inc. for authorized money transfer pay-out via TransFast

567,805 92,352

Receivable from borrowers for advanced insurance premium 833,046 482,040

Creditable Withholding Tax 330,675 780,993

Cash bond with BancNet 521,500 521,500

Cash bond with SSS 500,000 500,000

Receivable from separated RB Mendez Employees 2,358,900 2,358,900 Receivable from Universal Storefront Services Corporation for authorized money transfer pay-out via Western Union 2,187,861 764,047

Other receivables 1,449,031 1,632,836

P 21,265,719 P 19,199,153


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11.5 Allowance for credit losses As of December 31, allowance for credit losses consists of the following:

2017 2016

Loans and discounts P 50,205,710 P 52,476,991

Accrued interest receivable 576,858 1,363,312

Sales contract receivable 11,398,756 6,746,380

Accounts receivable 3,373,853 3,439,953

P 65,555,177 P 64,026,636

Included in the allowance for losses is the 100% provision for losses on receivables from separated RB Mendez employees acquired from the Purchase of Assets and Assumption of Liabilities of the said bank.

12. Premises, Furniture, Fixtures and Equipment

The composition of and movements for the years ended, December 31, 2017 and 2016 in this account

follow:

2017:

Land

Building

Lease-hold

Improve- ment

Furniture Fixtures & Equipment

Total

Cost Balance as at Jan. 1, 2017

P

11,298,088

P

59,688,234

P

514,615

P

45,870,168

P

117,371,105

Additions - 150,000 554,129 3,976,561 4,680,690 Disposal - - - (941,342) (941,342) Balance as at Dec.31,2017

11,298,088

59,838,234

1,068,744

48,905,387

121,110,453

Accumulated Depreciation

Balance as at Jan. 1,2017

30,155,360

222,788

36,630,493

67,008,641 Depreciation Expense (see Note 27)

2,424,161

341,821

3,339,809

6,105,791 Additions - - - - Disposal (941,342) (941,342) Balance as at Dec.31,2017

32,579,521

564,609

39,028,960

72,173,090

Carrying Amount

P

11,298,088

P

27,258,713

P

504,135 P

9,876,427

P

48,937,363

2016:

Land

Building

Lease-hold

Improve- ment

Furniture Fixtures & Equipment

Total

Cost

Balance as at Jan. 1, 2016

P 11,040,645

P 58,436,596 P

175,143

P 44,236,323

P 113,888,707

Additions 257,443 1,251,638 339,472 4,711,576 6,560,129 Disposal - - - (3,077,731) (3,077,731)


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Balance as at Dec.31,2016 11,298,088 59,688,234 514,615 45,870,168 117,371,105

Accumulated Depreciation

Balance as at Jan. 1,2016 - 26,513,028 175,138 34,566,568 61,254,734 Depreciation Expense (see Note 27) - 2,414,195

3,378

3,869,410 6,286,983

Additions - 1,228,137 44,272 834,958 2,107,367 Disposal - - - (2,640,443) (2,640,443)

Balance as at Dec.31,2016 - 30,155,360 222,788 36,630,493 67,008,641

Carrying Amount P 11,298,088 P 29,532,874 P

291,827

P 9,239,675 P 50,362,464

Additions to accumulated depreciation in 2016 were attributed to the purchase of all assets of RB Mendez. Gain on disposal of property and equipment amounted to P 2,443 and P 114,082 in 2017 and 2016, respectively and were included as part of gain on assets sold/exchanged in the statements of profit and loss. Under BSP rules, investments in property and equipment should not exceed 50% of a bank‟s unimpaired capital. As of December 31, 2017 and 2016, the Bank has satisfactorily complied with this BSP requirement.

13. Investment Properties - Net

Investment properties include real and other properties acquired by the bank in settlement of loans through foreclosure or dation in payment and/or for other reasons, whose carrying amount will be recovered principally through a sale transaction. Direct expenses incurred from these properties amounted to P 918,792 in 2017 and P 1,621,571 in 2016 are reported under Litigation expenses (see Note 28) as part of Other Administrative Expenses in the statements of profit and loss.

The cost, accumulated depreciation, impairment and the resultant carrying values of investment properties are shown below:

As of December 31, 2017 LAND BUILDINGS Other

Properties

TOTAL Cost P 82,608,742 35,989,727 180,000

P 118,778,469

Accumulated depreciation (13,968,473)

(13,968,473)

Allowance for Impairment (23,287,492) (2,056,555) (180,000)

(25,524,047)

Net carrying amount P 59,321,250 19,964,699 -

P 79,285,949

As of December 31, 2016 LAND BUILDINGS Other

Properties

TOTAL Cost P 99,515,622 30,086,322 207,000

P 129,808,944

Accumulated depreciation (11,850,204)

(11,850,204)

Allowance for Impairment (23,784,557) (57,756) (193,500)

(24,035,813)

Net carrying amount P 75,731,065 18,178,362 13,500

P 93,922,927


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68

A reconciliation of the carrying amounts, at the beginning and ending balance of investment property are shown below.

For the Year 2017:

LAND BUILDINGS OTHER

PROPERTIES

TOTAL

Balance at January 1, 2017, net of

accumulated depreciation and

impairment

P 75,731,065 18,178,362 13,500

P 93,922,927

Additions 5,080,567 10,094,290 -

15,174,857

Disposals

(20,627,012) (5,027,108) (13,500)

(25,667,620)

Depreciation for the Year (Note 27)

- (3,280,845) -

(3,280,845)

Impairment (Note 16)

(863,370) - -

(863,370)

Balance at December 31,2017, net

of accumulated depreciation and

impairment

P 59,321,250 19,964,699 -

P 79,285,949

For the Year 2016:

LAND BUILDINGS OTHER

PROPERTIES

TOTAL

Balance at January 1, 2016, net of

accumulated depreciation and

impairment

66,915,372 14,244,293 53,912

81,213,577

Additions

P 20,395,751 9,806,815 -

P 30,202,566

Disposals

(6,896,638) (3,500,293) (40,412)

(10,437,343)

Depreciation for the Year (Note 27)

- (2,314,697) -

(2,314,697)

Impairment (Note 16)

(4,683,420) (57,756) -

(4,741,176)

Balance at December 31,2016, net

of accumulated depreciation and

impairment

P 75,731,065 18,178,362 13,500

P 93,922,927


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69

Aging of Investment properties (at net carrying amount), follows: As of December 31, 2017:

≤ 3 years >3 years but ≤ 5

years

> 5 years but ≤ 10 years > 10 years Total

Land P 9,087,314 20,808,442 10,013,826 19,411,668

P 59,321,250

Buildings 12,987,080 3,443,560 3,534,054 5

19,964,699

Other

Properties - - - -

-

Total

P 22,074,394 24,252,002 13,547,880 19,411,673

P 79,285,949


≤ 3 years >3 years but ≤ 5

years

> 5 years but ≤ 10 years > 10 years Total

Land P 23,572,186 24,312,914 8,950,711 18,895,254

P 75,731,065

Buildings 11,857,685 3,100,937 3,219,735 5

18,178,362

Other

Properties 13,500

13,500

Total

P 35,429,871 27,413,851 12,170,446 18,908,759

P 93,922,927

Gain on sale of investment properties amounted to P 26,719,401 and P 33,386,861 in 2017 and 2016, respectively.

