AR2010 Final 062911 - · PDF fileLetter to Shareholders Strong Foundations for Optimism Going forward, our expectation is for the Bank to grow recurring revenue streams and be less

Contents 2. Financial Highlights

3. Letter to Shareholders

5. Board of Directors

7. Directors' Profile

8. Board Committees

9. Senior Officers

11. Risk Management

13. Corporate Governance

17. Statement of Management's Responsibility for Financial Statements

43. Branches' Directory

44. Products and Services

Positive. Focused. Flexible. Organized. Proactive. These hold true for PBCom in its 72 years of banking experience. Despite challenges, the Bank was able to cope with transformation and growth.

Operating Results(for the year, in Million Pesos)

Total IncomeTotal ExpensesNet Income

Earnings Per Share

Balance Sheet

Total ResourcesLoans & Receivable, netNon-performing LoansDepositsCapital Funds

Non performing loans to total loansCapital Adequacy Ratio

2010

4,088.3 3,711.0

377.3

2.19

41,659.1 13,185.3 1,531.1

27,607.6 3,574.9

9.25%13.88%

2009

3,808.7 3,706.5

102.2

0.59

42,625.6 12,609.0 1,382.5 28,562.6 3,018.7

13.98%12.60%

Financial Highlights

* figures in Million

1 Philippine Bank of Communications Annual Report 2010 2 Annual Report 2010 Philippine Bank of Communications

Contents 2. Financial Highlights

3. Letter to Shareholders

5. Board of Directors

7. Directors' Profile

8. Board Committees

9. Senior Officers

11. Risk Management

13. Corporate Governance

17. Statement of Management's Responsibility for Financial Statements

43. Branches' Directory

44. Products and Services

Positive. Focused. Flexible. Organized. Proactive. These hold true for PBCom in its 72 years of banking experience. Despite challenges, the Bank was able to cope with transformation and growth.

Operating Results(for the year, in Million Pesos)

Total IncomeTotal ExpensesNet Income

Earnings Per Share

Balance Sheet

Total ResourcesLoans & Receivable, netNon-performing LoansDepositsCapital Funds

Non performing loans to total loansCapital Adequacy Ratio

2010

4,088.3 3,711.0

377.3

2.19

41,659.1 13,185.3 1,531.1

27,607.6 3,574.9

9.25%13.88%

2009

3,808.7 3,706.5

102.2

0.59

42,625.6 12,609.0 1,382.5 28,562.6 3,018.7

13.98%12.60%

Financial Highlights

* figures in Million


Letter to Shareholders

Strong Foundations for Optimism

Going forward, our expectation is for the Bank to grow recurring revenue streams and be less dependent on trading income. To this end, we are re-positioning our business platforms to widen the scope for profitable growth. Expecting a reversal of trend in interest rates for 2011, higher inflation and turmoil in the Middle East and elsewhere, the Bank has initiated changes in strategies to book more loans and generate incremental fee income. The Branch Lending Group was created to build up the Bank’s lending portfolio by prioritizing the processing of the borrowing requirements of existing and prospective branch depositors.

Guided by our 2011 business plan, another major thrust is geared towards generating new business by introducing new products and enhancing our existing products, offering competitive services as well as strengthening customer relationships, enhancing cross-selling capabilities of our branch personnel and upgrading operational efficiency that will enable us to attract new depositors.

The Bank, as part of its 2011 plan, approved an IT investment intended to upgrade core business systems, and set up the Bank’s corporate portal for more eBanking facilities in addition to existing services available through Bancnet Online. This service will include real-time balance inquiry, bills payment transactions, transfer of funds, and check re-orders. Likewise, we are instituting revisions and enhancements on our internal processes, leading to better operational efficiency at a reduced cost.

We are capitalizing on opportunities regardless of the economic cycle. We believe that the strategic choices we have made will lay the foundations for a growing share in the vibrant financial services markets, strengthen the quality and diversity of our earnings, and position us well for 2011 and beyond.

Through Time and Change

Again, we wish to acknowledge the support we have received from our shareholders, our Board of Directors, and our regulators. Through their counsel, the Bank was able to achieve last year’s favorable results and is on the threshold of bigger opportunities. Finally, we commend the hard work and dedication of our people, all 924 of them. They helped enrich the PBCom brand through 72 years.

RALPH C. NUBLA, JR.Chairman of the Board

HENRY Y. UYPresident and CEO

Dear Shareholders,

2010 was an extraordinary year for the Philippine economy. The country’s Gross Domestic Product jumped by 7.3%, the strongest expansion in more than three (3) decades. The industry sector was the key contributor to the country’s economic growth with its huge 12.1% rise, while services also leaped by 7.1% from 2.8% in 2009. Investments were boosted by improved business confidence and low interest rates as household consumption continued to draw support from remittances that reached $18.8 billion. Full-year inflation, on the other hand, was noticeably tame at 3.8%, almost at the lower end of the government’s forecast of 3.5% to 5.5% as exports hit $50.7 billion, rising by 34.8% on the back of a strong rebound in foreign trade. Our sound monetary policy decisions also paved the way to a more stable Peso:$ exchange rate which ended the year at P43.885:$1.00.

As a reflection of growth, the Philippines registered international reserves at record levels, hitting $62.3 billion by end-December 2010, broadly equivalent to a healthy 9.6 months’ worth of imports and payment of services. In addition, the cumulative Balance of Payments (BOP) for the year yielded an all-time high surplus of $14.4 billion, more than double the $6.4 billion surplus achieved in 2009.

The exceptional performance of the economy restored investor confidence, leading economists to forecast that growth in 2011 will still be good, and will be investment-led, as internally generated funds will be augmented by foreign inflows seeking profitable return on investments in emerging markets like the Philippines.

Solid Momentum of PBCom

Operating under this dynamic environment, and once again proving its resiliency, PBCom’s Net Income for 2010 surged to P377 million, a remarkable 270% increase over the previous period’s P102 million. The Bank’s earnings were driven by dramatic growth in our trading and fee based businesses and continued improvements in interest margins.

Treasury was the main engine of the Bank’s earnings’ growth. Trading gains from domestic government securities and dollar-denominated Philippine-issued bonds grew by a hefty 326% to P507 million in 2010 from the prior year’s P119 million. Treasury aggressively took positions in government securities while meeting the liquidity needs of the Bank’s core loan business. Volume of domestic securities traded rose enormously by 189%, from P29.4 billion in 2009 to P85.1 billion in 2010. Treasury’s timely positioning, optimal utilization of limits, and competitive pricing resulted to the 436% upsurge in domestic trading gains, from P53 million in 2009 to P284 million in 2010. Although some emerging market economies and several members of the European Union encountered serious economic problems, investors continued to pick up Philippine sovereign US-dollar bonds which offered better yields. More players in this market provided an opportunity for the Bank to realize higher trading gains from RoPs which increased by a hefty 243%, from P65 million in 2009 to P223 million in 2010.

Our Trust business likewise made reasonable progress during the year. An increment of P1 billion pushed Trust asset levels to P4.3 billion, representing a 30% increase over 2009’s P3.3 billion. Before the year-end of 2010, the Group launched two (2) new Unit Investment Trust Fund (UITF) products, the PBCom Best Balanced Fund and the PBCom Value Equity Fund.

We have taken numerous other steps to further improve our risk profile. We conducted a bankwide Risk Management Awareness Workshop to promote risk awareness and operational efficiency. To further complement comprehensive operational risk identification, assessment, monitoring and control, the existing risk profile for head office and Information Technology (IT) units were enhanced to consider process mapping in the risk identification phase as well as include operational risk factors for systems and people components in addition to detailed loss event type classification aligned with Basel 2 and Internal Capital Adequacy Assessment Process (ICAAP) requirements.

As part of its robust business continuity planning process, the Risk Management Group, being the Business Continuity Plan (BCP) Process Coordinator, has facilitated a comprehensive Business Continuity Exercise to test the workability of the business continuity plans and disaster recovery of critical business units. The Market and Liquidity Risk Management of Treasury and Trust have likewise initiated risk measurement tools and policies to meet both regulatory and industry best practices.

Conservative Approach to Expansion

Reflecting our emphasis on balance sheet quality more than size, total resources stood at P41.7 billion at the end of 2010. Capital funds stood at P3.57 billion as of year-end, up by P556 million from 2009’s re-stated level and was primarily attributed to the current year’s profit of P377 million, the decline in year-on-year net unrealized losses on Available-for-Sale Securities, and increases in cumulative FCDU foreign exchange gains from revaluation and appraisal increment. Our Capital Adequacy Ratio was at 13.88%, well above the 10.00% requirement of the Bangko Sentral ng Pilipinas (BSP), and better than the 12.60% level posted in 2009.

To strengthen the capital position of the Bank, we continued to explore the possible entry of strategic third party investors who are willing to take a substantial stake in the Bank. In the Bank’s Annual Stockholder’s Meeting held on October 15, 2010, the stockholders approved the increase in the Bank's authorized capital stock of up to 100% of the present level of P17.5 billion under the terms and conditions as may be fixed and approved by the Bank's Board of Directors. This move was in preparation for the Bank’s Capital Build-up Program as required by the BSP.

Facing Competition

The Bank continued to boost its traditional deposits, prioritizing the growth of low-cost funds over rate-sensitive placements. As a result, PBCom’s Current Account/Savings Account (CA/SA) base expanded from P6.1 billion in 2009 to P6.8 billion, while our high cost Time Deposits were tempered from P22.4 billion to P20.7 billion. This resulted in a favorable reduction in interest expense which went down by 15% or P281 million to P1.6 billion in 2010.

On the other hand, Loans and Receivables increased by P576 million mainly coming from higher investments in core loans and other debt securities as the Corporate Banking Group continued to build on existing good relationships in the Filipino-Chinese business community, which has consistently been a source of strength for PBCom. Our Account and Credit Officers collaborated to maintain very close interaction with borrowers and kept themselves abreast of specific industry developments, not only to continue responding to customer requirements, but also to anticipate and mitigate potential key risk areas.

Steady Results

Consequently, our net interest income improved in 2010, increasing by 15% to P1.5 billion from P1.3 billion in 2009 which, together with the strong growth in our fee-based revenues, raised our total operating Income by 29% from P1.9 billion to P2.5 billion. In comparison, total operating expenses including provision for credit and impairment losses grew by only 13.7% to P1.840 billion.

Headcount and related expenses declined. Organizational strength was sustained however through continuing human resource proficiency training and cross-posting programs. This translated to an enhancement in the Bank’s institutional capability in responding to business requirements even as manpower complement was streamlined. We likewise implemented process improvements and reengineered our businesses to enhance productivity and improve turnaround time while reducing costs.

Another key factor in our success is our aggressive remedial management and asset disposal efforts which generated gross revenues of P247 million. Total non-performing loans (NPL) dropped to P852 million, net of fully provisioned accounts of P679 million, improving our NPL ratio to 9.2% in 2010, down from 14.0%.

www.pbcom.com.ph


Letter to Shareholders

Strong Foundations for Optimism

Going forward, our expectation is for the Bank to grow recurring revenue streams and be less dependent on trading income. To this end, we are re-positioning our business platforms to widen the scope for profitable growth. Expecting a reversal of trend in interest rates for 2011, higher inflation and turmoil in the Middle East and elsewhere, the Bank has initiated changes in strategies to book more loans and generate incremental fee income. The Branch Lending Group was created to build up the Bank’s lending portfolio by prioritizing the processing of the borrowing requirements of existing and prospective branch depositors.

Guided by our 2011 business plan, another major thrust is geared towards generating new business by introducing new products and enhancing our existing products, offering competitive services as well as strengthening customer relationships, enhancing cross-selling capabilities of our branch personnel and upgrading operational efficiency that will enable us to attract new depositors.

The Bank, as part of its 2011 plan, approved an IT investment intended to upgrade core business systems, and set up the Bank’s corporate portal for more eBanking facilities in addition to existing services available through Bancnet Online. This service will include real-time balance inquiry, bills payment transactions, transfer of funds, and check re-orders. Likewise, we are instituting revisions and enhancements on our internal processes, leading to better operational efficiency at a reduced cost.

We are capitalizing on opportunities regardless of the economic cycle. We believe that the strategic choices we have made will lay the foundations for a growing share in the vibrant financial services markets, strengthen the quality and diversity of our earnings, and position us well for 2011 and beyond.

Through Time and Change

Again, we wish to acknowledge the support we have received from our shareholders, our Board of Directors, and our regulators. Through their counsel, the Bank was able to achieve last year’s favorable results and is on the threshold of bigger opportunities. Finally, we commend the hard work and dedication of our people, all 924 of them. They helped enrich the PBCom brand through 72 years.

RALPH C. NUBLA, JR.Chairman of the Board

HENRY Y. UYPresident and CEO

Dear Shareholders,

2010 was an extraordinary year for the Philippine economy. The country’s Gross Domestic Product jumped by 7.3%, the strongest expansion in more than three (3) decades. The industry sector was the key contributor to the country’s economic growth with its huge 12.1% rise, while services also leaped by 7.1% from 2.8% in 2009. Investments were boosted by improved business confidence and low interest rates as household consumption continued to draw support from remittances that reached $18.8 billion. Full-year inflation, on the other hand, was noticeably tame at 3.8%, almost at the lower end of the government’s forecast of 3.5% to 5.5% as exports hit $50.7 billion, rising by 34.8% on the back of a strong rebound in foreign trade. Our sound monetary policy decisions also paved the way to a more stable Peso:$ exchange rate which ended the year at P43.885:$1.00.

As a reflection of growth, the Philippines registered international reserves at record levels, hitting $62.3 billion by end-December 2010, broadly equivalent to a healthy 9.6 months’ worth of imports and payment of services. In addition, the cumulative Balance of Payments (BOP) for the year yielded an all-time high surplus of $14.4 billion, more than double the $6.4 billion surplus achieved in 2009.

The exceptional performance of the economy restored investor confidence, leading economists to forecast that growth in 2011 will still be good, and will be investment-led, as internally generated funds will be augmented by foreign inflows seeking profitable return on investments in emerging markets like the Philippines.

Solid Momentum of PBCom

Operating under this dynamic environment, and once again proving its resiliency, PBCom’s Net Income for 2010 surged to P377 million, a remarkable 270% increase over the previous period’s P102 million. The Bank’s earnings were driven by dramatic growth in our trading and fee based businesses and continued improvements in interest margins.

Treasury was the main engine of the Bank’s earnings’ growth. Trading gains from domestic government securities and dollar-denominated Philippine-issued bonds grew by a hefty 326% to P507 million in 2010 from the prior year’s P119 million. Treasury aggressively took positions in government securities while meeting the liquidity needs of the Bank’s core loan business. Volume of domestic securities traded rose enormously by 189%, from P29.4 billion in 2009 to P85.1 billion in 2010. Treasury’s timely positioning, optimal utilization of limits, and competitive pricing resulted to the 436% upsurge in domestic trading gains, from P53 million in 2009 to P284 million in 2010. Although some emerging market economies and several members of the European Union encountered serious economic problems, investors continued to pick up Philippine sovereign US-dollar bonds which offered better yields. More players in this market provided an opportunity for the Bank to realize higher trading gains from RoPs which increased by a hefty 243%, from P65 million in 2009 to P223 million in 2010.

Our Trust business likewise made reasonable progress during the year. An increment of P1 billion pushed Trust asset levels to P4.3 billion, representing a 30% increase over 2009’s P3.3 billion. Before the year-end of 2010, the Group launched two (2) new Unit Investment Trust Fund (UITF) products, the PBCom Best Balanced Fund and the PBCom Value Equity Fund.

We have taken numerous other steps to further improve our risk profile. We conducted a bankwide Risk Management Awareness Workshop to promote risk awareness and operational efficiency. To further complement comprehensive operational risk identification, assessment, monitoring and control, the existing risk profile for head office and Information Technology (IT) units were enhanced to consider process mapping in the risk identification phase as well as include operational risk factors for systems and people components in addition to detailed loss event type classification aligned with Basel 2 and Internal Capital Adequacy Assessment Process (ICAAP) requirements.

As part of its robust business continuity planning process, the Risk Management Group, being the Business Continuity Plan (BCP) Process Coordinator, has facilitated a comprehensive Business Continuity Exercise to test the workability of the business continuity plans and disaster recovery of critical business units. The Market and Liquidity Risk Management of Treasury and Trust have likewise initiated risk measurement tools and policies to meet both regulatory and industry best practices.

Conservative Approach to Expansion

Reflecting our emphasis on balance sheet quality more than size, total resources stood at P41.7 billion at the end of 2010. Capital funds stood at P3.57 billion as of year-end, up by P556 million from 2009’s re-stated level and was primarily attributed to the current year’s profit of P377 million, the decline in year-on-year net unrealized losses on Available-for-Sale Securities, and increases in cumulative FCDU foreign exchange gains from revaluation and appraisal increment. Our Capital Adequacy Ratio was at 13.88%, well above the 10.00% requirement of the Bangko Sentral ng Pilipinas (BSP), and better than the 12.60% level posted in 2009.