14. Goodwill

The balance of this account as of December 31, follows:

2017 2016

Goodwill P 12,252,898 P 12,508,898

Goodwill represents the excess of the cost of acquisition over the fair value of the net assets of RB Mendez at the date of purchase of all assets and assumption of all liabilities (P&A) of RB Mendez in October,2016 computed at sum of net liabilities assumed of P 49,473 and total consideration or price of P 12,459,425. In 2017, regulatory penalty of P 256,000, which was previously charged from RB Mendez‟s BSP Demand Deposit Account (DDA), was credited to the Bank‟s BSP DDA for reason of BSP waiver of the penalty as regulatory relief by virtue of the P&A transaction. As a result, the Goodwill balance was reduced by the said amount.


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15. Other Assets - Net The components and net carrying value of this account are shown below: 2017 2016 Due from Closed Bank/ in Liquidation (see Note 15.2) P 5,750,000 P 5,750,000 Other Intangible Assets - net (see Note 15.1) 3,039,229 2,425,405 Sinking fund – Medical Benefits 269,274 621,940 Prepaid expense 1,417,266 1,316,491 Deposit with Manila Electric Company (Meralco) 571,339 571,339 Shortage 103,780 28,760 Miscellaneous Assets 370,823 331,066

11,521,711 11,045,001 Less: Allowance for probable losses ( see Note 15.2) 5,750,000 5,750,000

Net Carrying Value P 5,771,711 P 5,295,001

15.1 Other Intangible Assets - Net Other Intangible assets refer to computer license software licenses to enable the Bank to utilize information technology assets such as the core banking system, personal computers in its operation, etc. The cost of the licenses is amortized on a straight-line basis for a period ranging from two (2) to five (5) years. Amortization expense on computer software licenses amounted to P 681,426 in 2017 and P530,388 in 2016. These are included as part of depreciation/amortization expenses in the statements of profit and loss.

The cost, accumulated amortization and net carrying value as of December 31, 2017 and 2016, follow:

2017 2016

Cost Balance as at January 1 P 6,692,343 P 5,575,111 Addition during the year 1,295,250 1,117,232

Balance as at December 31 7,987,593 6,692,343

Accumulated Depreciation Balance as at January 4,266,938 3,548,742 Amortization Expense (See Note 26) 681,426 530,388 Addition - 187,808

Balance as at December 31 4,948,364 4,266,938

Carrying Amount P 3,039,229 P 2,425,405

15.2 Due From Closed Banks

This account refers to the uninsured deposit with closed banks which are under receivership of the PDIC. As of December 31, 2017 and 2016, the Bank has provided 100% allowance for losses on due from closed banks.


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16. Allowance for Impairment

A reconciliation of allowance for impairment on the following assets is summarized below:

Beginning Balance

2017

2016

Loans and Receivable P 64,026,636 P 51,148,035 Investment Properties 24,035,813 20,463,238 Other Assets

5,750,000 4,500,000

Add (Deduct) Allowance for impairment acquired from P&A - 6,633,375 Impairment- investment properties (see note 13) 863,370 4,741,176 Impairment – loans and receivables 6,997,910 7,495,226 Disposal - Investment Properties (1,300,345) (1,168,601) Write-off of Bad Debts (see Note 34.2.d) (2,390,243) - Adjustment (1,153,917) - Ending Balance Loans and Receivables (See Note 11.5) P 65,555,177 P 64,026,636 Investment Properties (See Not 13) 25,524,047 24,035,813 Other Assets ( See Note 15) 5,750,000 5,750,000

17. Deposit Liabilities

As of December 31, this account consists of the following: 2017 2016

No. of

Accts Amount No. of

Accts Amount

Demand deposits 1,355 P 197,112,693

1,365 P 198,791,728

Savings deposits 51,584 873,681,039

49,704 804,369,239

Time deposits 406 289,884,495

408 253,092,344

53,345 P 1,360,678,227

51,477 P 1,256,253,311

The maturity profile of this account is presented below:

2017 2016

No. of Accts

Amount No. of Accts Amount

Short Term (one year or less) 52,939 P 1,070,793,732 51,069 P 1,003,160,967

Medium Term (>1 year to 5 years) 231 145,786,371 253 151,353,457

Long Term (>5 years) 175 144,098,124 155 101,738,887

53,345

P 1,360,678,227

51,477

P

1,256,253,311


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72

Hereunder is the breakdown of deposit liabilities by size and number of accounts:

2017 2016

No. of Accts

Amount

No. of Accts

Amount

P500,000 and below 52,849

P 697,465,902

51,010

P

661,232,748

Over P 500,000 496

663,212,325

467

595,020,563

53,345

P 1,360,678,227

51,477

P

1,256,253,311

Savings deposit and Demand Deposit bear interest rates at 0.10% p.a. in 2017 and 0.25% in 2016. Time deposit interest rates ranged from 0.12% p.a. to 3% p.a. in 2017 and 0.27% to 3.15%, in 2016. Interest expense on deposit liabilities in 2017 and 2016 amounted to P 10,650,504 and P11,463,967, respectively, and were included as part of interest expense in the statements of profit and loss.

Under existing BSP regulations, deposit liabilities of the Bank are subject to statutory/legal reserve requirement at 5%, 3%, and 3% of demand deposit, savings and time deposit, respectively wherein eligible or available reserve of the Bank refers to the balance of Demand Deposit Account with the BSP (reported as Due from BSP in the Balance Sheet) amounting to P 46,228,845 and P 42,348,632 as of December 31, 2017 and 2016, respectively. (see Note 8).

18. Bills Payable

This account represents borrowings with Land Bank of the Philippines under rediscounting privileges. The said borrowing is denominated in Philippine pesos with annual interest rates of 5%, both in 2017 and 2016. Total interest expense on bills payable incurred amounted to P 33,333 in 2017 and P 36,111 in 2016, and were included as part of interest expense in the statements of profit and loss. Bills payable is collateralized by certain loans from customers (see Note 11). Maturity profile of bills payable as of December 31, 2017 and 2016, is both within one year.

19. Other Financial Liabilities

This account consists of: 2017 2016

Due to the Treasurer of the Philippines P 86,402 P 86,402

Accrued interest expense payable 537,074 652,497

Income tax payable 1,743,447 5,346,269

Other taxes & licenses payable 982,176 2,181,338

P 3,349,099 P 8,266,506


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20. Accrued Expenses and Other Liabilities


Accounts payable P 12,296,390 P 8,156,899

Accrued profit sharing benefit payable 7,896,925 6,281,948

Withholding tax payable 162,804 724,561

Post-employment benefit obligation 1,311,824 552,404

Overage 376,821 367,400

Premiums payable to SSS, Philhealth & HDMF 346,161 100,671

Other liabilities 56,225 52,172

P 22,447,150 P 16,236,055

Accounts payable includes mainly of amounts which the Bank owes to its suppliers, service providers, bills payment collections and advance payments received from its customers. Accrued profit sharing benefit payable represents total amount due to directors, key management personnel, and regular full-time employees for profit sharing in accordance with Bank‟s by-laws.

21. Equity

21.1 Capital Stock Capital stock as of December 31, 2017 and 2016 consists of:

Number of Shares

Amount

Preferred Stock – P 100 par value Authorized – 100,000 shares non-voting Issued and outstanding - P - Common stock – P100.00 par value Authorized – 1,900,000 shares with voting rights Issued and outstanding 1,888,798 188,879,800

Total 1,888,798 P 188,879,800

Preferred stock – government shall be issued only to PDIC on account of the financial assistance available under the Strengthening Program for Rural Banks (SPRB) in view of the consolidation of RB Tanza and RB Teresa. Preferred shares are entitled to dividend rate equal to prevailing 5-year FXTN rate, on gross basis, on the date of PDIC‟s subscription to the Preferred shares (PS), payable annually to PDIC. Such rate shall be based on PDST-R2 set the previous business day. The PS is redeemable and convertible to common shares starting at the end of the 5

th year but not later than the 10

th year from issuance of PS. Furthermore,

PDIC may exercise put option on the PS. As of December 31, 2016 and 2015, the Bank did not avail the financial assistance under the SPRB, hence, no preferred stock was subscribed and outstanding.


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74

Pursuant to the Articles and Plan of Consolidation, the shares, which were issued to the stockholders of RB Tanza and RB Teresa by new corporation, Bangko Mabuhay, were valued at net assets in the balance sheets of RB Tanza and RB Teresa as of September 30, 2013.

21.2 Additional Paid-in Capital

Pursuant to the Articles and Plan of Consolidation, the excess of consolidated net worth over the value of issued shares from cut-off date as at September 30, 2013 until date of consolidation on April 1, 2015, was treated as additional paid in capital. The additional paid-in capital was arrived at based on audited financial statements of constituent banks as of March 31, 2015, as follows:

RB Teresa RB Tanza Consolidated Bank

(a) (b) (a) + (b) Total Assets P 68,295,336 P 1,224,384,098 P 1,292,679,434 Total Liabilities 64,836,512 1,012,151,291 1,076,987,803

Net Assets P 3,458,824 P 212,232,807 P 215,691,631 Less: Common Stock issued (see Note 21.1) (188,879,800)

Additional Paid in Capital P 26,811,831

21.3 Treasury Shares

In the aftermath of the consolidation, the Bank requested for the authority from the BSP to repurchase 93,330 common shares issued to former RB Teresa stockholders as agreed that the Bank shall buy out the RB Teresa stockholders for P 25 Million. The Monetary Board approved the said request in its Resolution No. 976 dated June 2,2016, subject to the condition, among others, that the Bank shall have sufficient unrestricted retained earnings in its books, as determined by the Central Point of Contact Department I of the BSP, to cover the shares to be purchased in compliance with Section 41 of Batas Pambansa Blg. 68 (the Corporation Code of the Philippines). In February 2017, the BSP granted the Bank to proceed with the repurchase transaction as the Bank‟s unrestricted retained earnings amounted to P 44.037 Million, which was more than the purchase price of P 25 Million. On March 7, 2017, the Bank repurchased 93,330 of its issued common shares from the former stockholders of RB Teresa for P 25 Million as treasury shares. The said treasury shares were disposed or sold to the remaining stockholders on 30 August 2017 at par or a total of P 9.333 Million. In accordance with the Philippine Accounting Standards (PAS) 32 paragraph no. 33, the excess of cost of the treasury shares over its selling price shall be recognized directly against retained earnings.


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75

22. Interest Income

This account consists of interest income earned from: 2017 2016

Loans and Discounts

Agricultural P 3,630,315 P 2,429,645

Microfinance 30,265,822 28,461,689

SME 42,361,554 34,218,477

Private Corporations 8,743,880 12,899,036

Individuals – Housing Purposes 4,416,731 2,349,149

Individuals – Consumption Purposes 1,904,076 2,252,074

Individuals for Other Purposes 9,006,280 14,961,923

Sub-total 100,328,658 97,571,993

Sales Contract Receivable

6,546,937

6,926,800

Interest Income subject to Regular Income Tax 106,875,595 104,498,793

Interest Subject to Final Tax

Due From Other Banks 4,485,750 4,434,404

Held-to-Maturity Financial Assets 9,071,598 7,940,586

Sub-total 13,557,348 12,374,990

P 120,432,943 P

116,873,783

23. Interest Expense


Interest Expense subject to withholding tax:

Savings Deposits P 3,285,806 P 3,914,003

Time Deposit 3,104,752 3,648,572

Demand Deposit 239,052 490,293

Sub-total 6,629,610 8,052,868

Interest Expense on tax exempt time deposit 4,020,894 3,411,099

Total Interest Expense on Deposit Liabilities 10,650,504 11,463,967

Interest expense on bills payable 33,333 36,111

P 10,683,837 P

11,500,078


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76

24. Service Charges, Fees and Commissions

This account consists of:

2017

2016

Bank Commission on loans

P 14,360,583 P

13,244,520

Commission on insurance premiums 4,125,718 3,588,852 Charges on demand deposit

750,349

686,854

Service fees – bills payment services (Bayad Center)

847,501

580,888

Fees on remittance services

347,522

494,323

ATM transaction fees

634,069

890,605

Inspection fees

323,422

290,134

Other retail banking fees

78,618 78,278

Total

P

21,467,782 P

19,854,454

25. Miscellaneous Income


2017

2016

Rental Income

P 864,458 P

963,339

Penalty on Loans

2,479,285

-

3,480,589

Dormant Charges

142,731

154,945

Others

4,532

9,043

P 3,491,006 P

4,607,916


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77

26. Compensation and Fringe Benefits This account consists of the following:

2017 2016

Employees Salaries and Fringe Benefits

Salaries and wages P 28,920,176 P 25,573,776

Profit sharing (See Note 26.1) 8,648,745 8,961,970

13th month pay 2,410,163 2,151,461

Social security expense 2,443,627 2,161,294

Provision for Retirement Fund 1,311,824 552,394

Medical, hospitalization & health plan 836,266 458,992

Other fringe benefits 8,940,381 8,071,886

Sub-total 53,511,182 47,931,773

Profit Sharing – Board of Directors & Executive Committee 10,810,932 11,202,462

Directors‟ Fees 2,064,000 2,055,892

P 66,386,114 P 61,190,127

26.1 Profit sharing

Profit sharing for the year 2017 and 2016 as provided in the Bank‟s By-Laws follows:

2017 2016

Directors

P 10,810.932 P

11,202,462

Key management personnel

2,698,889

2,797,279 Employees

5,949,856 6,164,691

P 19,459,677 P 20,164,432

26.2 Post-employment Benefit

a. Characteristics of the Defined Benefit Plan

The Bank maintains a funded, noncontributory post-employment benefit plan that is being administered by an independent trustee bank. The Bank‟s Management, in coordination the trustee bank, acts in the best interest of the plan assets and is responsible for setting the investment policies. The post-employment plan covers all regular full-time employees.