To strengthen the capital position of the Bank, we continued to explore the possible entry of strategic third party investors who are willing to take a substantial stake in the Bank. In the Bank’s Annual Stockholder’s Meeting held on October 15, 2010, the stockholders approved the increase in the Bank's authorized capital stock of up to 100% of the present level of P17.5 billion under the terms and conditions as may be fixed and approved by the Bank's Board of Directors. This move was in preparation for the Bank’s Capital Build-up Program as required by the BSP.

Facing Competition

The Bank continued to boost its traditional deposits, prioritizing the growth of low-cost funds over rate-sensitive placements. As a result, PBCom’s Current Account/Savings Account (CA/SA) base expanded from P6.1 billion in 2009 to P6.8 billion, while our high cost Time Deposits were tempered from P22.4 billion to P20.7 billion. This resulted in a favorable reduction in interest expense which went down by 15% or P281 million to P1.6 billion in 2010.

On the other hand, Loans and Receivables increased by P576 million mainly coming from higher investments in core loans and other debt securities as the Corporate Banking Group continued to build on existing good relationships in the Filipino-Chinese business community, which has consistently been a source of strength for PBCom. Our Account and Credit Officers collaborated to maintain very close interaction with borrowers and kept themselves abreast of specific industry developments, not only to continue responding to customer requirements, but also to anticipate and mitigate potential key risk areas.

Steady Results

Consequently, our net interest income improved in 2010, increasing by 15% to P1.5 billion from P1.3 billion in 2009 which, together with the strong growth in our fee-based revenues, raised our total operating Income by 29% from P1.9 billion to P2.5 billion. In comparison, total operating expenses including provision for credit and impairment losses grew by only 13.7% to P1.840 billion.

Headcount and related expenses declined. Organizational strength was sustained however through continuing human resource proficiency training and cross-posting programs. This translated to an enhancement in the Bank’s institutional capability in responding to business requirements even as manpower complement was streamlined. We likewise implemented process improvements and reengineered our businesses to enhance productivity and improve turnaround time while reducing costs.

Another key factor in our success is our aggressive remedial management and asset disposal efforts which generated gross revenues of P247 million. Total non-performing loans (NPL) dropped to P852 million, net of fully provisioned accounts of P679 million, improving our NPL ratio to 9.2% in 2010, down from 14.0%.

www.pbcom.com.ph


www.pbcom.com.ph


Board of Directors

Ralph C. Nubla, JR. Chairman

ViCtoR p. lazatiN Vice Chairman

CaRlos G. ChuNGDirector

ENRiquE t. luy Director

RomaN aNthoNy V. azaNza, JR. Director

ERNEsto t. luy Director

DaViD l. balaNGuE PDIC Consultant

RobERto m. maCasaEt, JR.Independent Director

tEREsita a. sEEIndependent Director

Raul o. sERRaNoIndependent Director

imElDa s. siNGzoNIndependent Director

hENRy y. uyPresident & CEO

JohNNy o. CobaNkiatDirector JosEph C. taN

Director

FElix G. ChuNG Director

philip G. ChuNGDirector

www.pbcom.com.ph


Board of Directors

Ralph C. Nubla, JR. Chairman

ViCtoR p. lazatiN Vice Chairman

CaRlos G. ChuNGDirector

ENRiquE t. luy Director

RomaN aNthoNy V. azaNza, JR. Director

ERNEsto t. luy Director

DaViD l. balaNGuE PDIC Consultant

RobERto m. maCasaEt, JR.Independent Director

tEREsita a. sEEIndependent Director

Raul o. sERRaNoIndependent Director

imElDa s. siNGzoNIndependent Director

hENRy y. uyPresident & CEO

JohNNy o. CobaNkiatDirector JosEph C. taN

Director

FElix G. ChuNG Director

philip G. ChuNGDirector


Directors' Profi le

Ralph Nubla, Jr., ChairmanDirector of PBCom since 1976. Currently, the Chairman of the Board, Director of PBCom Finance Corporation, President of CNC Investments Inc., Echague Realty Corporation and R. Nubla Securities, Inc. He was Vice Chairman of the Board in 2000, Senior Vice President from 1982 to 2000 and appointed as Executive Director in 2004.

atty. Victor p. lazatin, Vice ChairmanDirector of PBCom since 2007. Currently, the Vice Chairman of the Board, a Senior Partner of Angara Abello Concepcion Regala and Cruz Law Offi ces and Director of Accra Investments, Accrain Holdings and Nationwide Development Corporation.

henry y. uy, President & CEODirector of PBCom since 1986. Currently, the President & CEO, Chairman of PBCom Finance Corporation since 2008 and Vice President of Echague Realty Corporation since 1992. He was President of PBCom in 1999 and appointed as Executive Director in 2004.

Enrique t. luy, DirectorDirector of PBCom since 2000. He was Chairman of the Board in 2005 to 2010, and Vice Chairman of the Board in 2003. Currently, Chairman of ICEC Insurance Agency Inc., Chairman and President of Luy's Securities Co., Inc., President of International Copra Export Corporation, Interco Manufacturing Corporation, ICEC Land Corporation, and Kimmee Realty Corporation.

Carlos G. Chung, DirectorDirector of PBCom since 1997. Currently, the Chairman of the Executive Committee, Vice Chairman of PBCom Finance Corporation, Director of La Suerte Cigar & Cigarette Factory, Century Container Corporation, State Investment Trust, Inc., & Stateland Inc., a Chairman/President of Supima Holdings, Inc. and Chairman of Tosen Foods, Inc. He has been a member of the Board of Trustees of Xavier School, Inc. since 1990. He is also the Chairman of Ways and Means Committee of ICA Scholarship Foundation since 2005. He was an Executive Director of PBCom in 2004.

Ernesto t. luy, DirectorDirector of PBCom since 2000. He was an Executive Director of PBCom in 2004. Currently, the Vice Chairman of PBCom Finance Corporation, the President of ICEC Insurance Agency Inc. and the Vice President and the Treasurer of International Copra Export Corporation, Interco Manufacturing Corporations and ICEC Land Corporation, Kimmee Realty Corporation and Luy's Securities Co., Inc.

Roman anthony V. azanza, Jr., DirectorDirector of PBCom since 2006. He was the President & CEO in 2006 to October 2010, Consultant for the PDIC to PBCom from 2004 to 2006, and Capital Market Development Specialist of Asian Development Bank in 2003. Currently, a member of the Financial Executive of the Philippines (FINEX) and a Fellow of the Institute of Corporate Directors (ICD). He spent 40 years in commercial and investment banking in Citibank, Bank of Hawaii and Societe Generale. He was also President of the Philippine Association of Finance Companies, the Investment House Association of the Philippines and the Manila Polo Club.

Johnny o. Cobankiat, DirectorDirector of PBCom since 2003. Currently, the President of Ace Hardware Philippines, Inc., Coby’s Marketing Corporation, Co Ban Kiat Hardware Inc., Cobankiat Builders Center Corporation, Cobankiat Marketing Corporation, Milwaukee Builders Center Corporation, Hyperland Holdings, Inc., European Mix Concept Inc., Fairbanks Scale Industries Corporation, and Handle Bar Inc.

philip G. Chung, DirectorCurrently, the President/COO of Elink Transcription Academy Inc., Director of Supima Holdings Corporation since 1984, Director of Century Container, Bicutan Container Corporation and TTC Development Corporation, a Stockholder of La Suerte Cigar & Cigarette Factory, a Founding Member of Association of Healthcare Documentation Inc. and Medical Coding and Billing Association of the Philippines, and a Member of the Medical Transcription Industry Association of the Philippines.

Felix G. Chung, DirectorDirector of PBCom since 2009. Currently, Director of La Suerte Cigar & Cigarette Factory since 1983, Director of Supima Holdings Corporation, Century Container, Bicutan Container Corporation and Tosen Foods Corporation, and Cats Motors, Inc.

atty. Joseph C. tan, DirectorFounding Partner of Marcos Ochoa Serapio & Tan Law Offi ces. He was a Special Counsel of Agus Cruz & Manzano Law Offi ces in 2004 and Associate of Puno & Puno Law Offi ces in 1991.

Roberto m. macasaet, Jr., Independent DirectorHe is the President & CEO of Associated Medical & Clinical Services Inc. since 2006. He was the Vice President of Citadel’s Holdings Inc. from 2001 to 2005 and held various positions in senior management with Fil Hispano Holdings Corporation (formerly Fil Hispano Ceramics Inc.) from 1990 to 2001.

imelda s. singzon, Independent DirectorCurrently, the Executive Vice President of Philippine Deposit Insurance Corporation. She was a former First Senior Vice President of PNB, the Vice President of New York-based First Philippine Fund, a Member of the Board of Directors of various government corporations such as National Food Authority, Livelihood Corporation, Fertilizer and Pesticides Authority and some PNB subsidiaries.

teresita a. see, Independent DirectorTeresita Ang See’s experiences broadly encompass that of being an educator and resource person, author, cultural and social development worker, peace and anti-crime advocate. She was the Founding President of Kaisa Para Sa Kaunlaran, a Chinese-Filipino NGO, President of Kaisa Heritage Center which houses Bahay Tsinoy, Secretary Treasurer of International Society for the Study of Chinese Overseas (ISSCO), a visiting Lecturer at Ateneo de Manila University, Spokesperson of Citizens Action Against Crime (CAAC), and the Founding Chairperson of Movement for Restoration of Peace and Order (MRPO).

Raul o. serrano, Independent DirectorHe was a member of the Board of Trustees of the Government Service Insurance System in 2005. He held various managerial positions in Solidbank Corporation and Allied Banking Corporation until retirement. He is an active member and Past President of the Rotary Club of Diliman District 3780. He holds various positions in the District. He was the Past President of UP Village Homeowners’ Association. He is also a civic and religious leader in the community.

David l. balangue, PDIC ConsultantMr. Balangue is the former Managing Partner and Chairman of Sycip, Gorres, Velayo (SGV) & Co. He is a Director of Trans-Asia Oil and Energy Development Corporation, Chairman of the Financial Reporting Standards Council, Member of the Board of Trustees of the Makati Business Club and Acting Vice Chairman of NAMFREL, Director of Manufacturers Life Insurance Co. (Phils.), Inc. and Chairman of Coalition Against Corruption.

ExECutiVE CommittEE

Chairman: Carlos G. Chung

Vice Chairman: Ralph C. Nubla, Jr.

Members: Roman Anthony V. Azanza, Jr. Roberto M. Macasaet, Jr. Raul O. Serrano Imelda S. Singzon Henry Y. Uy

Alternates: Johnny O. Cobankiat Atty. Victor P. Lazatin Ernesto T. Luy Atty. Joseph C. Tan

auDit CommittEE

Chairman: Raul O. Serrano

Members: Johnny O. Cobankiat Enrique T. Luy Imelda S. Singzon Atty. Joseph C. Tan

Risk maNaGEmENt CommittEE

Chairman: Roberto M. Macasaet, Jr.

Members: Roman Anthony V. Azanza, Jr. Philip Chung Bun Lim Ralph C. Nubla, Jr. Imelda S. Singzon Henry Y. Uy

Alternates: Johnny O. Cobankiat Ernesto T. Luy Atty. Joseph C. Tan

GoVERNaNCE CommittEE


Members: Teresita Ang-See Carlos G. Chung Atty. Victor P. Lazatin Atty. Joseph C. Tan Alternates: Johnny O. Cobankiat Ernesto T. Luy Ralph C. Nubla, Jr.

tRust CommittEE

Chairman: Felix G. Chung

Members: Philip Chung Bun LimRoberto M. Macasaet, Jr.Henry Y. Uy

assEt Disposal aND spECial aCCouNts CommittEE


Vice Chairman: Johnny O. Cobankiat

Members: Atty. Victor P. Lazatin Ernesto T. Luy Roberto M. Macasaet, Jr.

Atty. Joseph C. Tan Henry Y. Uy

Alternates: Roman Anthony V. Azanza, Jr.Ralph C. Nubla, Jr.

aNti-moNEy lauNDERiNG CommittEE

Chairman: Henry Y. Uy

Members: Roman Anthony V. Azanza, Jr. Carlos G. Chung

Ralph C. Nubla, Jr.

Board Committeeswww.pbcom.com.ph


Directors' Profile

Ralph Nubla, Jr., ChairmanDirector of PBCom since 1976. Currently, the Chairman of the Board, Director of PBCom Finance Corporation, President of CNC Investments Inc., Echague Realty Corporation and R. Nubla Securities, Inc. He was Vice Chairman of the Board in 2000, Senior Vice President from 1982 to 2000 and appointed as Executive Director in 2004.

atty. Victor p. lazatin, Vice ChairmanDirector of PBCom since 2007. Currently, the Vice Chairman of the Board, a Senior Partner of Angara Abello Concepcion Regala and Cruz Law Offices and Director of Accra Investments, Accrain Holdings and Nationwide Development Corporation.

henry y. uy, President & CEODirector of PBCom since 1986. Currently, the President & CEO, Chairman of PBCom Finance Corporation since 2008 and Vice President of Echague Realty Corporation since 1992. He was President of PBCom in 1999 and appointed as Executive Director in 2004.

Enrique t. luy, DirectorDirector of PBCom since 2000. He was Chairman of the Board in 2005 to 2010, and Vice Chairman of the Board in 2003. Currently, Chairman of ICEC Insurance Agency Inc., Chairman and President of Luy's Securities Co., Inc., President of International Copra Export Corporation, Interco Manufacturing Corporation, ICEC Land Corporation, and Kimmee Realty Corporation.

Carlos G. Chung, DirectorDirector of PBCom since 1997. Currently, the Chairman of the Executive Committee, Vice Chairman of PBCom Finance Corporation, Director of La Suerte Cigar & Cigarette Factory, Century Container Corporation, State Investment Trust, Inc., & Stateland Inc., a Chairman/President of Supima Holdings, Inc. and Chairman of Tosen Foods, Inc. He has been a member of the Board of Trustees of Xavier School, Inc. since 1990. He is also the Chairman of Ways and Means Committee of ICA Scholarship Foundation since 2005. He was an Executive Director of PBCom in 2004.

Ernesto t. luy, DirectorDirector of PBCom since 2000. He was an Executive Director of PBCom in 2004. Currently, the Vice Chairman of PBCom Finance Corporation, the President of ICEC Insurance Agency Inc. and the Vice President and the Treasurer of International Copra Export Corporation, Interco Manufacturing Corporations and ICEC Land Corporation, Kimmee Realty Corporation and Luy's Securities Co., Inc.

Roman anthony V. azanza, Jr., DirectorDirector of PBCom since 2006. He was the President & CEO in 2006 to October 2010, Consultant for the PDIC to PBCom from 2004 to 2006, and Capital Market Development Specialist of Asian Development Bank in 2003. Currently, a member of the Financial Executive of the Philippines (FINEX) and a Fellow of the Institute of Corporate Directors (ICD). He spent 40 years in commercial and investment banking in Citibank, Bank of Hawaii and Societe Generale. He was also President of the Philippine Association of Finance Companies, the Investment House Association of the Philippines and the Manila Polo Club.

Johnny o. Cobankiat, DirectorDirector of PBCom since 2003. Currently, the President of Ace Hardware Philippines, Inc., Coby’s Marketing Corporation, Co Ban Kiat Hardware Inc., Cobankiat Builders Center Corporation, Cobankiat Marketing Corporation, Milwaukee Builders Center Corporation, Hyperland Holdings, Inc., European Mix Concept Inc., Fairbanks Scale Industries Corporation, and Handle Bar Inc.

philip G. Chung, DirectorCurrently, the President/COO of Elink Transcription Academy Inc., Director of Supima Holdings Corporation since 1984, Director of Century Container, Bicutan Container Corporation and TTC Development Corporation, a Stockholder of La Suerte Cigar & Cigarette Factory, a Founding Member of Association of Healthcare Documentation Inc. and Medical Coding and Billing Association of the Philippines, and a Member of the Medical Transcription Industry Association of the Philippines.

Felix G. Chung, DirectorDirector of PBCom since 2009. Currently, Director of La Suerte Cigar & Cigarette Factory since 1983, Director of Supima Holdings Corporation, Century Container, Bicutan Container Corporation and Tosen Foods Corporation, and Cats Motors, Inc.

atty. Joseph C. tan, DirectorFounding Partner of Marcos Ochoa Serapio & Tan Law Offices. He was a Special Counsel of Agus Cruz & Manzano Law Offices in 2004 and Associate of Puno & Puno Law Offices in 1991.