The normal retirement age is 60. Normal retirement benefit is equal to one (1) month‟s final salary for every year of service.


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b. Explanation of Amounts Presented in the Financial Statements Actuarial valuation of the Bank‟s retirement fund is made every three years to determine the current service cost and past service liability of the Bank. The last actuarial valuation report obtained from an independent actuary was as of December 31, 2015.

Total benefits paid out from plan assets amounted to P 1,143,628 in 2017 and P 1,300,038 in 2016.

The composition of the fair value of the fund at the end of reporting period by category and risk characteristics is shown below. 2017 2016

Deposit in banks P 14,968 P 1,626,872 Investments 13,972,583 12,582,056 Other receivables 643,127 89,883 Accrued payables (13,779) (14,259)

P 14,616,899 P 14,284,552

The movements in the fair value of plan assets are presented below: 2017 2016

Balance at beginning of year P 14,284,552 P 14,714,757 Contributions to the Plan (see Note 30.2) 552,404 859,474 Realized and unrealized earnings on plan assets 923,571 10,359 Benefits paid (see Note 30.2) (1,143,628) (1,300,038)

P 14,616,899 P 14,284,552

The fair values of the investments are determined based on quoted market prices in active markets. Plan assets do not comprise any of the Bank‟s own financial instruments or any of its assets occupied and/or used in its operations. Current service costs amounting to P 1,311,824 in 2017 and P 552,394 in 2016 are presented as part of Compensation and Fringe Benefits in the statements of profit or loss. In determining the amounts of the defined post-employment obligation, the following significant actuarial assumptions were used in 2015:

Discount rate 5.27% Salary increase rate 3.00% Employee turnover rate 1% - 5% Assumptions regarding future mortality experience are based on published mortality and disability tables. The valuation was done using the applicable PDST-R2 government bond rate for the valuation date. As at the last appraisal on December 31, 2015, the unfunded Defined Benefit Obligation (DBO) amounted as follows:

Present value of DBO P 14,731,080 Salary increase rate 14,714,757

Employee turnover rate P 16,323


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c. Risk Associated with the Retirement Plan

The plan exposes the Bank to actuarial risks such as investment risk, interest rate risk, longevity risk and salary risk.

i. Investment and Interest Risks The present value of the Defined Benefit Obligation (DBO) is calculated using a discount rate

determined by reference to market yields of government bonds. Generally, a decrease in the interest rate of a reference government bonds will increase the plan obligation. However, this will be partially offset by an increase in the return on the plan‟s investments in debt securities and if the return on plan assets falls below this rate, it will create a deficit in the plan. Currently, the plan has relatively balanced investment in cash and cash equivalents and debt securities. Due to the long-term nature of the plan obligation, a level of continuing debt investments is an appropriate element of the Bank‟s long-term strategy to manage the plan efficiently.

ii. Longevity and Salary Risks The present value of the DBO is calculated by reference to the best estimate of the mortality of the plan

participants both during and after their employment, and to their future salaries. Consequently, increases in the life expectancy and salary of plan participants will result in an increase in the plan obligation.

d. Other Information The information on the sensitivity analysis for certain actuarial assumptions, the Bank‟s asset-liability matching strategy, and the timing and uncertainly of future cash flows related to the retirement plan are described below.

i. Sensitivity Analysis The following table summarizes the effects of the changes in the significant actuarial assumptions used

in the determination of the defined benefit obligation as of December 31, 2015:

Impact on Post-employment Benefit Obligation

Increase in

Assumption Decrease in

Assumption For Discount rate: D + 0.5% D – 0.5% Present Value of Accrued Retirement Benefits (using projected salaries)

P 14,503,369 P 14,992,860

Increase / (Decrease) by: (227,711) 261,780 For Salary rate: S + 1% S – 1% Present Value of Accrued Retirement Benefits (using projected salaries)

P 15,295,575 P 14,306,492

Increase / (Decrease) by: 564,495 (424,588)

The above sensitivity analysis is based on a change in an assumption while holding all other assumptions constant. This analysis may not be representative of the actual change in the DBO as it is likely that the change in assumptions would occur in isolation of one another as some of the assumptions may be correlated. Furthermore, in presenting the above sensitivity analysis, the present value of the DBO has been calculated using the projected unit credit method at the end of reporting period, which is the same as that applied in calculating DBO recognized in the statements of financial


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80

position. There is no actuarial valuation in 2017 and 2016. Hence, there is no comparison of sensitivity analysis between the current year against that of previous year.

ii. Asset-liability Marketing Strategies

To efficiently manage the retirement plan, the Bank through its Retirement Plan Committee, ensures that the investment positions are managed in accordance with its asset-liability matching strategy to achieve that long term- investments are in line with the obligations under the retirement plan. This strategy aims to match the plan assets to the retirement obligations by investing in long term fixed interest securities (i.e. government bonds) with maturities that match the benefit payments as they fall due and in the appropriate currency. The Bank actively monitors how the duration and the expected yield of the investments are matching the expected cash outflows arising from the retirement obligations. In view of this, investments are made in reasonably diversified portfolio, such that the failure of any single investment would not have a material impact on the overall levels of assets. A large portion of the plan assets as of December 31, 2017 and 2016 consists of government securities. The Bank believes that government securities offer the best returns over the long term with an acceptable level of risk.

iii. Hereunder is the list of projected benefit payments as of December 31, 2015 (based on normal retirement at age 60 only)

Date of Retirement No. of

Retirees 2015

1 year and less 1 P 2,465,681

More than 1 year to 5 years 0 -

More than 5 years to 10 years 6 8,963,761



More than 20 years 116 127,033,931 The weighted average duration of defined benefit obligation as of December 31, 2015 is 22 years. 27. Depreciation and amortization expense


Bank Premises, Furniture, Fixtures and Equipment

Depreciation – Building (see Note 12) P 2,424,161 P 2,417,572

Depreciation – Furniture, Fixtures and Equipment (see Note 12) 3,681,630 3,869,410