Roberto m. macasaet, Jr., Independent DirectorHe is the President & CEO of Associated Medical & Clinical Services Inc. since 2006. He was the Vice President of Citadel’s Holdings Inc. from 2001 to 2005 and held various positions in senior management with Fil Hispano Holdings Corporation (formerly Fil Hispano Ceramics Inc.) from 1990 to 2001.

imelda s. singzon, Independent DirectorCurrently, the Executive Vice President of Philippine Deposit Insurance Corporation. She was a former First Senior Vice President of PNB, the Vice President of New York-based First Philippine Fund, a Member of the Board of Directors of various government corporations such as National Food Authority, Livelihood Corporation, Fertilizer and Pesticides Authority and some PNB subsidiaries.

teresita a. see, Independent DirectorTeresita Ang See’s experiences broadly encompass that of being an educator and resource person, author, cultural and social development worker, peace and anti-crime advocate. She was the Founding President of Kaisa Para Sa Kaunlaran, a Chinese-Filipino NGO, President of Kaisa Heritage Center which houses Bahay Tsinoy, Secretary Treasurer of International Society for the Study of Chinese Overseas (ISSCO), a visiting Lecturer at Ateneo de Manila University, Spokesperson of Citizens Action Against Crime (CAAC), and the Founding Chairperson of Movement for Restoration of Peace and Order (MRPO).

Raul o. serrano, Independent DirectorHe was a member of the Board of Trustees of the Government Service Insurance System in 2005. He held various managerial positions in Solidbank Corporation and Allied Banking Corporation until retirement. He is an active member and Past President of the Rotary Club of Diliman District 3780. He holds various positions in the District. He was the Past President of UP Village Homeowners’ Association. He is also a civic and religious leader in the community.

David l. balangue, PDIC ConsultantMr. Balangue is the former Managing Partner and Chairman of Sycip, Gorres, Velayo (SGV) & Co. He is a Director of Trans-Asia Oil and Energy Development Corporation, Chairman of the Financial Reporting Standards Council, Member of the Board of Trustees of the Makati Business Club and Acting Vice Chairman of NAMFREL, Director of Manufacturers Life Insurance Co. (Phils.), Inc. and Chairman of Coalition Against Corruption.

ExECutiVE CommittEE


Vice Chairman: Ralph C. Nubla, Jr.

Members: Roman Anthony V. Azanza, Jr. Roberto M. Macasaet, Jr. Raul O. Serrano Imelda S. Singzon Henry Y. Uy

Alternates: Johnny O. Cobankiat Atty. Victor P. Lazatin Ernesto T. Luy Atty. Joseph C. Tan

auDit CommittEE


Members: Johnny O. Cobankiat Enrique T. Luy Imelda S. Singzon Atty. Joseph C. Tan

Risk maNaGEmENt CommittEE

Chairman: Roberto M. Macasaet, Jr.

Members: Roman Anthony V. Azanza, Jr. Philip Chung Bun Lim Ralph C. Nubla, Jr. Imelda S. Singzon Henry Y. Uy

Alternates: Johnny O. Cobankiat Ernesto T. Luy Atty. Joseph C. Tan

GoVERNaNCE CommittEE


Members: Teresita Ang-See Carlos G. Chung Atty. Victor P. Lazatin Atty. Joseph C. Tan Alternates: Johnny O. Cobankiat Ernesto T. Luy Ralph C. Nubla, Jr.

tRust CommittEE

Chairman: Felix G. Chung

Members: Philip Chung Bun Lim Roberto M. Macasaet, Jr. Henry Y. Uy

assEt Disposal aND spECial aCCouNts CommittEE


Vice Chairman: Johnny O. Cobankiat

Members: Atty. Victor P. Lazatin Ernesto T. Luy Roberto M. Macasaet, Jr. Atty. Joseph C. Tan Henry Y. Uy

Alternates: Roman Anthony V. Azanza, Jr. Ralph C. Nubla, Jr.

aNti-moNEy lauNDERiNG CommittEE

Chairman: Henry Y. Uy

Members: Roman Anthony V. Azanza, Jr. Carlos G. Chung Ralph C. Nubla, Jr.

Board Committeeswww.pbcom.com.ph


Senior Offi cers

Henry Y. UyPRESIDENT & CEO

[L-R]: Felimon F. Baltazar, Aurora C. Manguerra, Guillermo B. Pablo III

[Standing L-R]: Enrique R. Bartolome, Jr., Romeo G. De La Rosa, Carmencita L. Tan, Danilo Dominguez, Mary Jane T. Cuatico,Ma. Socorro I. Santos, Vilma V. Bugia, Froilan Miguel G. Alcantara, Annabelle T. Yeo (Resigned: 04.01.11), Antonio Q. Beltran,Col. Almario A. Hilario (Retired); [Sitting L-R]: Evelyn G. Tan, Editha N. Bautista, Marina U. Francisco, Atty. Rainelda R. Lastimosa,Rose Margaret T. Cuatico, Ma. Rosario Lourdes S. Garcia; [Not in the picture]: Fernando S. Grey, Jr.

Angel M. CorpusEXECUTIVE VICE PRESIDENT

Atty. Bernard B. LopezCORPORATE SECRETARY

VICE PRESIDENTS

ASSISTANT VICE PRESIDENTS

FIRST VICE PRESIDENTS

www.pbcom.com.ph

[Standing L-R]: Juan B. Estioko, Francisco E. Marcelo, Jr., James Y. Go, Evangeline Y. Qua, Evelyn D. Vinluan, Enrique L. Luy, Jr., Raul C. Diaz, Roberto B. Reyes, [Sitting L-R]: Carolina O. Yu, Gloria Elena H. Go

[L-R]: Christopher T. Bacud, Virginia P. Basaca, Jesus Romeo A. Rivera, Lauro D. Gutierrez, Julie N. Go, Irwyn D. Chan, Annabel C. Lee, Rodrigo D. Joaquin, Jr., Maria Rosario C. Geronimo, Lillian L. Lim, Atty. Romeo L. Ibarra, Melanie B. Ricasio; [Not in the picture]: Ricardo M. Bondoc, Alicia S. Yu, Velma M. Vargas

SENIOR VICE PRESIDENTS


Senior Officers

Henry Y. Uy PRESIDENT & CEO

[L-R]: Felimon F. Baltazar, Aurora C. Manguerra, Guillermo B. Pablo III

[Standing L-R]: Enrique R. Bartolome, Jr., Romeo G. De La Rosa, Carmencita L. Tan, Danilo Dominguez, Mary Jane T. Cuatico,Ma. Socorro I. Santos, Vilma V. Bugia, Froilan Miguel G. Alcantara, Annabelle T. Yeo (Resigned: 04.01.11), Antonio Q. Beltran,Col. Almario A. Hilario (Retired); [Sitting L-R]: Evelyn G. Tan, Editha N. Bautista, Marina U. Francisco, Atty. Rainelda R. Lastimosa,Rose Margaret T. Cuatico, Ma. Rosario Lourdes S. Garcia; [Not in the picture]: Fernando S. Grey, Jr.

Angel M. CorpusEXECUTIVE VICE PRESIDENT

Atty. Bernard B. LopezCORPORATE SECRETARY

VICE PRESIDENTS

ASSISTANT VICE PRESIDENTS

FIRST VICE PRESIDENTS

www.pbcom.com.ph

[Standing L-R]: Juan B. Estioko, Francisco E. Marcelo, Jr., James Y. Go, Evangeline Y. Qua, Evelyn D. Vinluan, Enrique L. Luy, Jr., Raul C. Diaz, Roberto B. Reyes, [Sitting L-R]: Carolina O. Yu, Gloria Elena H. Go

[L-R]: Christopher T. Bacud, Virginia P. Basaca, Jesus Romeo A. Rivera, Lauro D. Gutierrez, Julie N. Go, Irwyn D. Chan, Annabel C. Lee, Rodrigo D. Joaquin, Jr., Maria Rosario C. Geronimo, Lillian L. Lim, Atty. Romeo L. Ibarra, Melanie B. Ricasio; [Not in the picture]: Ricardo M. Bondoc, Alicia S. Yu, Velma M. Vargas

SENIOR VICE PRESIDENTS

PBCom’s risk mission, objectives and philosophy are based on the strategy that for effective risk management, it is necessary to have both an appropriate risk management environment and a dynamic and pro-active risk management process.

The risk management philosophy of PBCom is to develop risk awareness, and a risk/return consciousness in order to protect deposits, preserve and properly allocate capital and ensure an adequate return on capital. Overseeing the bankwide implementation of the risk management process and ensuring compliance with defined risk parameters is the Risk Management Committee, composed of several Board members and senior management. Directly reporting to the Risk Management Committee is the Risk Management Group, a distinct and independent unit in the bank whose primary responsibility is to enable the risk management process in the areas of Treasury, Credit, Operations and Trust and to develop and continually update the bank’s risk management system.

Capital management

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 Bangko Sentral ng Pilipinas (BSP) in supervising the Bank.

The primary objectives of the Bank’s capital management are to ensure that the Bank complies with regulatory capital requirements under BSP Circular No. 538 dated August 4, 2006 (Revised Risk-Based Capital Adequacy Framework) that took effect on July 1, 2007, and that the Bank maintains strong credit ratings and healthy capital ratios in order to support its business and to maximize shareholders’ value.

The Bank manages its capital structure and makes adjustments to it in the light of changes in economic conditions and the risk characteristics of its activities. No changes were made in the objectives, policies and processes from the previous years.

The Bank computes its risk-based capital adequacy ratio as a percentage of its qualifying capital to its risk-weighted assets which shall not be less than 10% in accordance with Circular No. 538, and at least 12.5% under the Financial Assistance Agreement (FAA). Qualifying capital and risk weighted assets are computed based on the guidelines under Circular No. 538.

The Bank has complied in full with all its regulatory capital requirements.

The regulatory qualifying capital of the Bank consists of Tier 1 (core) capital, which comprises paid-up common and preferred stock, surplus including current year’s profit and surplus reserves less required deductions such as unsecured credit accommodations to directors, officers, stockholders and related interests (DOSRI) and deferred income tax and significant minority investments in banks and other financial allied undertakings. The other component of regulatory capital is Tier 2 (supplementary) capital, which includes appraisal increment reserves, as authorized by the monetary board and general loan loss provision.

The bank’s capital charge for credit risk is computed at 10% of credit risk-weighted on- and off- balance sheet assets. Risk weights of on-balance sheet assets are based on third party credit assessment of the individual exposure given by eligible external credit assessment institutions as listed in BSP Circular No. 538. For off-balance sheet assets, the risk weights are calculated by multiplying the notional principal amount by the appropriate credit conversion factor as specified in BSP Circular No. 538.

Market risk capital charge is computed according to the methodology set under BSP Circular No. 360, as amended by BSP Circular No. 538 using the standardized approach. Under this approach, capital for market risk is equivalent to 10% of market risk-weighted assets that cover interest rate, equity and foreign exposures of the bank.

The bank computes operational risk capital charge using the basic indicator approach, under which capital for operational risk is equal to 15% of the bank’s average gross income over the previous three years of positive annual gross income.

The Bank has likewise implemented its Internal Capital Adequacy Assessment Process (ICAAP) as required under BSP Circular No. 639. The ICAAP methodology adopted by the bank involved, first, an assessment of whether the risks covered by the Framework: credit risk, market risk and operational risk - are fully captured; and second, an assessment of other risks the Bank is exposed to which are not fully captured and covered under the Framework, and an assessment of whether, and how much capital to allocate against these other risks. The Bank presented a trial document and underwent an initial dialogue with BSP. As a result of the dialogue, an Interim ICAAP document was submitted in April 30, 2010.

treasury Risk management

Market risk arises from adverse fluctuations in the market value of financial instruments in both on- and off-balance sheet items. The Bank employs Value-at-Risk (VaR) using a 99% one-tailed confidence level to measure market risk while a regular back testing program is conducted to ensure an accurate and robust VaR model. Policies in Back Testing of the VAR model was provided in 2010. The process incorporated the 250-day observation to address the 2009 BSP findings. Stress Testing is also employed to determine the earnings impact of extreme market movements not captured by VaR calculations. Finally, a system of risk limits that reflect the Bank’s level of capital, expected returns and the overall risk appetite is used to manage market risk. These limits include the VAR limit, Nominal Position limit, Stop-loss limit and Management Action Trigger (MAT) limit. The Bank also uses BSP’s Risk Assessment System (RAS) to assess the market risk of the Bank.

Credit risk is the risk to earnings that a counterparty is unable to pay obligations on time and in full as previously contracted. The Bank has established an internal risk rating system to determine the soundness of a financial institution before credit lines are granted. Once the credit facilities are granted, a system of monitoring credit limits are employed to manage credit exposures.

Liquidity risk refers to the possibility that the Bank will be unable to meet its financial obligations in any currency. The Bank employs liquidity ratios, liquidity stress testing, a liquidity gapping report and Maximum Cumulative Outflow (MCO) limit to manage liquidity risk. Market stress testing results are also applied to the Liquidity Gap report to measure impact on future cash flows.

Interest rate risk arises from the possibility that changes in interest rates will affect future cash flows or fair values of financial instruments. The Bank follows a prudent policy in managing its assets and liabilities so as to ensure that the exposure to fluctuations in interest rates is kept within acceptable limits.

A substantial proportion of the total loan portfolio is for a term of less than one year, and the majority of the balance of its medium-term portfolio is on a floating-rate basis. Floating rate loans are repriced periodically by reference to the transfer pool rate which reflects the Bank’s internal cost of funds. As a result of these factors, the Bank’s exposure to interest rate fluctuations, and other market risks, is significantly reduced. The Bank, in keeping with banking industry practice, aims to achieve stability and lengthen the term structure of its deposit base, while providing adequate liquidity to cover transactional banking requirements of customers. Repricing gap policies for interest rate risk measurement was likewise instituted in 2010. Furthermore, report on the monthly Rate Reasonability for the PHP-GS and USD ROP positions has been successfully automated.

Credit Risk management

The Bank employs a risk rating system to assess and measure the diverse risk factors of a borrower. The system is designed to reveal the overall risk of lending and serves as a tool for making credit decisions, evaluating the credit risk of potential and existing borrowers, and for pricing purposes.

Periodic assessment of the loan portfolio quality and credit process is conducted through a robust credit review process. A pro-active assessment of the loan portfolio is done through the conduct of periodic stress testing of loan accounts. Among the tools used are:

a. Rapid Portfolio Review (RPR) – is a form of “stress testing” meant to cover significant developments in the credit environment that can affect the borrower’s business and ultimately the quality of the Bank’s portfolio within a 12-month scenario. It allows management to determine the capital impact for the excessive large loan exposure given to the corporate/group of borrowers.

b. Specific Impairment Test - performed for classified loan accounts whose outstanding principal balances and booked Accrued Interest Receivable (AIR) fall within selected criteria. Computation is based on the carrying amount of outstanding loan and booked AIR less net present value of the expected collection discounted at the loan’s original interest rate.

c. Collective Impairment Test - performed for loan accounts with no signs of impairment. This may be compared with the general loan loss provisioning of BSP.

The management of the credit portfolio is subject to prudential limits which serve to control the magnitude of credit risk exposures and preserve the quality of the portfolio. The Bank also monitors large exposures and credit risk concentrations in accordance with BSP Circular 414.

The credit risk management function also involves the identification of inherent risks related to transactions or processes executed with respect to all lending-related activities. In line with this function, the Risk Management Group has developed a Key Risk Indicators Report (KRIR) to serve as a tool to monitor the risk profile of the Bank’s business units (e.g. lending and support groups) and to establish internal loss and key risk indicator databases.

operational Risk management

Operational risk arises from inadequate or failed internal processes, people, systems and external events. The primary tool in controlling operational risk is an effective system of internal controls effected by the Board and participated by each and every employee of the Bank.

Aside from securing adequate insurance coverages over properties owned and acquired, putting up of reserves for self-insurance and setting up allowances for probable losses, operational risk is mitigated through preventive and detective controls which are embedded in operating policies and procedures, approval limits and authorities to govern day-to-day operations.

Proactively, the Bank has implemented a robust operational risk identification, assessment, monitoring, control and reporting system in each operating unit in the Bank. Principal operational risk identification and assessment tool used is the risk assessment survey, risk mapping and operational risk matrix that are periodically updated. Risk Control Self-Assessments are also used where applicable. These tools are supplemented by the Operational Losses and Key Risk Indicators Reports which are required to be submitted monthly by all operating units. Moreover, a system for reporting of operational crimes and losses, and policies on whistle-blowing and handling of administrative cases are in place. In line with the bank’s thrust of continuous improvement, the Risk Management Group presented specifications for automation of operational risk reporting and monitoring in branches. The project will enable faster reporting of operational risks from the branches up to Risk Management, utilize technology capacity to collate and manage data, and provide a backbone to enable development of

an operational loss database. Now ready for user acceptance testing, it will eventually be introduced to other groups and units of the bank. To further complement the comprehensive operational risk identification, assessment, monitoring and control, the existing Risk Profile for Head Office and Information Technology (IT) Units were enhanced to consider the process mapping in the risk identification phase and included operational risk factors for systems and people components, and detailed loss event type classification aligned with Basel 2 and ICAAP requirements.

To instill risk awareness and operational risk control environment, the Bank through its Risk Management Group conducts seminars and workshops on Operational Risk Management attended by different units of the Bank. The Risk Management Group likewise continuously develops and implements risk management policies, while holding interactive meetings with operating units to address risk issues and implement process enhancements.

A technology risk management framework that incorporates the requirements under existing BSP regulations and which takes into account strategic, operational, compliance and reputational risk is periodically reviewed and updated to ensure that all risks in the Bank’s technology-enabled products, services, delivery channels and processes are effectively managed and that any gaps between the existing technology infrastructure vis a vis regulatory requirements are being regularly monitored and addressed.

The Bank through its Business Continuity Planning (BCP) Directorate and Risk Management Group acting as BCP Coordinator follows a robust business continuity planning process that involves business impact analysis/risk assessment, periodic review and updating of business continuity plans and conduct of BCP tests. Risk Management Group being the BCP Process Coordinator, facilitated a comprehensive Business Continuity Exercise last quarter 2010 to test the workability of the business continuity plans and disaster recovery of critical business units. A BCP awareness seminar was likewise conducted bankwide to update and familiarize all bank employees on BCP process and Call Tree mechanism.

trust Risk management

Trust risks pertain to losses that can occur for failure of the Trust Group to fulfill its fiduciary responsibilities to the trustors/principals. Having account management, trading, investment and operations functions, Trust is also exposed to the major risk areas of Market, Credit and Operations.

Risks arising in the performance of trust duties and obligations are addressed through the Trust Committee and Risk Management Group. The Trust Committee performs oversight functions on trust services. The Risk Management Group spearheads the effective implementation of the risk management process through:

Operational Loss and Key Risk Indicators Report to analyze, manage and monitor the risk profile of trust; BOD-approved Trust Risk Management Policies to guide Trust in managing risk associated with organization, account management, trading, investment and operations functions; Stress Testing of UITF portfolio to measure the earnings impact to market movements that are considered ‘extreme” but possible; and, conducts seminars, interactive meetings with concerned risk takers to effectively promote risk awareness.

Risk Managementwww.pbcom.com.ph


PBCom’s risk mission, objectives and philosophy are based on the strategy that for effective risk management, it is necessary to have both an appropriate risk management environment and a dynamic and pro-active risk management process.

The risk management philosophy of PBCom is to develop risk awareness, and a risk/return consciousness in order to protect deposits, preserve and properly allocate capital and ensure an adequate return on capital. Overseeing the bankwide implementation of the risk management process and ensuring compliance with defined risk parameters is the Risk Management Committee, composed of several Board members and senior management. Directly reporting to the Risk Management Committee is the Risk Management Group, a distinct and independent unit in the bank whose primary responsibility is to enable the risk management process in the areas of Treasury, Credit, Operations and Trust and to develop and continually update the bank’s risk management system.

Capital management

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 Bangko Sentral ng Pilipinas (BSP) in supervising the Bank.

The primary objectives of the Bank’s capital management are to ensure that the Bank complies with regulatory capital requirements under BSP Circular No. 538 dated August 4, 2006 (Revised Risk-Based Capital Adequacy Framework) that took effect on July 1, 2007, and that the Bank maintains strong credit ratings and healthy capital ratios in order to support its business and to maximize shareholders’ value.

The Bank manages its capital structure and makes adjustments to it in the light of changes in economic conditions and the risk characteristics of its activities. No changes were made in the objectives, policies and processes from the previous years.

The Bank computes its risk-based capital adequacy ratio as a percentage of its qualifying capital to its risk-weighted assets which shall not be less than 10% in accordance with Circular No. 538, and at least 12.5% under the Financial Assistance Agreement (FAA). Qualifying capital and risk weighted assets are computed based on the guidelines under Circular No. 538.

The Bank has complied in full with all its regulatory capital requirements.

The regulatory qualifying capital of the Bank consists of Tier 1 (core) capital, which comprises paid-up common and preferred stock, surplus including current year’s profit and surplus reserves less required deductions such as unsecured credit accommodations to directors, officers, stockholders and related interests (DOSRI) and deferred income tax and significant minority investments in banks and other financial allied undertakings. The other component of regulatory capital is Tier 2 (supplementary) capital, which includes appraisal increment reserves, as authorized by the monetary board and general loan loss provision.

The bank’s capital charge for credit risk is computed at 10% of credit risk-weighted on- and off- balance sheet assets. Risk weights of on-balance sheet assets are based on third party credit assessment of the individual exposure given by eligible external credit assessment institutions as listed in BSP Circular No. 538. For off-balance sheet assets, the risk weights are calculated by multiplying the notional principal amount by the appropriate credit conversion factor as specified in BSP Circular No. 538.

Market risk capital charge is computed according to the methodology set under BSP Circular No. 360, as amended by BSP Circular No. 538 using the standardized approach. Under this approach, capital for market risk is equivalent to 10% of market risk-weighted assets that cover interest rate, equity and foreign exposures of the bank.

The bank computes operational risk capital charge using the basic indicator approach, under which capital for operational risk is equal to 15% of the bank’s average gross income over the previous three years of positive annual gross income.

The Bank has likewise implemented its Internal Capital Adequacy Assessment Process (ICAAP) as required under BSP Circular No. 639. The ICAAP methodology adopted by the bank involved, first, an assessment of whether the risks covered by the Framework: credit risk, market risk and operational risk - are fully captured; and second, an assessment of other risks the Bank is exposed to which are not fully captured and covered under the Framework, and an assessment of whether, and how much capital to allocate against these other risks. The Bank presented a trial document and underwent an initial dialogue with BSP. As a result of the dialogue, an Interim ICAAP document was submitted in April 30, 2010.

treasury Risk management

Market risk arises from adverse fluctuations in the market value of financial instruments in both on- and off-balance sheet items. The Bank employs Value-at-Risk (VaR) using a 99% one-tailed confidence level to measure market risk while a regular back testing program is conducted to ensure an accurate and robust VaR model. Policies in Back Testing of the VAR model was provided in 2010. The process incorporated the 250-day observation to address the 2009 BSP findings. Stress Testing is also employed to determine the earnings impact of extreme market movements not captured by VaR calculations. Finally, a system of risk limits that reflect the Bank’s level of capital, expected returns and the overall risk appetite is used to manage market risk. These limits include the VAR limit, Nominal Position limit, Stop-loss limit and Management Action Trigger (MAT) limit. The Bank also uses BSP’s Risk Assessment System (RAS) to assess the market risk of the Bank.

Credit risk is the risk to earnings that a counterparty is unable to pay obligations on time and in full as previously contracted. The Bank has established an internal risk rating system to determine the soundness of a financial institution before credit lines are granted. Once the credit facilities are granted, a system of monitoring credit limits are employed to manage credit exposures.

Liquidity risk refers to the possibility that the Bank will be unable to meet its financial obligations in any currency. The Bank employs liquidity ratios, liquidity stress testing, a liquidity gapping report and Maximum Cumulative Outflow (MCO) limit to manage liquidity risk. Market stress testing results are also applied to the Liquidity Gap report to measure impact on future cash flows.

Interest rate risk arises from the possibility that changes in interest rates will affect future cash flows or fair values of financial instruments. The Bank follows a prudent policy in managing its assets and liabilities so as to ensure that the exposure to fluctuations in interest rates is kept within acceptable limits.

A substantial proportion of the total loan portfolio is for a term of less than one year, and the majority of the balance of its medium-term portfolio is on a floating-rate basis. Floating rate loans are repriced periodically by reference to the transfer pool rate which reflects the Bank’s internal cost of funds. As a result of these factors, the Bank’s exposure to interest rate fluctuations, and other market risks, is significantly reduced. The Bank, in keeping with banking industry practice, aims to achieve stability and lengthen the term structure of its deposit base, while providing adequate liquidity to cover transactional banking requirements of customers. Repricing gap policies for interest rate risk measurement was likewise instituted in 2010. Furthermore, report on the monthly Rate Reasonability for the PHP-GS and USD ROP positions has been successfully automated.

Credit Risk management

The Bank employs a risk rating system to assess and measure the diverse risk factors of a borrower. The system is designed to reveal the overall risk of lending and serves as a tool for making credit decisions, evaluating the credit risk of potential and existing borrowers, and for pricing purposes.

Periodic assessment of the loan portfolio quality and credit process is conducted through a robust credit review process. A pro-active assessment of the loan portfolio is done through the conduct of periodic stress testing of loan accounts. Among the tools used are:

a. Rapid Portfolio Review (RPR) – is a form of “stress testing” meant to cover significant developments in the credit environment that can affect the borrower’s business and ultimately the quality of the Bank’s portfolio within a 12-month scenario. It allows management to determine the capital impact for the excessive large loan exposure given to the corporate/group of borrowers.

b. Specific Impairment Test - performed for classified loan accounts whose outstanding principal balances and booked Accrued Interest Receivable (AIR) fall within selected criteria. Computation is based on the carrying amount of outstanding loan and booked AIR less net present value of the expected collection discounted at the loan’s original interest rate.

c. Collective Impairment Test - performed for loan accounts with no signs of impairment. This may be compared with the general loan loss provisioning of BSP.

The management of the credit portfolio is subject to prudential limits which serve to control the magnitude of credit risk exposures and preserve the quality of the portfolio. The Bank also monitors large exposures and credit risk concentrations in accordance with BSP Circular 414.

The credit risk management function also involves the identification of inherent risks related to transactions or processes executed with respect to all lending-related activities. In line with this function, the Risk Management Group has developed a Key Risk Indicators Report (KRIR) to serve as a tool to monitor the risk profile of the Bank’s business units (e.g. lending and support groups) and to establish internal loss and key risk indicator databases.

operational Risk management

Operational risk arises from inadequate or failed internal processes, people, systems and external events. The primary tool in controlling operational risk is an effective system of internal controls effected by the Board and participated by each and every employee of the Bank.

Aside from securing adequate insurance coverages over properties owned and acquired, putting up of reserves for self-insurance and setting up allowances for probable losses, operational risk is mitigated through preventive and detective controls which are embedded in operating policies and procedures, approval limits and authorities to govern day-to-day operations.

Proactively, the Bank has implemented a robust operational risk identification, assessment, monitoring, control and reporting system in each operating unit in the Bank. Principal operational risk identification and assessment tool used is the risk assessment survey, risk mapping and operational risk matrix that are periodically updated. Risk Control Self-Assessments are also used where applicable. These tools are supplemented by the Operational Losses and Key Risk Indicators Reports which are required to be submitted monthly by all operating units. Moreover, a system for reporting of operational crimes and losses, and policies on whistle-blowing and handling of administrative cases are in place. In line with the bank’s thrust of continuous improvement, the Risk Management Group presented specifications for automation of operational risk reporting and monitoring in branches. The project will enable faster reporting of operational risks from the branches up to Risk Management, utilize technology capacity to collate and manage data, and provide a backbone to enable development of

an operational loss database. Now ready for user acceptance testing, it will eventually be introduced to other groups and units of the bank. To further complement the comprehensive operational risk identification, assessment, monitoring and control, the existing Risk Profile for Head Office and Information Technology (IT) Units were enhanced to consider the process mapping in the risk identification phase and included operational risk factors for systems and people components, and detailed loss event type classification aligned with Basel 2 and ICAAP requirements.

To instill risk awareness and operational risk control environment, the Bank through its Risk Management Group conducts seminars and workshops on Operational Risk Management attended by different units of the Bank. The Risk Management Group likewise continuously develops and implements risk management policies, while holding interactive meetings with operating units to address risk issues and implement process enhancements.

A technology risk management framework that incorporates the requirements under existing BSP regulations and which takes into account strategic, operational, compliance and reputational risk is periodically reviewed and updated to ensure that all risks in the Bank’s technology-enabled products, services, delivery channels and processes are effectively managed and that any gaps between the existing technology infrastructure vis a vis regulatory requirements are being regularly monitored and addressed.

The Bank through its Business Continuity Planning (BCP) Directorate and Risk Management Group acting as BCP Coordinator follows a robust business continuity planning process that involves business impact analysis/risk assessment, periodic review and updating of business continuity plans and conduct of BCP tests. Risk Management Group being the BCP Process Coordinator, facilitated a comprehensive Business Continuity Exercise last quarter 2010 to test the workability of the business continuity plans and disaster recovery of critical business units. A BCP awareness seminar was likewise conducted bankwide to update and familiarize all bank employees on BCP process and Call Tree mechanism.

trust Risk management

Trust risks pertain to losses that can occur for failure of the Trust Group to fulfill its fiduciary responsibilities to the trustors/principals. Having account management, trading, investment and operations functions, Trust is also exposed to the major risk areas of Market, Credit and Operations.

Risks arising in the performance of trust duties and obligations are addressed through the Trust Committee and Risk Management Group. The Trust Committee performs oversight functions on trust services. The Risk Management Group spearheads the effective implementation of the risk management process through:

Operational Loss and Key Risk Indicators Report to analyze, manage and monitor the risk profile of trust; BOD-approved Trust Risk Management Policies to guide Trust in managing risk associated with organization, account management, trading, investment and operations functions; Stress Testing of UITF portfolio to measure the earnings impact to market movements that are considered ‘extreme” but possible; and, conducts seminars, interactive meetings with concerned risk takers to effectively promote risk awareness.

Risk Managementwww.pbcom.com.ph


Refers to a system whereby shareholders, creditors and other stakeholders of a corporation ensure that management enhances the value of the corporation in an increasingly competitive global financial market place.

The Board of Directors assume certain responsibilities to different constituencies or stakeholders, i.e., the Bank itself, its stockholders, its depositors and other creditors, its management and employees, and the public at large. These constituencies or stakeholders have the right to expect that the Bank is being run in a prudent and sound manner. The business and affairs of PBCom are subject to the general oversight and authority of the Board of Directors.

Thus, it is the primary responsibility of the Board of Directors, among others to:

1. Appoint a competent management team at all times, applying fit and proper standards on key personnel;

2. Establish objectives and draw up a business strategy for achieving them. Business plans should be established

to direct its on-going activities, regularly reviewed, with corrective action taken as needed;

3. Conduct the affairs of the Bank with high degree of integrity, prescribing corporate values, codes of conduct and other standards of appropriate behavior for itself, the senior management and other employees;

4. Establish and ensure compliance with sound written policies, providing a mechanism to ensure compliance with said policies;

5. Prescribe a clear assignment of responsibilities and decision-making authorities, incorporating a hierarchy of required approvals from individuals to the Board of Directors;

6. Establish a system of checks and balances which applies in the first instance to the board itself and effective check and control by the Board over the Chief Executive Officer and key managers and by the latter over the line officers of the Bank;

7. Monitor, assess and control the performance of management; and

8. Adopt and maintain adequate risk management policy.

The position of the bank director is a position of trust and confidence, acting in the best interest of the Bank in a manner characterized by transparency, accountability and fairness. He exercises leadership, prudence and integrity in directing the Bank towards sustained progress over the long term.

Corporate Governancewww.pbcom.com.ph


PBCom has specialized Board-level committees, namely, Audit Committee, Risk Management Committee, and Governance Committee. These committees were constituted to assist the Board of Directors in discharging its duties and responsibilities particularly within the bounds of effective corporate governance.

audit Committee The Audit Committee is composed of five members of the Board of Directors of which two are independent directors. All of the members of the Audit Committee are financially literate. They are assisted by a consultant who is an accounting and financial management expert.

The Audit Committee has a written charter, which includes its purpose, objective, duties and responsibilities, duly approved by the Board of Directors. The Audit Committee assists the Board of Directors in fulfilling its statutory and fiduciary responsibilities with respect to internal controls including financial reporting control and information technology security, accounting policies, and auditing and financial reporting practices

In 2010, the Audit Committee held a total of seven meetings. Its members as of December 31, 2010, who were designated to the Audit Committee on October 28, 2010 following their election to the Board of Directors in the October 15, 2010 Stockholders’ Meeting, has held three meetings in 2010.

The following is the summary of members’ attendance performance in 2010:

Aurora L. Shih1 4/4Deborah Anne N. Tan1 4/4Raul O. Serrano2 3/3Imelda S. Singzon2 3/3Johnny O. Cobankiat2 3/3Joseph C. Tan2 3/3

1Up to October 15, 2010 only.2Effective October 28, 2010.

The total per diem paid to members for their attendance in the meetings in 2010 was P100,000.00.

The following is a summary of key activities of the Audit Committee in 2010:

1. Discussed with internal and external auditors their respective overall audit scope and plans as well as the result of internal and external auditors’ respective examinations, evaluations of internal controls and overall quality of financial reporting.

2. Recommended to the Board, and the Board approved, the inclusion of financial statements for the year ended December 31, 2010 in the Bank’s Annual Report (Form 17-A) filed with the Securities and Exchange Commission.

3. Approved the appointment of the external auditor.

The Audit Committee approved the following external auditor-related fees:

For 2009 paid in 2010 P 2,897,664.00For 2010 paid in 2011 P 2,858,240.00

The above audit fees are inclusive of other assurance related services by the external auditor that are reasonably related to the performance of the audit or review of the Bank’s financial statements and all other fees.

Risk management CommitteeThe Risk Management Committee is composed of at least three members of the Board of Directors who possess adequate knowledge on bank’s risk exposures, the President & Chief Executive Officer, the Corporate Treasurer and the Chief Risk Officer. The Chairman of the Committee is a non-executive director while the Secretary of the Committee is the Chief Risk Officer.