6,105,791 6,286,982

Other Intangible – Computer Software

Amortization – Computer software (see Note 15.1) 681,426 530,388

Investment Properties

Depreciation – Building (see Note 13) 3,280,845 2,314,697

P 10,068,062 P 9,132,067


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81

28. Other Administrative Expenses


2017

2016

Rent P 761,806 P

657,807

Power light and water

3,070,427

2,897,159

Postage and telephone

3,008,347

2,622,407

Repairs and maintenance

2,024,951

1,902,632

Security, messenger and janitorial expense

7,565,348

7,098,405

Information technology

431,657

557,591

BSP Supervisory fees

238,688

215,313

Insurance – PDIC

2,477,492

2,156,233

Insurance – Others

1,224,741

1,290,227

Management and professional fees

404,054

562,321

Representation and entertainment

1,442,060

1,693,007

Travelling

272,122

219,477

Fuel and lubricant

2,046,014

1,525,362

Advertising and publicity

1,836,266

1,414,266

Membership fees and dues 328,165

168,052 Donation and charitable contributions

240,438

137,107

Periodicals and magazines

58,362

62,129

Stationery and supplies

2,363,142

2,993,408

Fines, Penalties and Other Charges 161,012 3,780 Litigation expense

918,792

1,621,571

Miscellaneous

1,678,165

3,182,077

P 32,552,049 P

32,980,331


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82

29. Income Taxes Expense

The components of income tax expense as shown in the Statements of Profit or Loss for the years ended December 31 follow:

2017

2016

Regular corporate income tax (RCIT) at 30%

P 8,276,550 P

11,849,978

Deferred

(1,382,300)

(2,248,568)

P 6,894,250 P 9,601,410

A reconciliation of tax on pretax profit computed at the applicable statutory rates to income tax due reported in the income tax returns:

2017

2016 Net income before income tax P 31,199,146 P 35,554,767

Tax at the domestic rate of 30% 9,359,744 10,666,430 Add (Deduct) Tax effects of:

Non-taxable income (4,067,199) (3,712,497)

Bad Debts Written off (717,073) - Non-deductible expenses 3,701,078 4,896,044

P 8,276,550 P 11,849,977

Under the Tax Code, the Bank may be subject to Minimum Corporate Income Tax (MCIT) computed at 2% of gross income as defined under the tax regulations, or Regular Corporate Income Tax (RCIT) computed at 30% of income after allowable deductions, whichever is higher. The Bank was subject to the RCIT for the years ended, December 31, 2017 and 2016. The deferred tax asset movement during the years ended December 31, 2017 and 2016 is shown below:

2017

2016 Balance as at January 1 P 9,664,766 P 7,416,198 Tax effect of temporary difference – provision for credit losses 1,382,300 2,248,568

Balance as at December 31 P 11,047,066 P 9,664,766

For the years ended December 31, 2017 and 2016, the Bank opted to claim itemized deductions in computing its income tax.


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30. Related Party Transactions

The Bank‟s related parties include entities under common ownership, key management and others as described below. 2017 2016

Related Party Category Amount of

Transaction Outstanding

Balance Amount of

Transaction Outstanding

Balance Entities under common ownership

Loans P 9,795,908 P 77,880 P - P 9,795,908 Retirement Fund 1,696,032 - 2,159,512 - Key management and others Loans 22,490,776 - 140,000 22,490,776 Accrued Interest Receivable 776,454 - - 776,454 Accounts Receivable 502,273 - 22,773 502,273 Compensation 18,731,687 19,135,013 -

P 77,880 P 33,565,411

30.1 DOSRI Loans

In compliance with BSP Regulations, the Bank discloses loan transactions with its accessories, affiliates and with certain directors, officers, stockholders and related interests (DOSRI). The General Banking Act provides that in aggregate, loans to DOSRI should not exceed the Bank‟s total equity or 15% of the Bank‟s total loan portfolio, whichever is lower. In addition, the amount of individual loans to DOSRI, of which 70% must be secured, and should not exceed the amount of their deposit and the book value of their shares of stock in the Bank.

Relative to DOSRI loans, the following additional information is presented: 2017 2016 Secured DOSRI loans

P 77,880 P 14,288,114

Unsecured DOSRI loans

- 19,277,297

Total outstanding DOSRI loans

P 77,880 P 33,565,411

Past Due DOSRI Loans

P - P 30,745,816

% to total DOSRI loans to loan portfolio

0.01% 6.45%

% of Unsecured DOSRI Loans to Total DOSRI Loans

- 57.43%

% of Past due DOSRI loans to Total DOSRI Loans

- 91.60%


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Hereunder, is the summary of compliance and non-compliance with DOSRI loan ceiling regulations: As of December 31, 2017:

Outstanding

Balance Ceiling Excess over

Ceiling Remarks Aggregate Ceiling DOSRI Loans P 77,880 77,882,833 - Complied Unsecured DOSRI Loans - 23,364 - Complied Individual

DOSRI Loans 77,880 5,026,825 - Complied Unsecured DOSRI Loans - 23,364 - Complied


Outstanding

Balance Ceiling Excess over

Ceiling Remarks Aggregate Ceiling DOSRI Loans P 33,565,411 78,112,132 - Complied Unsecured DOSRI Loans 19,277,297 10,069,623 9,207,674 Not Complied Individual

DOSRI Loans 33,565,411 14,776,303 23,061,174 Not Complied Unsecured DOSRI Loans 19,277,297 10,069,623 12,183,108 Not Complied

In 2016, the aggregate and individual unsecured DOSRI loans, and the individual DOSRI loans exceeded the regulatory ceiling as the result of consolidation of RB Tanza and RB Teresa. As a remedy, Bangko Mabuhay requested the authority from the BSP to repurchase the 93,330 of its issued shares from the former stockholders of RB Teresa for P 25 Million in which the proceeds thereof would be used to settle the said DOSRI loans. (see Note 21.3) In February 2017, the BSP granted the Bank to proceed with the repurchase transaction, and on March 7, 2017, the Bank repurchased 93,330 of its issued common shares as treasury shares. Hence, as of December 31, 2017, the Bank is in compliance with the BSP regulations on aggregate, individual and unsecured ceilings for DOSRI loans.