The Risk Management Committee has a written charter, which includes its purpose, objective, duties and responsibilities, duly approved by the Board of Directors. The Risk Management Committee assists the Board of Directors in the effective discharge of its function in overseeing the risk management program of the Bank. An effective risk management program is a critical component for the safe and sound operation of the Bank. It is a key element in achieving PBCom’s goal and objectives, optimizing growth and capital while minimizing losses to the Bank.

In 2010, the Risk Management Committee held a total of six (6) meetings. New members of the committee were designated after the election of the Board of Directors in the 2010 Stockholders’ meeting, namely:

• Roberto M. Macasaet, Jr.• Imelda S. Singzon• Philip Chung Bun Lin


Roman Anthony V. Azanza, Jr. 6/6Henry Y. Uy 6/6Carlos G. Chung1 4/5Ralph Nubla, Jr. 3/6Atty. Romulo A. Espaldon, Jr.1(deceased) 2/5Ernesto T. Luy2 2/6 Philip Chung Bun Lin3 1/1Imelda S. Singzon3 1/1Roberto M. Macasaet, Jr.3 0/1

1Up to September 23, 2010.2Alternate member effective November 18, 20103Effective November 18, 2010.


The following is a summary of key activities of the Risk Management Committee in 2010:

1. Review and recommend for approval of the Board of Directors, the bank’s written risk management program and policies &

procedures to identify, measure, monitor and control (Credit, Market, Interest Rate, Liquidity, Operational, Compliance, Strategic, Reputation and Technology-related) risks.

2. Review and approval of approval limits and authorities

3. Approval of Internal Capital Adequacy Assessment Process (ICAAP) Interim Document submitted to Bangko Sentral ng Pilipinas last April 30, 2010

Governance CommitteeThe Governance Committee serves as the primary resource for the Board of Directors to study, evaluate and make recommendations about the structure, charter, policies and practices of the Board and its committees and to address issues of corporate governance.

The Committee is composed of five members of the Board of Directors under the chairmanship of an independent director. The Board of Directors appoints the members of the Committee. The current membership of the Committee consists of:

• Director Raul O. Serrano – Chairman• Director Teresita Ang See – Member• Director Carlos G. Chung – Member• Director Atty. Victor P. Lazatin – Member • Director Atty. Joseph C. Tan – Member

Designated as alternate members of the Committee are Chairman Ralph Nubla Jr., Director Johnny O. Cobankiat and Director Ernesto T. Luy.

The primary responsibility of the Committee is to develop and recommend amendments to the Articles of Incorporation and By-Laws as well as the set of guiding corporate governance principles, policies and best practices including but not limited to:

• Size of the Board (number of members)• Criteria for Membership (e.g. Qualifications, Stock

Ownership, Diversity)• Retirement Age of Members• Mix of management and Independent Directors• Conflicts of Interest• Compensation and benefits of managing and

non-managing members of the Board, Senior Management• Structure and charter of Board Committees• Rotation of Committee members and chairs• performance Evaluation of CEO and the members of the Board• Succession Planning and Senior Management/Directors

Development

The Governance Committee is the mother group for the following sub-committees:

• Nomination Sub-Committee• Compensation and Remuneration Sub-Committee• Performance Evaluation Sub-Committee

Taking into account such relevant factors as strength of character, extent of business experience/expertise and mature judgment, the Nomination Sub-Committee identifies, evaluates and recommends to the Board individuals qualified to become directors.

The sub-committee also exercises oversight functions in the selection, nomination and appointment of members of senior management.

Based on the needs of the business to attract the best talents to help it accomplish its objectives and guided by periodic benchmarking with other leading financial institutions, the Compensation and Remuneration Sub-Committee oversees the implementation of the compensation and benefits program for Directors and senior management.

The Performance Evaluation Sub-Committee oversees the implementation of a Performance Management process for Senior Management and the Members of the Board.

The Committee meets once a quarter or whenever necessary.

Refers to a system whereby shareholders, creditors and other stakeholders of a corporation ensure that management enhances the value of the corporation in an increasingly competitive global financial market place.

The Board of Directors assume certain responsibilities to different constituencies or stakeholders, i.e., the Bank itself, its stockholders, its depositors and other creditors, its management and employees, and the public at large. These constituencies or stakeholders have the right to expect that the Bank is being run in a prudent and sound manner. The business and affairs of PBCom are subject to the general oversight and authority of the Board of Directors.

Thus, it is the primary responsibility of the Board of Directors, among others to:

1. Appoint a competent management team at all times, applying fit and proper standards on key personnel;

2. Establish objectives and draw up a business strategy for achieving them. Business plans should be established

to direct its on-going activities, regularly reviewed, with corrective action taken as needed;

3. Conduct the affairs of the Bank with high degree of integrity, prescribing corporate values, codes of conduct and other standards of appropriate behavior for itself, the senior management and other employees;

4. Establish and ensure compliance with sound written policies, providing a mechanism to ensure compliance with said policies;

5. Prescribe a clear assignment of responsibilities and decision-making authorities, incorporating a hierarchy of required approvals from individuals to the Board of Directors;

6. Establish a system of checks and balances which applies in the first instance to the board itself and effective check and control by the Board over the Chief Executive Officer and key managers and by the latter over the line officers of the Bank;

7. Monitor, assess and control the performance of management; and

8. Adopt and maintain adequate risk management policy.

The position of the bank director is a position of trust and confidence, acting in the best interest of the Bank in a manner characterized by transparency, accountability and fairness. He exercises leadership, prudence and integrity in directing the Bank towards sustained progress over the long term.

Corporate Governancewww.pbcom.com.ph


PBCom has specialized Board-level committees, namely, Audit Committee, Risk Management Committee, and Governance Committee. These committees were constituted to assist the Board of Directors in discharging its duties and responsibilities particularly within the bounds of effective corporate governance.

audit Committee The Audit Committee is composed of five members of the Board of Directors of which two are independent directors. All of the members of the Audit Committee are financially literate. They are assisted by a consultant who is an accounting and financial management expert.

The Audit Committee has a written charter, which includes its purpose, objective, duties and responsibilities, duly approved by the Board of Directors. The Audit Committee assists the Board of Directors in fulfilling its statutory and fiduciary responsibilities with respect to internal controls including financial reporting control and information technology security, accounting policies, and auditing and financial reporting practices

In 2010, the Audit Committee held a total of seven meetings. Its members as of December 31, 2010, who were designated to the Audit Committee on October 28, 2010 following their election to the Board of Directors in the October 15, 2010 Stockholders’ Meeting, has held three meetings in 2010.


Aurora L. Shih1 4/4Deborah Anne N. Tan1 4/4Raul O. Serrano2 3/3Imelda S. Singzon2 3/3Johnny O. Cobankiat2 3/3Joseph C. Tan2 3/3

1Up to October 15, 2010 only.2Effective October 28, 2010.


The following is a summary of key activities of the Audit Committee in 2010:

1. Discussed with internal and external auditors their respective overall audit scope and plans as well as the result of internal and external auditors’ respective examinations, evaluations of internal controls and overall quality of financial reporting.

2. Recommended to the Board, and the Board approved, the inclusion of financial statements for the year ended December 31, 2010 in the Bank’s Annual Report (Form 17-A) filed with the Securities and Exchange Commission.

3. Approved the appointment of the external auditor.

The Audit Committee approved the following external auditor-related fees:

For 2009 paid in 2010 P 2,897,664.00For 2010 paid in 2011 P 2,858,240.00

The above audit fees are inclusive of other assurance related services by the external auditor that are reasonably related to the performance of the audit or review of the Bank’s financial statements and all other fees.

Risk management CommitteeThe Risk Management Committee is composed of at least three members of the Board of Directors who possess adequate knowledge on bank’s risk exposures, the President & Chief Executive Officer, the Corporate Treasurer and the Chief Risk Officer. The Chairman of the Committee is a non-executive director while the Secretary of the Committee is the Chief Risk Officer.

The Risk Management Committee has a written charter, which includes its purpose, objective, duties and responsibilities, duly approved by the Board of Directors. The Risk Management Committee assists the Board of Directors in the effective discharge of its function in overseeing the risk management program of the Bank. An effective risk management program is a critical component for the safe and sound operation of the Bank. It is a key element in achieving PBCom’s goal and objectives, optimizing growth and capital while minimizing losses to the Bank.

In 2010, the Risk Management Committee held a total of six (6) meetings. New members of the committee were designated after the election of the Board of Directors in the 2010 Stockholders’ meeting, namely:

• Roberto M. Macasaet, Jr.• Imelda S. Singzon• Philip Chung Bun Lin


Roman Anthony V. Azanza, Jr. 6/6Henry Y. Uy 6/6Carlos G. Chung1 4/5Ralph Nubla, Jr. 3/6Atty. Romulo A. Espaldon, Jr.1(deceased) 2/5Ernesto T. Luy2 2/6 Philip Chung Bun Lin3 1/1Imelda S. Singzon3 1/1Roberto M. Macasaet, Jr.3 0/1

1Up to September 23, 2010.2Alternate member effective November 18, 20103Effective November 18, 2010.


The following is a summary of key activities of the Risk Management Committee in 2010:

1. Review and recommend for approval of the Board of Directors, the bank’s written risk management program and policies &

procedures to identify, measure, monitor and control (Credit, Market, Interest Rate, Liquidity, Operational, Compliance, Strategic, Reputation and Technology-related) risks.

2. Review and approval of approval limits and authorities

3. Approval of Internal Capital Adequacy Assessment Process (ICAAP) Interim Document submitted to Bangko Sentral ng Pilipinas last April 30, 2010

Governance CommitteeThe Governance Committee serves as the primary resource for the Board of Directors to study, evaluate and make recommendations about the structure, charter, policies and practices of the Board and its committees and to address issues of corporate governance.

The Committee is composed of five members of the Board of Directors under the chairmanship of an independent director. The Board of Directors appoints the members of the Committee. The current membership of the Committee consists of:

• Director Raul O. Serrano – Chairman• Director Teresita Ang See – Member• Director Carlos G. Chung – Member• Director Atty. Victor P. Lazatin – Member • Director Atty. Joseph C. Tan – Member

Designated as alternate members of the Committee are Chairman Ralph Nubla Jr., Director Johnny O. Cobankiat and Director Ernesto T. Luy.

The primary responsibility of the Committee is to develop and recommend amendments to the Articles of Incorporation and By-Laws as well as the set of guiding corporate governance principles, policies and best practices including but not limited to:

• Size of the Board (number of members)• Criteria for Membership (e.g. Qualifications, Stock

Ownership, Diversity)• Retirement Age of Members• Mix of management and Independent Directors• Conflicts of Interest• Compensation and benefits of managing and

non-managing members of the Board, Senior Management• Structure and charter of Board Committees• Rotation of Committee members and chairs• performance Evaluation of CEO and the members of the Board• Succession Planning and Senior Management/Directors

Development

The Governance Committee is the mother group for the following sub-committees:

• Nomination Sub-Committee• Compensation and Remuneration Sub-Committee• Performance Evaluation Sub-Committee

Taking into account such relevant factors as strength of character, extent of business experience/expertise and mature judgment, the Nomination Sub-Committee identifies, evaluates and recommends to the Board individuals qualified to become directors.

The sub-committee also exercises oversight functions in the selection, nomination and appointment of members of senior management.

Based on the needs of the business to attract the best talents to help it accomplish its objectives and guided by periodic benchmarking with other leading financial institutions, the Compensation and Remuneration Sub-Committee oversees the implementation of the compensation and benefits program for Directors and senior management.

The Performance Evaluation Sub-Committee oversees the implementation of a Performance Management process for Senior Management and the Members of the Board.

The Committee meets once a quarter or whenever necessary.

www.pbcom.com.ph


All enterprises must have a written code of business conduct to ensure that applicable laws are followed in letter and spirit.

Code of Ethics

The PBCom Code of Ethics embodies the corporate principles that serve to guide the conduct and behavior of Bank employees in every situation. As an institution imbued with public trust, the Bank requires a high level of integrity and professionalism among all employees.

Through the Code of Ethics, the Bank has institutionalized the observance of its Core Corporate Values such as, Trust, Integrity, Professionalism, Loyalty and Excellence.

The specific objectives of the Code of Ethics are to:

1. Promote a corporate culture of good governance and best practices. 2. Empower and protect employees by making them aware of the criteria/

standards involved in carrying out their functions and in making decisions.

3. Standardize application of policies and regulations and corrective measures in case of deviations from expected behavior.

The Code of Ethics enforces the following fundamental policies of the Bank:

1. Putting the interests of the Bank above in situations where actual or potential conflict of interest exists. When such situation occurs, employees must put the Bank’s interests over and above other interests and ensure that employees’ personal interests do not conflict with the duties, which they must perform for the Bank, or with the duties, which the Bank performs for clients. This covers the following restrictions:

a. Personal transactions with clients.b. Receiving gifts and gratuities from clients.

2. Probity in handling of confidential information, the disclosure or non-disclosure of such information is vital to the Bank’s well-being. Employees are mandated under the Code of Ethics to be able to:

a. Support good internal governance by prompt reporting of critical information within the Bank.

b. In accordance with law, keep client information confidential including the Bank’s propriety rights to trade secrets.

c. Comply with regulatory requirements to disclose and report specific information as mandated by the anti-money laundering law.

3. Compliance with the law and with internal regulations challenging within the Bank, any values or policies that are inconsistent with these guidelines.

4. Provide quality customer service toward clients while protecting the legitimate interests of the Bank at all times.

5. Render services to customers on the basis of rational business criteria rather than on factors such as race, gender or religion.

6. Conduct personal, professional or business affairs in accordance with the highest moral standards so that there can be no opportunity for unfavorable reflections upon the Bank as follows:

a. Employees of PBCom must ensure the proper conduct of their personal affairs.

b. Employees of PBCom should know the importance of meeting their financial obligations and living within their means.

c. Employees of PBCom, especially those having money and property accountability, are prohibited from frequenting gambling establishments.

To ensure employees’ adherence to the Code of Ethics, the Bank formulated its implementing guidelines under the PBCom Code of Conduct.

The Code of Conduct was discussed and adopted by the Labor- Management Committee of the Bank consisting of representatives from the Human Resources Group and Union representatives to ensure support and commitment from all sectors in the Bank.

The Code of Conduct serves as guidelines for the enforcement of the provisions of the Code of Ethics and prescribes the applicable sanctions in case of deviation thereof. Any breach of the provisions of the Code may result in disciplinary action ranging from reprimand to termination of employment, depending on the gravity of the offense, after observance of due process of law. However, the spirit of implementation also gives more emphasis on positive motivation rather than punitive measures. Penalties to be resorted to only when necessary and only to the extent required by the circumstances. Sanctions shall be meted to:

1. Correct unacceptable conduct2. Restore the integrity of order & discipline.

Application of sanctions are always guided by impartiality, open-mindedness, consistency, and fairness.

The Code of Ethics and the Code of Conduct are printed in handbook form and disseminated to all officers and staff.

Adherence to the Code is the responsibility of each employee of the Bank and is a condition for continued employment. Employees of PBCom annually confirm their adherence to these guidelines.

Corporate Governance

2010in

Retrospect

stoCkholDERs' mEEtiNG

baNk aNNiVERsaRy/sERViCE awaRDs

outREaCh

spoRts EVENts

www.pbcom.com.ph


All enterprises must have a written code of business conduct to ensure that applicable laws are followed in letter and spirit.

Code of Ethics

The PBCom Code of Ethics embodies the corporate principles that serve to guide the conduct and behavior of Bank employees in every situation. As an institution imbued with public trust, the Bank requires a high level of integrity and professionalism among all employees.

Through the Code of Ethics, the Bank has institutionalized the observance of its Core Corporate Values such as, Trust, Integrity, Professionalism, Loyalty and Excellence.

The specific objectives of the Code of Ethics are to:

1. Promote a corporate culture of good governance and best practices. 2. Empower and protect employees by making them aware of the criteria/

standards involved in carrying out their functions and in making decisions.

3. Standardize application of policies and regulations and corrective measures in case of deviations from expected behavior.

The Code of Ethics enforces the following fundamental policies of the Bank:

1. Putting the interests of the Bank above in situations where actual or potential conflict of interest exists. When such situation occurs, employees must put the Bank’s interests over and above other interests and ensure that employees’ personal interests do not conflict with the duties, which they must perform for the Bank, or with the duties, which the Bank performs for clients. This covers the following restrictions:

a. Personal transactions with clients.b. Receiving gifts and gratuities from clients.

2. Probity in handling of confidential information, the disclosure or non-disclosure of such information is vital to the Bank’s well-being. Employees are mandated under the Code of Ethics to be able to:

a. Support good internal governance by prompt reporting of critical information within the Bank.

b. In accordance with law, keep client information confidential including the Bank’s propriety rights to trade secrets.

c. Comply with regulatory requirements to disclose and report specific information as mandated by the anti-money laundering law.

3. Compliance with the law and with internal regulations challenging within the Bank, any values or policies that are inconsistent with these guidelines.

4. Provide quality customer service toward clients while protecting the legitimate interests of the Bank at all times.

5. Render services to customers on the basis of rational business criteria rather than on factors such as race, gender or religion.

6. Conduct personal, professional or business affairs in accordance with the highest moral standards so that there can be no opportunity for unfavorable reflections upon the Bank as follows:

a. Employees of PBCom must ensure the proper conduct of their personal affairs.

b. Employees of PBCom should know the importance of meeting their financial obligations and living within their means.

c. Employees of PBCom, especially those having money and property accountability, are prohibited from frequenting gambling establishments.

To ensure employees’ adherence to the Code of Ethics, the Bank formulated its implementing guidelines under the PBCom Code of Conduct.

The Code of Conduct was discussed and adopted by the Labor- Management Committee of the Bank consisting of representatives from the Human Resources Group and Union representatives to ensure support and commitment from all sectors in the Bank.

The Code of Conduct serves as guidelines for the enforcement of the provisions of the Code of Ethics and prescribes the applicable sanctions in case of deviation thereof. Any breach of the provisions of the Code may result in disciplinary action ranging from reprimand to termination of employment, depending on the gravity of the offense, after observance of due process of law. However, the spirit of implementation also gives more emphasis on positive motivation rather than punitive measures. Penalties to be resorted to only when necessary and only to the extent required by the circumstances. Sanctions shall be meted to:

1. Correct unacceptable conduct2. Restore the integrity of order & discipline.

Application of sanctions are always guided by impartiality, open-mindedness, consistency, and fairness.

The Code of Ethics and the Code of Conduct are printed in handbook form and disseminated to all officers and staff.

Adherence to the Code is the responsibility of each employee of the Bank and is a condition for continued employment. Employees of PBCom annually confirm their adherence to these guidelines.

Corporate Governance

2010in

Retrospect

stoCkholDERs' mEEtiNG

baNk aNNiVERsaRy/sERViCE awaRDs

outREaCh

spoRts EVENts

iNDEpENDENt auDitoRs’ REpoRt

The Stockholders and the Board of DirectorsPhilippine Bank of CommunicationsPBCom Tower, 6795 Ayala Avenuecorner V. A. Rufino Street, Makati City

Report on the Financial statements

We have audited the accompanying financial statements of Philippine Bank of Communications (the Bank) which comprise the statements of financial position as at December 31, 2010, 2009 and 2008 and statements of income, statements of comprehensive income, statements of changes in equity and statements of cash flows for each of the three years in the period ended December 31, 2010, and a summary of significant accounting policies and other explanatory information.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the Philippines for banks as described in Note 2 to the financial statements in 2010 and Philippine Financial Reporting Standards in 2009 and 2008, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Philippine Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our qualified audit opinion.

Basis for Qualified Opinion

As discussed in Note 15 to the financial statements, the excess of the book value over the net realizable value arising from the sale of the Bank’s nonperforming loans (NPLs) and real and other properties acquired (ROPA) to a special purpose vehicle (SPV) amounting to P11.12 billion in 2004 was deferred over a ten-year period starting in 2005 in accordance with regulatory accounting policies prescribed by the Bangko Sentral ng Pilipinas for banks and financial institutions availing of the provisions of Republic Act No. 9182, “The Special Purpose Vehicle Act of 2002”. Philippine Financial Reporting Standards require that the excess of the book value over the net realizable value arising from the sale and the expenses related to the SPV transaction be charged to 2004 operations. Had the excess of the book value over the net realizable value arising from the sale of NPLs and ROPA been charged to 2004 operations, the Bank’s total assets and equity would have been decreased by P5.92 billion as at December 31, 2010, 2009 and 2008.

Qualified Opinion

In our opinion, except for the effects of the matter described in the Basis for Qualified Opinion paragraph, the financial statements present fairly, in all material respects, the financial position of the Bank as at December 31, 2010 and its financial performance and its cash flows for the year then ended, in accordance with accounting principles generally accepted in the Philippines for banks as described in Note 2 to the financial statements.

In our opinion, except for the effects of the matter described in the Basis for Qualified Opinion paragraph, the financial statements present fairly, in all material respects, the financial position of the Bank as at December 31, 2009 and 2008, and its financial performance and its cash flows for each of the two years in the period ended December 31, 2009, in accordance with Philippine Financial Reporting Standards. Report on the supplementary information Required under Revenue Regulations 15-2010

Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplementary information on taxes and licenses in Note 34 to the financial statements is presented for purposes of filing with the Bureau of Internal Revenue and is not a required part of the basic financial statements. Such information is the responsibility of the management of Philippine Bank of Communications. The information has been subjected to the auditing procedures applied in our audit of the basic financial statements. In our opinion, the information is fairly stated in all material respects in relation to the basic financial statements taken as a whole.

SYCIP GORRES VELAYO & CO.

Vicky B. Lee-SalasPartnerCPA Certificate No. 86838SEC Accreditation No. 0115-AR-2Tax Identification No. 129-434-735BIR Accreditation No. 08-001998-53-2009,

June 1, 2009, Valid until May 31, 2012PTR No. 2641532, January 3, 2011, Makati City March 31, 2011


www.pbcom.com.ph

SyCip Gorres Velayo & Co.6760 Ayala Avenue1226 Makati CityPhilippines

Phone: (632) 891 0307Fax: (632) 819 0872www.sgv.com.ph

BOA/PRC Reg. No. 0001SEC Accreditation No. 0012-FR-2

statEmENt oF maNaGEmENt’s REspoNsibility FoR FiNaNCial statEmENts

The management of Philippine Bank of Communications (the Bank) is responsible for all information and representations contained in the financial statements as of and for the years ended December 31, 2010, 2009 and 2008. These financial statements have been prepared in conformity with accounting principles generally accepted in the Philippines for banks and reflect amounts that are based on the best estimates and informed judgment of management with an appropriate consideration to materiality.

In this regard, management maintains a system of accounting and reporting which provides for the necessary internal controls to ensure that transactions are properly authorized and recorded, assets are safeguarded against unauthorized use or disposition and liabilities are recognized. The management likewise discloses to the audit committee and to its external auditors: (i) all significant deficiencies in the design or operation of internal controls that could adversely affect its ability to record, process and report financial data; (ii) material weaknesses in the internal controls; and (iii) any fraud that involves management or other employees who exercise significant roles in internal controls.

The Board of Directors reviews the financial statements before such statements are approved and submitted to the stockholders of the Bank.

SyCip Gorres Velayo & Co., the independent auditors appointed by the Stockholders, has examined the financial statements of the Bank in accordance with Philippine Standards on Auditing and has expressed its opinion on the fairness of presentation upon completion of such examination, in its report to the Stockholders and the Board of Directors.

RALPH C. NUBLA, JR. HENRY Y. UY ANABELLE T. YEOChairman of the Board President and Chief Executive Officer Vice President and Controller

iNDEpENDENt auDitoRs’ REpoRt

The Stockholders and the Board of DirectorsPhilippine Bank of CommunicationsPBCom Tower, 6795 Ayala Avenuecorner V. A. Rufino Street, Makati City

Report on the Financial statements

We have audited the accompanying financial statements of Philippine Bank of Communications (the Bank) which comprise the statements of financial position as at December 31, 2010, 2009 and 2008 and statements of income, statements of comprehensive income, statements of changes in equity and statements of cash flows for each of the three years in the period ended December 31, 2010, and a summary of significant accounting policies and other explanatory information.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the Philippines for banks as described in Note 2 to the financial statements in 2010 and Philippine Financial Reporting Standards in 2009 and 2008, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Philippine Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our qualified audit opinion.

Basis for Qualified Opinion

As discussed in Note 15 to the financial statements, the excess of the book value over the net realizable value arising from the sale of the Bank’s nonperforming loans (NPLs) and real and other properties acquired (ROPA) to a special purpose vehicle (SPV) amounting to P11.12 billion in 2004 was deferred over a ten-year period starting in 2005 in accordance with regulatory accounting policies prescribed by the Bangko Sentral ng Pilipinas for banks and financial institutions availing of the provisions of Republic Act No. 9182, “The Special Purpose Vehicle Act of 2002”. Philippine Financial Reporting Standards require that the excess of the book value over the net realizable value arising from the sale and the expenses related to the SPV transaction be charged to 2004 operations. Had the excess of the book value over the net realizable value arising from the sale of NPLs and ROPA been charged to 2004 operations, the Bank’s total assets and equity would have been decreased by P5.92 billion as at December 31, 2010, 2009 and 2008.

Qualified Opinion

In our opinion, except for the effects of the matter described in the Basis for Qualified Opinion paragraph, the financial statements present fairly, in all material respects, the financial position of the Bank as at December 31, 2010 and its financial performance and its cash flows for the year then ended, in accordance with accounting principles generally accepted in the Philippines for banks as described in Note 2 to the financial statements.

In our opinion, except for the effects of the matter described in the Basis for Qualified Opinion paragraph, the financial statements present fairly, in all material respects, the financial position of the Bank as at December 31, 2009 and 2008, and its financial performance and its cash flows for each of the two years in the period ended December 31, 2009, in accordance with Philippine Financial Reporting Standards. Report on the supplementary information Required under Revenue Regulations 15-2010

Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplementary information on taxes and licenses in Note 34 to the financial statements is presented for purposes of filing with the Bureau of Internal Revenue and is not a required part of the basic financial statements. Such information is the responsibility of the management of Philippine Bank of Communications. The information has been subjected to the auditing procedures applied in our audit of the basic financial statements. In our opinion, the information is fairly stated in all material respects in relation to the basic financial statements taken as a whole.

SYCIP GORRES VELAYO & CO.

Vicky B. Lee-SalasPartnerCPA Certificate No. 86838SEC Accreditation No. 0115-AR-2Tax Identification No. 129-434-735BIR Accreditation No. 08-001998-53-2009,

June 1, 2009, Valid until May 31, 2012PTR No. 2641532, January 3, 2011, Makati City March 31, 2011


www.pbcom.com.ph

SyCip Gorres Velayo & Co.6760 Ayala Avenue1226 Makati CityPhilippines

Phone: (632) 891 0307Fax: (632) 819 0872www.sgv.com.ph

BOA/PRC Reg. No. 0001SEC Accreditation No. 0012-FR-2

statEmENt oF maNaGEmENt’s REspoNsibility FoR FiNaNCial statEmENts

The management of Philippine Bank of Communications (the Bank) is responsible for all information and representations contained in the financial statements as of and for the years ended December 31, 2010, 2009 and 2008. These financial statements have been prepared in conformity with accounting principles generally accepted in the Philippines for banks and reflect amounts that are based on the best estimates and informed judgment of management with an appropriate consideration to materiality.

In this regard, management maintains a system of accounting and reporting which provides for the necessary internal controls to ensure that transactions are properly authorized and recorded, assets are safeguarded against unauthorized use or disposition and liabilities are recognized. The management likewise discloses to the audit committee and to its external auditors: (i) all significant deficiencies in the design or operation of internal controls that could adversely affect its ability to record, process and report financial data; (ii) material weaknesses in the internal controls; and (iii) any fraud that involves management or other employees who exercise significant roles in internal controls.

The Board of Directors reviews the financial statements before such statements are approved and submitted to the stockholders of the Bank.

SyCip Gorres Velayo & Co., the independent auditors appointed by the Stockholders, has examined the financial statements of the Bank in accordance with Philippine Standards on Auditing and has expressed its opinion on the fairness of presentation upon completion of such examination, in its report to the Stockholders and the Board of Directors.

RALPH C. NUBLA, JR. HENRY Y. UY ANABELLE T. YEOChairman of the Board President and Chief Executive Officer Vice President and Controller

philippiNE baNk oF CommuNiCatioNsstatEmENts oF iNComE

philippiNE baNk oF CommuNiCatioNsstatEmENts oF FiNaNCial positioN

December 31

assEtsCash and other Cash items (Notes 17 and 18)Due from bangko sentral ng pilipinas

(Notes 17 and 18)Due from other banks interbank loans Receivable and securities

purchased under Resale agreements (Note 7)Derivative assets (Note 23)available-for-sale investments (Note 8)held-to-maturity investments (Note 9)loans and Receivables (Notes 10 and 30)investment in an associate (Note 11)property and Equipment (Note 12) At cost At appraised valueinvestment properties (Note 13)intangibles (Note 14)other assets (Notes 15 and 32)

liabilitiEs aND EquityliabilitiesDeposit liabilities (Notes 17 and 30)DemandSavingsTime

bills payable (Note 18)outstanding acceptancesmanager’s Checkaccrued interest, taxes and other Expenses (Note 19)Deferred tax liabilities - net (Note 29)income tax payableother liabilities (Note 20)

EquityPreferred stock (Note 22)Common stock (Note 22)Additional paid-in capitalSurplus reserves (Note 22)Deficit (Note 32)Net unrealized losses on available-for-sale

investments (Note 8)Revaluation increment on land (Note 12)Cumulative translation adjustment

See accompanying Notes to Financial Statements.

2010

p379,603,692

2,439,553,972556,586,784

1,149,282,1771,881,829

6,383,573,5917,811,130,176

13,185,347,82611,299,640

595,063,677397,279,000

2,667,775,3046,642,048

6,074,098,252p41,659,117,968

p4,487,871,8972,375,465,528

20,744,311,00427,607,648,4297,286,150,049

53,181,97034,019,822

151,371,31434,104,347

59,9362,917,661,450

38,084,197,317

3,000,000,0005,259,896,500

476,011,662105,772,314

(5,383,740,185)

(100,328,978)192,511,94424,797,394

3,574,920,651p41,659,117,968

2009(As restated -

Note 32)

P395,600,974

2,082,639,243578,317,738

1,790,111,707–

7,223,561,0627,794,492,591

12,608,985,45311,642,380

640,056,002282,638,490

3,086,521,72536,474,242

6,094,584,754P42,625,626,361

P3,858,100,2032,270,263,759

22,434,211,31028,562,575,2727,373,672,286

40,634,33041,848,961

217,656,458–

152,6843,370,385,934

39,606,925,925

3,000,000,0005,259,896,500

476,011,662105,772,314

(5,761,043,913)

(176,986,021)112,935,135

2,114,7593,018,700,436

P42,625,626,361

2008 (As restated -

Note 32)

P420,581,642

3,185,217,3011,139,319,473

––

9,035,657,4387,800,454,306

13,528,977,77111,687,580

683,801,027233,284,850

3,614,482,47450,407,773

6,129,856,713P45,833,728,348

P3,495,301,7582,360,309,295

25,757,690,43631,613,301,4897,302,546,024

31,406,72255,090,939

366,974,97580,256,549

–3,865,247,910

43,314,824,608

3,000,000,0005,259,896,500

476,011,662105,772,314

(5,865,996,809)

(604,044,742)137,215,13610,049,679

2,518,903,740P45,833,728,348

years Ended December 31

iNtEREst iNComETrading and investment securities (Note 25)Loans and receivables (Notes 10 and 30)Deposits with other banks and othersInterbank loans receivable and securities purchased under resale agreements (Note 7)Others (Note 20)

iNtEREst aND FiNaNCE ChaRGEsDeposit liabilities (Notes 17 and 30)Bills payable, borrowings and others (Note 18)

NEt iNtEREst iNComETrading and securities gain - net (Notes 8, 23 and 25)Rent income (Notes 13 and 27)Service charges, fees and commissionsIncome from trust operations (Note 24)Profit (loss) from assets sold or exchanged (Notes 13 and 15)Foreign exchange gain (loss) - net Miscellaneous (Note 11)total opERatiNG iNComE

Compensation and fringe benefits (Notes 26 and 30)Provision for credit and impairment losses - net (Note 16)Taxes and licenses (Note 29)Depreciation and amortization (Notes 12, 13, 14 and 15)Occupancy and other equipment-related costs (Note 27)Miscellaneous (Note 28)

total opERatiNG ExpENsEs

iNComE bEFoRE tax

pRoVisioN FoR iNComE tax (Note 29)

NEt iNComE (Notes 15 and 31)

basic/Diluted Earnings per share (Note 31)


2010

p1,407,132,9211,120,577,647

35,225,129

23,939,421515,354,449

3,102,229,567

877,180,998719,633,489

1,596,814,487

1,505,415,080507,040,740302,863,960135,578,11713,450,562

2,972,197(2,530,596)26,665,410

2,491,455,470

607,210,898377,793,501314,383,383131,078,948

67,169,854342,236,653

1,839,873,237

651,582,233

274,278,505

p377,303,728

p2.19

2009

P1,525,635,7841,113,094,853

48,602,458

16,024,103480,157,793

3,183,514,991

1,196,653,388680,720,326

1,877,373,714

1,306,141,277119,185,253306,474,116147,998,643

15,208,616

(6,377,267)22,758,97419,944,662

1,931,334,274

616,045,361346,495,064313,313,804151,902,631

57,830,203133,041,260

1,618,628,323

312,705,951

210,512,957

P102,192,994

P0.59

2008

P1,506,466,0111,331,460,970

85,558,533

48,235,463429,650,956

3,401,371,933

1,340,128,289608,756,591

1,948,884,880

1,452,487,053104,637,519308,299,103180,094,358

22,096,483

101,011,489(62,566,085)