30.2 Transactions with Retirement Fund The Bank‟s retirement fund has no transactions direct and indirect with the Bank or its employees for the years ended, December 31, 2017 and 2016, except for the contributions and benefits paid out of the plan to the Bank‟s Employees as follows:

2017 2016

Contributions to the Plan (see Note 26.2 b) 552,404 859,474 Benefits paid (see Note 26.2 b.) 1,143,628 1,300,038

P 1,696,032 P 2,159,512


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30.3 Key management and others compensation

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 officers, with rank of assistant vice president and up to constitute key management personnel for purpose of PAS 24, Related Party Disclosures. The compensation of key management personnel, directors and executive credit committee members is included in the Compensation and Fringe Benefits disclosed in Note 26, and broken down in 2017 and 2016, as follows: 2017 2016

Key

Management

Directors & Executive Committee

Total

Key

Management

Directors & Executive Committee

Total

Salaries and wages

P 2,540,428 - 2,540,428

P 2,476,332 - 2,476,332

Other short term benefits

617,438 - 617,438

603,047 - 603,047 Directors fees

- 2,064,000 2,064,000

- 2,055,893 2,055,893

Profit sharing

2,698,889 10,810,932 13,509,821

2,797,279 11,202,462 13,999,741

P 5,856,755 12,874,932 18,731,687 P 5,876,658 13,258,355 19,135,013

31.Basic Earnings per Share

The following reflects the income and share data used in the basic earnings per share computations

2017

2016

Net Profit

P 24,304,896 P

25,953,357 Dividends to preferred shares - -

Net profit attributable to common shareholders 24,304,896 25,953,357

Divided by number of outstanding common shares

1,888,798

1,888,798

Basic Earnings per share P 12.87 P 13.74

32. Selected Financial Performance Indicators

The following are some of the financial performance indicators of the Bank: 2017 2016 Return on average equity (ROE)

Net Profit Average Total Capital Accounts 9.23% 10.39%


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Return on average asset (ROA)

Net Profit Average Total Assets 1.51% 1.78%

Net interest margin ratio

Net Interest Income Average Interest Earning Assets 8.43% 8.36%

33. Contingent Liabilities

In the normal course of business, the Bank makes various commitments and incurs contingent liabilities that are not reflected in the accompanying financial statements. These commitments and contingent liabilities include various guarantees, commitments to extend credit and pending litigation. Bangko Mabuhay does not anticipate material losses or liabilities to be recognized in the accompanying financial statements of Bangko Mabuhay as a result of the said commitments and transactions As of December 31, 2017 and 2016, the Bank is committed to borrowers with unused credit lines amounting to P10,417,581 and P9,784,926, respectively.

34. Supplementary Information Required by the Bureau of Internal Revenue

Presented below is the supplementary information which is required by the Bureau of Internal Revenue (BIR) under it existing revenue regulations to be disclosed as part of the notes to financial statements. This supplementary information is not a required disclosure under PFRS.

34.1 Requires under Revenue Regulation (RR) 15-2010

This information on taxes, duties, and license fees paid or accrued during the taxable year under RR 15-2010 follows:

a. Gross Receipts Tax (GRT)

In lieu of the value-added tax, the Bank is subject to the GRT, pursuant to Section 121 and 122 of the Tax Code, as amended, which is imposed on banks, non-banks financial intermediaries and finance companies. The Bank reported total GRT amounting to P9,403,470 in 2017 and P 9,623,612 in 2016 included under Taxes and Licenses account (See Note 34.1 c). Total GRT payable as of December 31, 2017 and 2016 amounted to P 720,235 and P 1,897,357 included as part of accrued taxes and licenses payable under Other Financial Liabilities in the statement of financial position (See Note 19). GRT is levied on the Bank‟s gross income at prescribed tax rates of either 7%, 5%, or 1% of the related income.

b. Documentary Stamp Tax (DST)

The Bank‟s DST transactions arise from the original issue of shares of stock, and execution of debt instruments and deposit liabilities. Hereunder is the breakdown of DST incurred in 2017 and 2016 as included under Taxes and Licenses Expense in the Statement of Profit or Loss (See Note 34.1 c):

2017 2016

DST on deposit P 1,928,139 P 1,329,826


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DST on bills payable 40,010 81,020

P 1,968,149 P 1,410,846

c. Taxes and Licenses

The details of Taxes and Licenses account for the year ended December 31 follow:

2017 2016

Gross Receipts Tax (see Note 34.1 a) P 9,403,470 P 9,623,612

Documentary Stamp Tax (see Note 34.1 b) 1,968,149 1,410,846

Municipal license and other registration expense 1,593,503 865,871

Real estate tax 188,908 235,562

Annual BIR Registration Fee 6,000 6,000

P 13,160,030 P 12,141,891

d. Withholding Taxes

The details of withholding taxes paid and accrued for the years ended as follow:

Final Withholding Tax - Interest

P

2017

2016

1,466,696 P

1,892,135 Withholding Taxes on Compensation and Fringe Benefits

4,748,155

4,248,429

Expanded/ Creditable Withholding Taxes

2,324,350

2,360,074

P 8,539,201 P 8,500,638

e. Other Required Tax Information

The Bank did not have any transactions in 2017 and 2016, which is subject to excise tax, customs duties and tariff fees.

34.2 Requirements Under RR 19-2011 RR 19-2011 requires schedules of taxable revenues and other non-operating income, cost of sales and services, itemized deductions and other significant tax information, to be disclosed in the notes to financial statements. The amounts of taxable revenues and income, and deductible costs and expenses presented below are based on relevant tax regulations issued by the BIR, hence, may not be the same as the amounts reflected in the 2017 and 2016 statements of profit or loss, which are based on PFRS.


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a. Taxable Revenues

The Bank‟s taxable revenues for the Years December 31, 2017 and 2016, at the regular tax rate pertain to the following:

Note 2017 2016

Interest income 22 P 106,875,595 P 104,498,793

Service charges, fees and commissions 24 21,467,782 19,854,454

Miscellaneous income 25 3,491,006 4,607,916

Recovery on charged off assets 34,054 22,801

P 131,868,437 P 128,983,964

b. Deductible Cost of Services

Deductible cost of services for the years ended December 31, 2017 and 2016 at the regular tax rate comprise the following:

Note 2017 2016

Compensation and fringe benefits 26 P 53,511,182 P 47,931,773

Stationery and supplies 28 2,363,142 2,993,408

Depreciation 27 10,068,062 9,132,067

Interest expense 23 10,683,837 11,500,078

Non-deductible interest expense (4,473,925) (4,083,746)

Insurance - PDIC 28 2,477,492 2,156,233

BSP Supervision fees 28 238,688 215,313

P 74.868,478 P 69,845,126

c. Taxable Non-operating and Other Income

Taxable non-operating and other income pertains to gain on sale of non-financial asset amounting to P 26,721,844 and P33,500,944 in 2017 and 2016, respectively.

d. Itemized Deductions The amounts of itemized deductions for the years ended December 31, 2017 and 2016 subject to regular tax rate follow:

Note 2017 2016

Taxes and licenses

34.1c

P 13,160,030 P

12,141,891

Profit Sharing – Directors and Executive Credit Committee 26 10,810,932 11,202,462