61,238,4022,167,298,322

615,797,38050,195,011

327,598,893103,822,258149,922,285313,305,766

1,560,641,593

606,656,729

289,270,824

P317,385,905

P1.84


NEt iNComE

othER CompREhENsiVE iNComE (loss):Changes in net unrealized gain (loss) on available-for-sale investments (Note 8)Net movement in revaluation increment (Note 12), net of taxNet movement in cumulative translation adjustment

othER CompREhENsiVE iNComE (loss)

total CompREhENsiVE iNComE (loss)


2010

p377,303,728

76,657,04379,576,80922,682,635

178,916,487

p556,220,215

2009

P102,192,994

427,058,721(21,520,099)

(7,934,920)

397,603,702

P499,796,696

2008

P317,385,905

(650,349,319)(36,709,104)

10,049,679

(677,008,744)

(P359,622,839)

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December 31

assEtsCash and other Cash items (Notes 17 and 18)Due from bangko sentral ng pilipinas

(Notes 17 and 18)Due from other banks interbank loans Receivable and securities

purchased under Resale agreements (Note 7)Derivative assets (Note 23)available-for-sale investments (Note 8)held-to-maturity investments (Note 9)loans and Receivables (Notes 10 and 30)investment in an associate (Note 11)property and Equipment (Note 12) At cost At appraised valueinvestment properties (Note 13)intangibles (Note 14)other assets (Notes 15 and 32)

liabilitiEs aND EquityliabilitiesDeposit liabilities (Notes 17 and 30)DemandSavingsTime

bills payable (Note 18)outstanding acceptancesmanager’s Checkaccrued interest, taxes and other Expenses (Note 19)Deferred tax liabilities - net (Note 29)income tax payableother liabilities (Note 20)

EquityPreferred stock (Note 22)Common stock (Note 22)Additional paid-in capitalSurplus reserves (Note 22)Deficit (Note 32)Net unrealized losses on available-for-sale

investments (Note 8)Revaluation increment on land (Note 12)Cumulative translation adjustment


2010

p379,603,692

2,439,553,972556,586,784

1,149,282,1771,881,829

6,383,573,5917,811,130,176

13,185,347,82611,299,640

595,063,677397,279,000

2,667,775,3046,642,048

6,074,098,252p41,659,117,968

p4,487,871,8972,375,465,528

20,744,311,00427,607,648,429

7,286,150,04953,181,97034,019,822

151,371,31434,104,347

59,9362,917,661,450

38,084,197,317

3,000,000,0005,259,896,500

476,011,662105,772,314

(5,383,740,185)

(100,328,978)192,511,94424,797,394

3,574,920,651p41,659,117,968

2009(As restated -

Note 32)

P395,600,974

2,082,639,243578,317,738

1,790,111,707–

7,223,561,0627,794,492,591

12,608,985,45311,642,380

640,056,002282,638,490

3,086,521,72536,474,242

6,094,584,754P42,625,626,361

P3,858,100,2032,270,263,759

22,434,211,31028,562,575,272

7,373,672,28640,634,33041,848,961

217,656,458–

152,6843,370,385,934

39,606,925,925

3,000,000,0005,259,896,500

476,011,662105,772,314

(5,761,043,913)

(176,986,021)112,935,135

2,114,7593,018,700,436

P42,625,626,361

2008 (As restated -

Note 32)

P420,581,642

3,185,217,3011,139,319,473

––

9,035,657,4387,800,454,306

13,528,977,77111,687,580

683,801,027233,284,850

3,614,482,47450,407,773

6,129,856,713P45,833,728,348

P3,495,301,7582,360,309,295

25,757,690,43631,613,301,489

7,302,546,02431,406,72255,090,939

366,974,97580,256,549

–3,865,247,910

43,314,824,608

3,000,000,0005,259,896,500

476,011,662105,772,314

(5,865,996,809)

(604,044,742)137,215,136

10,049,6792,518,903,740

P45,833,728,348


iNtEREst iNComETrading and investment securities (Note 25)Loans and receivables (Notes 10 and 30)Deposits with other banks and othersInterbank loans receivable and securities purchased under resale agreements (Note 7)Others (Note 20)

iNtEREst aND FiNaNCE ChaRGEsDeposit liabilities (Notes 17 and 30)Bills payable, borrowings and others (Note 18)

NEt iNtEREst iNComETrading and securities gain - net (Notes 8, 23 and 25)Rent income (Notes 13 and 27)Service charges, fees and commissionsIncome from trust operations (Note 24)Profit (loss) from assets sold or exchanged (Notes 13 and 15)Foreign exchange gain (loss) - net Miscellaneous (Note 11)total opERatiNG iNComE

Compensation and fringe benefits (Notes 26 and 30)Provision for credit and impairment losses - net (Note 16)Taxes and licenses (Note 29)Depreciation and amortization (Notes 12, 13, 14 and 15)Occupancy and other equipment-related costs (Note 27)Miscellaneous (Note 28)

total opERatiNG ExpENsEs

iNComE bEFoRE tax

pRoVisioN FoR iNComE tax (Note 29)

NEt iNComE (Notes 15 and 31)

basic/Diluted Earnings per share (Note 31)


2010

p1,407,132,9211,120,577,647

35,225,129

23,939,421515,354,449

3,102,229,567

877,180,998719,633,489

1,596,814,487

1,505,415,080507,040,740302,863,960135,578,11713,450,562

2,972,197(2,530,596)26,665,410

2,491,455,470

607,210,898377,793,501314,383,383131,078,948

67,169,854342,236,653

1,839,873,237

651,582,233

274,278,505

p377,303,728

p2.19

2009

P1,525,635,7841,113,094,853

48,602,458

16,024,103480,157,793

3,183,514,991

1,196,653,388680,720,326

1,877,373,714

1,306,141,277119,185,253306,474,116147,998,643

15,208,616

(6,377,267)22,758,97419,944,662

1,931,334,274

616,045,361346,495,064313,313,804151,902,631

57,830,203133,041,260

1,618,628,323

312,705,951

210,512,957

P102,192,994

P0.59

2008

P1,506,466,0111,331,460,970

85,558,533

48,235,463429,650,956

3,401,371,933

1,340,128,289608,756,591

1,948,884,880

1,452,487,053104,637,519308,299,103180,094,358

22,096,483

101,011,489(62,566,085)

61,238,4022,167,298,322

615,797,38050,195,011

327,598,893103,822,258149,922,285313,305,766

1,560,641,593

606,656,729

289,270,824

P317,385,905

P1.84


NEt iNComE

othER CompREhENsiVE iNComE (loss):Changes in net unrealized gain (loss) on available-for-sale investments (Note 8)Net movement in revaluation increment (Note 12), net of taxNet movement in cumulative translation adjustment

othER CompREhENsiVE iNComE (loss)

total CompREhENsiVE iNComE (loss)


2010

p377,303,728

76,657,04379,576,80922,682,635

178,916,487

p556,220,215

2009

P102,192,994

427,058,721(21,520,099)

(7,934,920)

397,603,702

P499,796,696

2008

P317,385,905

(650,349,319)(36,709,104)

10,049,679

(677,008,744)

(P359,622,839)

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balance at January 1, 2010Amortization of deferred charges (Notes 15 and 32)balance at January 1, 2010 (as restated)Total comprehensive income for the yearbalance at December 31, 2010

Balance at January 1, 2009Amortization of deferred charges (Notes 15 and 32)Balance at January 1, 2009 (As restated)Total comprehensive income (loss) for the yearTransfer to surplus Balance at December 31, 2009

Balance at January 1, 2008Amortization of deferred charges (Notes 15 and 32)Balance at January 1, 2008 (As restated)Total comprehensive income (loss) for the yearTransfer to surplusBalance at December 31, 2008


preferredstock

(Note 22)p3,000,000,000

–3,000,000,000

–p3,000,000,000

P3,000,000,000–

3,000,000,000––

P3,000,000,000

P3,000,000,000–

3,000,000,000––

P3,000,000,000

Commonstock

(Note 22)p5,259,896,500

–5,259,896,500

–p5,259,896,500

P5,259,896,500–

5,259,896,500––

P5,259,896,500

P5,259,896,500–

5,259,896,500––

P5,259,896,500

additionalpaid-in Capital

p476,011,662–

476,011,662–

p476,011,662

P476,011,662–

476,011,662––

P476,011,662

P476,011,662–

476,011,662––

P476,011,662

surplusReserves(Note 22)

p105,772,314–

105,772,314–

p105,772,314

P105,772,314–

105,772,314––

P105,772,314

P104,504,283–

104,504,283–

1,268,031P105,772,314

Deficit (Note 32)

(p4,684,491,104)(1,076,552,809)(5,761,043,913)

377,303,728(p5,383,740,185)

(P4,789,444,000)(1,076,552,809)(5,865,996,809)

102,192,9942,759,902

(P5,761,043,913)

(P5,105,265,099)(1,076,552,809)(6,181,817,908)

317,385,905(1,564,806)

(P5,865,996,809)

Net unrealizedlosses on

available-for-saleinvestments

(Note 8)(p176,986,021)

–(176,986,021)

76,657,043(p100,328,978)

(P604,044,742)–

(604,044,742)427,058,721

–(P176,986,021)

P46,304,577–

46,304,577(650,349,319)

–(P604,044,742)

Revaluationincrement

on land(Note 12)

p112,935,135–

112,935,13579,576,809

p192,511,944

P137,215,136–

137,215,136(21,520,099)

(2,759,902)P112,935,135

P173,924,240–

173,924,240(36,709,104)

–P137,215,136

Cumulativetranslationadjustmentp2,114,759

–2,114,759

22,682,635p24,797,394

P10,049,679–

10,049,679(7,934,920)

–P2,114,759

P–––

10,049,679–

P10,049,679

totalEquity

(Note 32)p4,095,253,245(1,076,552,809)

3,018,700,436556,220,215

p3,574,920,651

P3,595,456,549(1,076,552,809)

2,518,903,740499,796,696

–P3,018,700,436

P3,955,376,163(1,076,552,809)

2,878,823,354(359,622,839)

(296,775)P2,518,903,740

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balance at January 1, 2010Amortization of deferred charges (Notes 15 and 32)balance at January 1, 2010 (as restated)Total comprehensive income for the yearbalance at December 31, 2010

Balance at January 1, 2009Amortization of deferred charges (Notes 15 and 32)Balance at January 1, 2009 (As restated)Total comprehensive income (loss) for the yearTransfer to surplus Balance at December 31, 2009

Balance at January 1, 2008Amortization of deferred charges (Notes 15 and 32)Balance at January 1, 2008 (As restated)Total comprehensive income (loss) for the yearTransfer to surplusBalance at December 31, 2008


preferredstock

(Note 22)p3,000,000,000

–3,000,000,000

–p3,000,000,000

P3,000,000,000–

3,000,000,000––

P3,000,000,000

P3,000,000,000–

3,000,000,000––

P3,000,000,000

Commonstock

(Note 22)p5,259,896,500

–5,259,896,500

–p5,259,896,500

P5,259,896,500–

5,259,896,500––

P5,259,896,500

P5,259,896,500–

5,259,896,500––

P5,259,896,500

additionalpaid-in Capital

p476,011,662–

476,011,662–

p476,011,662

P476,011,662–

476,011,662––

P476,011,662

P476,011,662–

476,011,662––

P476,011,662

surplusReserves(Note 22)

p105,772,314–

105,772,314–

p105,772,314

P105,772,314–

105,772,314––

P105,772,314

P104,504,283–

104,504,283–

1,268,031P105,772,314

Deficit (Note 32)

(p4,684,491,104)(1,076,552,809)(5,761,043,913)

377,303,728(p5,383,740,185)

(P4,789,444,000)(1,076,552,809)(5,865,996,809)

102,192,9942,759,902

(P5,761,043,913)

(P5,105,265,099)(1,076,552,809)(6,181,817,908)

317,385,905(1,564,806)

(P5,865,996,809)

Net unrealizedlosses on

available-for-saleinvestments

(Note 8)(p176,986,021)

–(176,986,021)

76,657,043(p100,328,978)

(P604,044,742)–

(604,044,742)427,058,721

–(P176,986,021)

P46,304,577–

46,304,577(650,349,319)

–(P604,044,742)

Revaluationincrement

on land(Note 12)

p112,935,135–

112,935,13579,576,809

p192,511,944

P137,215,136–

137,215,136(21,520,099)

(2,759,902)P112,935,135

P173,924,240–

173,924,240(36,709,104)

–P137,215,136

Cumulativetranslationadjustmentp2,114,759

–2,114,759

22,682,635p24,797,394

P10,049,679–

10,049,679(7,934,920)

–P2,114,759

P–––

10,049,679–

P10,049,679

totalEquity

(Note 32)p4,095,253,245(1,076,552,809)

3,018,700,436556,220,215

p3,574,920,651

P3,595,456,549(1,076,552,809)

2,518,903,740499,796,696

–P3,018,700,436

P3,955,376,163(1,076,552,809)

2,878,823,354(359,622,839)

(296,775)P2,518,903,740

philippiNE baNk oF CommuNiCatioNsstatEmENts oF ChaNGEs iN Equity


www.pbcom.com.ph

philippiNE baNk oF CommuNiCatioNsNotEs to FiNaNCial statEmENts

1. Corporate information

Philippine Bank of Communications (the Bank) is a publicly listed domestic commercial bank organized in the Philippines. It was incorporated on August 23, 1939 and received the authority to engage in commercial banking services such as deposit products, loans and trade finance, domestic and foreign fund transfers, treasury, foreign exchange and trust services through a network of 64 local branches.

The Bank acquired a license to operate as an expanded commercial bank from the Bangko Sentral ng Pilipinas (BSP) on December 24, 1993. On March 31, 2000, the BSP’s Monetary Board approved the amendment of the Bank’s license to a regular commercial banking license.

The Bank’s principal place of business is at PBCom Tower, 6795 Ayala Avenue corner V. A. Rufino Street, Makati City.

Rehabilitation PlanOn March 15, 2004, the Bank and its majority stockholders entered into a Financial Assistance Agreement (FAA) with the Philippine Deposit Insurance Corporation (PDIC) under the following salient provisions:

1. Fresh capital infusion from the existing major stockholders amounting to P3.00 billion;2. Compliance at all times with a risk-based capital adequacy ratio (RBCAR) of at

least 12.50%, with any shortfall to be covered by additional capital infusion from the major stockholders;

3. Prohibition against the sale of, or lien or encumbrances on the controlling interest; 4. Sale of certain nonperforming assets (NPAs) to a Special Purpose Vehicle (SPV)

and amortization of losses from such sale based on SPV guidelines, with the necessary modifications;

5. Maximum direct loan from PDIC amounting to P7.64 billion payable at the end of ten (10) years with interest rate of 1.00% per annum;

6. Unless the loan is prepaid in accordance with the FAA, the major stockholders agree to absolutely divest, sell or transfer their controlling interest to a strategic third party investor; and

7. Prior approval from PDIC on the declaration, distribution, or payment of cash or stock dividends; effecting any profit sharing or distribution of bonuses to directors and officers of the Bank; transactions or activities not in accordance with the rehabilitation plan; and any single major capital expenditure.

Proceeds from the PDIC loan amounting to P7.64 billion were used by the Bank to purchase government securities, which were pledged to PDIC to secure such obligation (Notes 9 and 18). The interest income on these securities, net of all taxes and the corresponding 1.00% interest expense on the loan from PDIC, represents the income support of PDIC to the Bank. Any interest income in excess of 85.00% of the actual losses from the sale of NPAs to an SPV shall inure to the benefit of PDIC. The actual loss on the sale of the NPAs is the difference between the net book value of the NPAs and the proceeds from such sale (Note 15).

As discussed in Note 15, on October 11, 2004, the Bank entered into an Asset Sale and Purchase Agreement (ASPA) with an SPV covering the cash sale of certain NPAs of the Bank.

On March 25, 2004, the BSP through its Monetary Board approved the revised Financial Recovery and Rehabilitation Program of the Bank subject to the following conditions, among others: (a) infusion of the P3.00 billion fresh capital (as required under the FAA discussed above) within 30 days from the approval of the rehabilitation plan; and (b) existing appraisal increment reserve shall be allowed as part of unimpaired capital for purposes of computing the regulatory ratios.

On March 26, 2004, the major stockholders infused the P3.00 billion fresh capital to the Bank as advances for future stock subscriptions, awaiting the approval of the Securities and Exchange Commission (SEC) on the amendment of the Bank’s Articles of Incorporation covering the increase in the authorized capital stock of the Bank by the creation of new preferred shares. On April 1, 2006, the SEC approved the capital increase of the Bank from P14.50 billion to P17.50 billion.

On January 13, 2009, the PDIC prepared to bid out 67.00% of the ownership interest in the Bank as the five-year deadline for stockholders to divest control of the Bank expired in March 2009. The sale of the shares and the related controlling interest of the majority stockholders in the Bank is one of the requirements of the FAA entered into by the Bank with PDIC. In accordance with the FAA, PDIC obtained a special power of attorney (SPA) to enforce the sale of shares if the Bank’s stockholders would not be able to do so within the prescribed period.