Security, messenger and janitorial services 28 7,565,348 7,098,404

Communication, light and water 28 6,078,774 5,519,566

Directors‟ fees 26 2,064,000 2,055,893

Repairs and maintenance 28 2,024,951 1,902,632

Fuel and oil 28 2,046,014 1,525,362

Advertising and promotion 28 1,836,266 1,414,266

Representation 28 1,442,060 1,693,007


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Insurance – Others 28 1,224,741 1,290,227

Information technology 28 431,657 557,591

Management and professional fees 28 404,054 562,321

Rental 28 761,806 657,807

Litigation 28 918,792 1,621,571

Transportation and travel 28 272,122 219,477

Donation and charitable contribution 28 240,438 137,107

Fees and Commission Expense 237,111 124,235

Bad Debts Written Off 16 2,390,243 -

Miscellaneous 28 2,225,704 3,540,274

P 56,135,043 P 53,139,858 35. Schedule of Philippine Financial Reporting Standards and Interpretations

Pursuant to Part I Section 4 J. of the Securities Regulation Code (SRC) Rule 68, as amended, promulgated by the SEC, hereunder is a schedule of Philippine Financial Reporting Standards and Interpretations effective as of December 31, 2017 and 2016 and the indication opposite each standard whether it is “adopted”, or “not adopted” or “not applicable”:

PHILIPPINE FINANCIAL REPORTING STANDARDS AND INTERPRETATIONS As of December 31, 2016

Adopted Not

Adopted

Not Applicabl

e

Framework for the Preparation and Presentation of Financial Statements

✔

Conceptual Framework Phase A: Objectives and qualitative Characteristics

✔

PFRSs Practice Statement Management Commentary ✔

Philippine Financial Reporting Standards

PFRS 1 (Revised)

First-time adoption of Philippine Financial Reporting Standards

✔

Amendments to PFRS 1: Additional Exemptions for First-time Adopters

✔

Amendments to PFRS 1: Limited Exemption from Comparative PFRS 7 Disclosures for First-time Adopters

✔

Amendments to PFRS 1: Severe Hyperinflation and Removal of Fixed Date for First-time adopters

✔

Amendments to PFRS 1: Government Loans ✔

PFRS 2 Share-based Payment ✔

Amendment to PFRS 2:vesting Conditions and Cancellations

✔

Amendments to PFRS 2: Group Cash-settled Share-based Payment Transactions

✔

PFRS 3 (Revised)

Business Combination ✔

PFRS 4 Insurance Contracts ✔

Amendments to PAS 39 and PFRS 4; Financial Guarantee Contracts

✔

PFRS 5 Non-current Assets Held for Sale and Discontinued Operations

✔

PFRS 6 Explorations for and Evaluation of Mineral Resources ✔


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PFRS 7 Financial Instruments: Disclosures ✔

Amendments to PAS 39 and PFRS 7: Reclassifications of Financial Assets

✔

Amendments to PAS 39 and PFRS 7 Reclassifications of Financial Assets – Effective Date and Transition

✔

Amendment to PFRS 7: Improving Disclosures about Financial Instruments

✔

Amendment to PFRS 7: Disclosures – Transfer of Financial Assets

✔

Amendment to PFRS 7: Disclosures Offsetting of Financial Assets and Financial Liabilities

✔

Amendment to PFRS: Mandatory Effective Date of PFRS 9 and Transition Disclosures

✔

PFRS 8 Operating Segments ✔

PFRS 9 Financial Instruments ✔

Amendments to PFRS: Mandatory Effective Date of PFRS 9 and Transitions Disclosures

✔

Amendment to PFRS 9: Hedge Accounting and Amendments to PFRS 7 and PAS 39

✔

PFRS 10 Consolidated Financial Statements ✔

PFRS 11 Joint Arrangements ✔

PFRS 12 Disclosure of Interest in Other Entities ✔

PFRS 13 Fair Value Measurement ✔

PFRS 14 Regulatory Deferral Accounts (effective Jan. 1, 2016 ✔

Philippine Accounting Standards

PAS 1 (Revised)

Presentation of Financial Statements ✔

Amendments to PAS 1: Capital Disclosures ✔

Amendments to PAS 32 and PAS 1: Puttable Financial Instruments and Obligations Arising in Liquidation

✔

Amendment to PAS 1 : Presentation of items of Other Comprehensive Income

✔

PAS 2 Inventories ✔

PAS 7 Statement of Cash Flows ✔

PAS 8 Accounting Policies, Changes in Accounting Estimates and Errors

✔

PAS 10 Events after the Reporting Period ✔

PAS 11 Construction Contracts ✔

PAS 12 Income Taxes ✔

Amendment to PAS 12 – Deferred Tax: Recovery of Underlying Assets

✔

PAS 16 Property Plant and Equipment ✔

PAS 17 Leases ✔

PAS 18 Revenue ✔

PAS 19 Employee Benefits ✔

Amendments to PAS 19: Actuarial Gains and Losses, Group Plans and Disclosures

✔

PAS 19 (Amended)*

Employee Benefits ✔

Amendments to PAS 19: Defined Benefit Plans – Employee Contributions

✔


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PAS 20 Accounting for Government Grants and Disclosure of Government Assistance

✔

PAS 21 The Effects of Changes in Foreign Exchange Rate ✔

Amendment: Net Investment in a Foreign Operation

✔

PAS 23 Borrowing Costs ✔

PAS 24 Related Party Disclosure ✔

PAS 27 Consolidated and Separate Financial Statements ✔

PAS 27 (Amended)

Separate Financial Statements ✔

PAS 28 (Amended)

Investments in Associates and Joint Ventures ✔

PAS 29 Financial Reporting in Hyperinflationary Economies

✔

PAS 31 Interests in Joint Ventures ✔

PAS 32 Financial Instruments: Disclosure and Presentation ✔

Amendments to PAS 32 and PAS 1: Puttabe Financial Instruments: Arising on Liquidation

✔

Amendment to PAS 32: Classification of Rights Issues

✔

Amendment to PAS 32: Offsetting Financial Assets and Financial Liabilities

✔

PAS 33 Earnings per Share ✔

PAS 34 Interim Financial Reporting ✔

PAS 36 Impairment of Assets ✔

Amendments to PAS 36: Recoverable Amount Disclosures for Non-Financial Assets

✔

PAS 37 Provisions, Contingent Liabilities and Contingent Assets

✔

PAS 38 Intangible Assets ✔

PAS 39 Financial Instruments: Recognition and Measurement

✔

Amendments to PAS 39: Transition and Initial Recognition of Financial Assets and Financial Liabilities

✔

Amendments to PAS 39: Cash Flow Hedge Accounting of Forecast Intragroup Transactions

✔

Amendments to PAS 39 : The Fair Value Options ✔

Amendments to PAS 39 and PFRS 4: Financial Guarantee Contracts

✔

Amendments to PAS 39 and PFRS 7 Reclassification of Financial Assets

✔

Amendments to PAS39 and PAS 7: Reclassification of Financial Assets – Effective Date and Transition

✔

Amendment to Philippine Interpretation IFRIC-9 and PAS 39: Embedded Derivatives

✔

Amendment to PAS 39: Eligible Hedge Items ✔

Amendments to PAS 39: Novation of Derivatives and Continuation of Hedge Accounting

✔

PAS 40 Investment Property ✔

PAS 41 Agriculture ✔


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Philippine Interpretations – International Financial Reporting Interpretations Committee (IFRIC)

IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities

✔

IFRIC 2 Members‟ Share in Co-operative Entities and Similar Instruments

✔

IFRIC 4 Determining Whether an Arrangement Contains a Lease

✔

IFRIC 5 Rights to Interests arising from Decommissioning, Restoration and Environmental Rehabilitation Funds

✔

IFRIC 6 Liabilities arising from Participating in a Specific Market-Waste Electrical and Electronic Equipment

✔

IFRIC 7 Applying the Restatement Approach under PAS 39 Financial reporting Hyperinflationary Economies

✔

IFRIC 8 Scope to PFRS 2 ✔

IFRIC 9

Reassessment of Embedded Derivatives ✔

Amendments to Philippine Interpretation IFRIC-9 and PAS 39: Embedded Derivatives

✔

IFRIC 10 Interim Financial Reporting and Impairment ✔

IFRIC 11 PFRS-2 Group and Treasury Share Transactions ✔

IFRIC 12 Service Concession Arrangements ✔

IFRIC 13 Customer Loyalty Programmes ✔

IFRIC 14 PAS 19 -The Limit of Defined Benefit Asset, Minimum Funding Requirements and their Interaction

✔

Amendments to Philippine Interpretations IFRIC-14, Prepayments of a Minimum Funding Requirement

✔

IFRIC 16 Hedges of a Net Investment in a Foreign Operation

✔

IFRIC 17 Distributions of Non-cash Assets to Owners ✔

IFRIC 18 Transfers of Assets from Customers ✔

IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments

✔

IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine

✔

IFRIC 21 Levies ✔

Philippine Interpretations – Standing Interpretations Committee (SIC)

SIC-7 Introduction of the Euro ✔

SIC-10 Government Assistance – No Specific Relation to Operating Activities

✔

SIC-12 Consolidation – Special Purpose Entities ✔

Amendment to SIC – 12: Scope of SIC 12 ✔

SIC-13 Jointly Controlled Entities – Non Monetary Contributions by Ventures

✔

SIC-15 Operating Leases – Incentives ✔

SIC-25 Income Taxes – Changes in the Tax Status of an Entity or its Shareholders

✔

SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of A Lease

✔

SIC-29 Service Concession Arrangements: Disclosures ✔


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SIC-31 Revenue – Barter Transactions Involving Advertising Services

✔

SIC-32 Intangible Assets – Web Site Costs ✔

36. Reconciliation Statement The reconciliation statement between the Balance Sheet and Income Statement (submitted to BSP) and the Audited Financial Statements as of December 31, 2017 is presented below, pursuant to Subsection X190.1 (2008-X166.1) of the MORB:

(In Thousands of Pesos)

FRP

Per Trial Balance

Variance Discrepancy

Reason for Discrepancy

Cash and other cash items 24,422 24,422 -

Due from Bangko Sentral ng Pilipinas 46,229 46,229 -

Due from Other Banks 545,094 545,094 -

Held to Maturity Financial Assets – Net 373,494 373,494 -

Loans and Receivables – Net 469,013 528,307 (59,294)

(See explanation

item 1 below)

Premises, Furniture, Fixtures and Equipment – Net 48,937 48,937 -

Investment Properties – Net 79,286 79,286 -

Goodwill 12,253 12,253 -

Deferred Tax Asset 11,047 11,047 -

Other Assets – Net 65,066 5,772 59,294

TOTAL ASSETS 1,674,841 1,674,841 -

LIABILITIES AND EQUITY

Deposit Liabilities 1,360,678 1,360,678 -

Bills Payable 20,000 20,000 -

Other Financial Liabilities 3,278 3,349 (71)

See explanation

Item 2 below)

Accrued Expenses and Other Liabilities 22,447 22,447 -

TOTAL LIABILITIES 1,406,403 1,406,474 -

Paid-in Capital Stock 188,880 188,880 -

Additional Paid-In Capital 26,812 26,812

Retained Earnings 52,746 52,675 71

TOTAL EQUITY 268,438 268,367 -

TOTAL LIABILITIES AND EQUITY 1,674,841 1,674,841 -


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FRP

Per Trial Balance

Variance Discrepancy

Reason for Discrepancy

Total Income 172,148 172,148 -

Total Expenses 147,772 147,843 (71) See Item 2

Net Income Before Income Tax 24,376 24,305 71

Explanation (figures in Thousands of Pesos): Item 1: Under the financial reporting package of the BSP, sales contract receivable, accrued interest income, and accounts receivables are presented as separate line item from the loans and other receivables in the balance sheet. However, the said accounts are included as part of loans and receivables in the audit report. Accounting Entries:

(Figures in Millions of Pesos) Debit Credit

Loans and Receivables 59,294 Other Assets SCR - net 38,514

Accrued Interest Receivable- net 2,888

Accounts Receivable - net 17,892 Item 2: Additional accrual of GRT and adjustment on provision for income tax as of Dec. 31, 2017:

Figures in Millions of Pesos) Debit Credit

Taxes and Licenses - GRT 101

Financial Liabilities – Accrued Income Tax 30

Provision for Income Tax 30 Financial Liabilities – Accrued Other Taxes 101


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II. Compliance with Appendix 63c of the MORB – Disclosure in the Annual Reports and Published Statement of Condition

A. Capital Structure and Capital Adequacy

2017 (in P Millions)

2016 (In P Millions)

1 Tier 1 capital

Paid up common stock 188.880 188.880

Additional paid in capital 26.812 26.812

Retained earnings 28.370 18.084

Undivided Profits 24.376 25.953

Total Tier 1 Capital 268.438 259.729

2 Tier 2 Capital

General Loan Loss Provision 2.618 3.079

3 Deductions from Tier 1 and Tier 2 Capital

Unsecured DOSRI - 18.157

Deferred tax asset 11.047 9.665

Goodwill 12.253 12.509

Total Deductions 23.300 40.331

4 Total Qualifying Capital 247.756 222.477

5 Capital Requirement for Credit Risk 1,246.223 1.234.011

6 Capital Requirement for Market Risk - -

7 Capital Requirement for Operational Risk 169.694 144.633

8 Total Capital Adequacy Ratio Tier 1 Capital Adequacy Ratio

17.50 17.31

16.14 15.91

BANGKO MABUHAY (A RURAL BANK), INC. ANNUAL REPORT 2017 · Inc. thru the Purchase of all its assets...

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