In 2010, pursuant to the FAA with PDIC, the Bank continued to explore various options available to comply with the FAA’s requirement for the Bank to bid out 67.00% of the “Controlling interest” of the majority stockholders of the Bank.

In the Annual Stockholder’s Meeting held on October 15, 2010, the stockholders approved the increase of the Bank’s authorized capital stock of up to 100.00% of its present level of P17.50 billion under the terms and conditions as may be fixed and approved by the Board of Directors (BOD). The said increase in the Bank’s authorized capital stock was in preparation for the capital restoration program of the Bank as required by the BSP.

The accompanying comparative financial statements were authorized for issue by the BOD of the Bank on March 31, 2011.

2. accounting policies

basis of preparationThe accompanying financial statements have been prepared on a historical cost basis except for derivatives instruments and available-for-sale (AFS) investments that are measured at fair value and land that is measured at appraised value. All values are rounded to the nearest peso unless otherwise stated.

The accompanying financial statements of the Bank include the accounts maintained in the Regular Banking Unit (RBU) and Foreign Currency Deposit Unit (FCDU). The functional currency of the RBU and the FCDU is the Philippine peso and United States dollar (USD), respectively. For financial reporting purposes, FCDU accounts and foreign currency-denominated accounts in the RBU are translated into their equivalents in Philippine pesos (see accounting policy on foreign currency translation). The financial statements of these units are combined after eliminating inter-unit accounts and transactions.

statement of ComplianceExcept for the deferral of losses on sold NPAs to an SPV in 2004 (Note 15), the 2010 financial statements of the Bank have been prepared in accordance with Philippine generally accepted accounting principles (GAAP) for banks, particularly the availment of the exemption from the tainting provision of the Bank’s held-to-maturity investments (HTM) disposed through a bond exchange which was permitted by the BSP for prudential reporting and the SEC for financial reporting purposes.

Except for the deferral of losses on sold NPAs to an SPV in 2004 and accounting for the HTM investments under the tainting rule in 2010 (Note 9), the financial statements of the Bank for the three years in the period ended December 31, 2010 have been prepared in compliance with Philippine Financial Reporting Standards (PFRS).

Changes in accounting policiesThe accounting policies adopted are consistent with those of the previous financial year except for the following new and amended PFRS adopted as of January 1, 2010, which did not have any impact on the accounting policies, financial position or performance of the Bank:

New Standards and Interpretations• PFRS 2, Share-based Payment: Group Cash-settled Share-based Payment

Transactions• PFRS 3, Business Combinations (Revised)• Philippine Accounting Standards (PAS) 27, Consolidated and Separate Financial

Statements (Amended)• PAS 39, Financial Instruments: Recognition and Measurement - Eligible Hedged

Items • Philippine Interpretation on International Financial Reporting Interpretations

Committee (IFRIC) 17, Distributions of Non-cash Assets to Owners

Improvements to PFRSsThe omnibus amendments to PFRSs issued in May 2008 and April 2009 were issued primarily with a view of removing inconsistencies and clarifying wording. There are separate transitional provisions for each standard.

Issued in April 2009PFRS 8, Operating Segments, clarifies that segment assets and liabilities need only be reported when those assets and liabilities are included in measures that are used by the chief operating decision maker (CODM). Since the Bank’s CODM reviews segment assets and liabilities, the Bank has continued to disclose these information in Note 6.

Other amendments resulting from improvements to PFRSs to the following standards did not have any impact on the accounting policies, financial position or performance of the Bank.

Issued in 2008• PFRS 5, Non-current Assets Held for Sale and Discontinued Operations

Issued in 2009• PFRS 2, Share-based Payment• PFRS 5, Non-current Assets Held for Sale and Discontinued Operations• PAS 1, Presentation of Financial Statements• PAS 7, Statements of Cash Flows • PAS 17, Leases• PAS 36, Impairment of Assets• PAS 38, Intangible Assets• PAS 39, Financial Instruments: Recognition and Measurement• Philippine Interpretation IFRIC 9, Reassessment of Embedded Derivatives• Philippine Interpretation IFRIC 16, Hedge of a Net Investment in a Foreign Operation

Significant Accounting PoliciesForeign Currency TranslationThe financial statements are presented in Philippine pesos, which is the Bank’s presentation currency.

The books of accounts of the RBU are maintained in Philippine pesos, while those of the FCDU are maintained in USD.

RBUAs at statement of financial position date, foreign currency-denominated monetary assets and liabilities of the RBU are translated in Philippine peso based on the Philippine Dealing System (PDS) closing rate prevailing at end of the year and foreign currency-denominated income and expenses, based on the PDS weighted average rate (WAR) for the year. Foreign exchange differences arising from the restatement of foreign currency-denominated assets and liabilities in the RBU are credited to or charged against profit or loss in the year in which the rates change. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined.

FCDUAs at statement of financial position date, the assets and liabilities of the Bank’s FCDU are translated into the Bank's presentation currency (the Philippine peso) at the PDS closing rate prevailing at the statement of financial position date, and their income and expenses are translated at PDS WAR for the year. Exchange differences arising on translation are taken directly to the statement of comprehensive income as


Cash Flows FRom opERatiNG aCtiVitiEsIncome before income taxAdjustments to reconcile income before income tax to net cash generated from (used in) operations: Accretion of interest on bills payable (Note 18) Provision for credit and impairment losses (Note 16) Depreciation and amortization (Notes 12, 13, 14 and 15) Amortization of premium on held-to-maturity investments Equity in net losses (earnings) of an associate (Note 11) Gain from foreclosures and dacion (Note 13) Fair value gain on derivative asset (Note 23) Loss (gain) on sale of investment properties and foreclosed chattel (Notes 13 and 15) Amortization of unearned income credited to interest income - others (Note 20) Trading gains from sale of available-for sale investments (Notes 8 and 25) Reversal of provision for tax assessments (Note 28) Changes in operating assets and liabilities: Decrease (increase) in the amounts of: Financial assets at fair value through profit and loss Loans and receivables Other assets Increase (decrease) in the amounts of: Deposit liabilities Manager’s checks Accrued interest, taxes and other expenses Other liabilitiesNet cash used in operationsIncome taxes paidNet cash used in operating activitiesCash Flows FRom iNVEstiNG aCtiVitiEsAcquisitions of: Interbank loans receivable (Notes 7 and 33) Available-for-sale investments Property and equipment (Note 12) Software cost (Note 14)Proceeds from: Maturities of interbank loans receivable Sale of available-for-sale investments Disposal of property and equipment (Note 12) Disposal of investment properties (Note 13) Dividends received from associate (Note 11) Disposal of chattel mortgage (Note 15)Net cash provided by (used in) investing activitiesCash Flows FRom FiNaNCiNG aCtiVitiEsAvailments of: Bills payable Outstanding acceptances Marginal depositsSettlements of: Bills payable Outstanding acceptances Marginal deposits Self insuranceNet cash provided by (used in) financing activitiesEFFECt oF FoREiGN CuRRENCy tRaNslatioN aDJustmENtNEt iNCREasE (DECREasE) iN Cash aND Cash EquiValENtsCash aND Cash EquiValENts at bEGiNNiNG oF yEaRCash and other cash itemsDue from Bangko Sentral ng PilipinasDue from other banksInterbank loans receivable and securities purchased under resale agreements (Notes 7 and 33)

Cash aND Cash EquiValENts at END oF yEaRCash and other cash itemsDue from Bangko Sentral ng PilipinasDue from other banksInterbank loans receivable and securities purchased under resale agreements (Notes 7 and 33)

opERatioNal Cash Flows FRom iNtEREst

philippiNE baNk oF CommuNiCatioNsstatEmENts oF Cash Flows

2010

p651,582,233

551,013,332377,793,501131,078,948

6,339,591(257,260)

(5,040,334)(1,881,829)

2,068,137

(515,354,449)(500,900,079)

–

–(763,280,540)

20,383,666

(954,926,843)(7,829,139)

(66,285,144)35,435,339

(1,040,060,870)(274,371,253)

(1,314,432,123)

(43,840,000)(53,725,879,063)

(19,781,161)(5,714,646)

–55,143,320,266

4,884,817194,446,717

600,000–

1,548,036,930

p18,506,795,761308,926,371

11,757,708

(19,145,331,330)(296,378,731)

(7,540,258)–

(621,770,479)22,682,635

(365,483,037)

395,600,9742,082,639,243

578,317,738

1,790,111,7074,846,669,662

379,603,6922,439,553,972

556,586,784

1,105,442,177p4,481,186,625

2009

P312,705,951

486,562,847346,495,064151,902,631

1,407,71845,200

––

6,377,267

(480,157,793)(115,413,579)(169,663,646)

–526,988,559(10,444,541)

(3,050,726,217)(13,241,978)

20,497,813(8,299,129)

(1,994,963,833)(288,144,244)

(2,283,108,077)

–(20,747,166,983)

(24,243,456)(10,333,778)

–23,101,735,659

4,703,835433,197,254

–36,356,692

2,794,249,223

P22,954,508,834196,366,683

–

(23,369,945,419) (187,139,075)

––

(406,208,977)(3,380,923)

101,551,246

420,581,6423,185,217,3011,139,319,473

–4,745,118,416

395,600,9742,082,639,243

578,317,738

1,790,111,707P4,846,669,662

2008

P606,656,729

429,650,95650,195,011

103,822,258690,097

(1,218,454)(61,372,698)

–

(36,614,368)

(429,650,956)(110,997,422)

–

45,253,833(267,143,013)

174,682,962

(1,666,731,073)(158,575,732)

130,580,662(115,756,037)

(1,306,527,245)(294,600,289)

(1,601,127,534)

–(26,127,479,200)

(41,909,463)(14,411,964)

600,000,00024,516,036,297

48,622,39192,296,261

––

(926,845,678)

P6,567,705,8041,737,503,752

262,867,644

(5,284,093,243)(1,758,810,036)

(263,411,393)(296,775)

1,261,465,75310,049,679

(1,256,457,780)

504,880,7273,757,027,651

583,827,818

1,155,840,0006,001,576,196

420,581,6423,185,217,3011,139,319,473

–P4,745,118,416


Interest receivedInterest paid


2010

p2,676,791,8111,061,612,561

2009

P2,808,076,2071,430,138,524

2008

P2,905,821,9521,499,993,087


www.pbcom.com.ph

philippiNE baNk oF CommuNiCatioNsNotEs to FiNaNCial statEmENts

1. Corporate information

Philippine Bank of Communications (the Bank) is a publicly listed domestic commercial bank organized in the Philippines. It was incorporated on August 23, 1939 and received the authority to engage in commercial banking services such as deposit products, loans and trade finance, domestic and foreign fund transfers, treasury, foreign exchange and trust services through a network of 64 local branches.

The Bank acquired a license to operate as an expanded commercial bank from the Bangko Sentral ng Pilipinas (BSP) on December 24, 1993. On March 31, 2000, the BSP’s Monetary Board approved the amendment of the Bank’s license to a regular commercial banking license.

The Bank’s principal place of business is at PBCom Tower, 6795 Ayala Avenue corner V. A. Rufino Street, Makati City.

Rehabilitation PlanOn March 15, 2004, the Bank and its majority stockholders entered into a Financial Assistance Agreement (FAA) with the Philippine Deposit Insurance Corporation (PDIC) under the following salient provisions:

1. Fresh capital infusion from the existing major stockholders amounting to P3.00 billion;2. Compliance at all times with a risk-based capital adequacy ratio (RBCAR) of at

least 12.50%, with any shortfall to be covered by additional capital infusion from the major stockholders;

3. Prohibition against the sale of, or lien or encumbrances on the controlling interest; 4. Sale of certain nonperforming assets (NPAs) to a Special Purpose Vehicle (SPV)

and amortization of losses from such sale based on SPV guidelines, with the necessary modifications;

5. Maximum direct loan from PDIC amounting to P7.64 billion payable at the end of ten (10) years with interest rate of 1.00% per annum;

6. Unless the loan is prepaid in accordance with the FAA, the major stockholders agree to absolutely divest, sell or transfer their controlling interest to a strategic third party investor; and

7. Prior approval from PDIC on the declaration, distribution, or payment of cash or stock dividends; effecting any profit sharing or distribution of bonuses to directors and officers of the Bank; transactions or activities not in accordance with the rehabilitation plan; and any single major capital expenditure.

Proceeds from the PDIC loan amounting to P7.64 billion were used by the Bank to purchase government securities, which were pledged to PDIC to secure such obligation (Notes 9 and 18). The interest income on these securities, net of all taxes and the corresponding 1.00% interest expense on the loan from PDIC, represents the income support of PDIC to the Bank. Any interest income in excess of 85.00% of the actual losses from the sale of NPAs to an SPV shall inure to the benefit of PDIC. The actual loss on the sale of the NPAs is the difference between the net book value of the NPAs and the proceeds from such sale (Note 15).

As discussed in Note 15, on October 11, 2004, the Bank entered into an Asset Sale and Purchase Agreement (ASPA) with an SPV covering the cash sale of certain NPAs of the Bank.

On March 25, 2004, the BSP through its Monetary Board approved the revised Financial Recovery and Rehabilitation Program of the Bank subject to the following conditions, among others: (a) infusion of the P3.00 billion fresh capital (as required under the FAA discussed above) within 30 days from the approval of the rehabilitation plan; and (b) existing appraisal increment reserve shall be allowed as part of unimpaired capital for purposes of computing the regulatory ratios.

On March 26, 2004, the major stockholders infused the P3.00 billion fresh capital to the Bank as advances for future stock subscriptions, awaiting the approval of the Securities and Exchange Commission (SEC) on the amendment of the Bank’s Articles of Incorporation covering the increase in the authorized capital stock of the Bank by the creation of new preferred shares. On April 1, 2006, the SEC approved the capital increase of the Bank from P14.50 billion to P17.50 billion.

On January 13, 2009, the PDIC prepared to bid out 67.00% of the ownership interest in the Bank as the five-year deadline for stockholders to divest control of the Bank expired in March 2009. The sale of the shares and the related controlling interest of the majority stockholders in the Bank is one of the requirements of the FAA entered into by the Bank with PDIC. In accordance with the FAA, PDIC obtained a special power of attorney (SPA) to enforce the sale of shares if the Bank’s stockholders would not be able to do so within the prescribed period.

In 2010, pursuant to the FAA with PDIC, the Bank continued to explore various options available to comply with the FAA’s requirement for the Bank to bid out 67.00% of the “Controlling interest” of the majority stockholders of the Bank.

In the Annual Stockholder’s Meeting held on October 15, 2010, the stockholders approved the increase of the Bank’s authorized capital stock of up to 100.00% of its present level of P17.50 billion under the terms and conditions as may be fixed and approved by the Board of Directors (BOD). The said increase in the Bank’s authorized capital stock was in preparation for the capital restoration program of the Bank as required by the BSP.

The accompanying comparative financial statements were authorized for issue by the BOD of the Bank on March 31, 2011.

2. accounting policies

basis of preparationThe accompanying financial statements have been prepared on a historical cost basis except for derivatives instruments and available-for-sale (AFS) investments that are measured at fair value and land that is measured at appraised value. All values are rounded to the nearest peso unless otherwise stated.

The accompanying financial statements of the Bank include the accounts maintained in the Regular Banking Unit (RBU) and Foreign Currency Deposit Unit (FCDU). The functional currency of the RBU and the FCDU is the Philippine peso and United States dollar (USD), respectively. For financial reporting purposes, FCDU accounts and foreign currency-denominated accounts in the RBU are translated into their equivalents in Philippine pesos (see accounting policy on foreign currency translation). The financial statements of these units are combined after eliminating inter-unit accounts and transactions.

statement of ComplianceExcept for the deferral of losses on sold NPAs to an SPV in 2004 (Note 15), the 2010 financial statements of the Bank have been prepared in accordance with Philippine generally accepted accounting principles (GAAP) for banks, particularly the availment of the exemption from the tainting provision of the Bank’s held-to-maturity investments (HTM) disposed through a bond exchange which was permitted by the BSP for prudential reporting and the SEC for financial reporting purposes.

Except for the deferral of losses on sold NPAs to an SPV in 2004 and accounting for the HTM investments under the tainting rule in 2010 (Note 9), the financial statements of the Bank for the three years in the period ended December 31, 2010 have been prepared in compliance with Philippine Financial Reporting Standards (PFRS).

Changes in accounting policiesThe accounting policies adopted are consistent with those of the previous financial year except for the following new and amended PFRS adopted as of January 1, 2010, which did not have any impact on the accounting policies, financial position or performance of the Bank:

New Standards and Interpretations• PFRS 2, Share-based Payment: Group Cash-settled Share-based Payment

Transactions• PFRS 3, Business Combinations (Revised)• Philippine Accounting Standards (PAS) 27, Consolidated and Separate Financial

Statements (Amended)• PAS 39, Financial Instruments: Recognition and Measurement - Eligible Hedged

Items • Philippine Interpretation on International Financial Reporting Interpretations

Committee (IFRIC) 17, Distributions of Non-cash Assets to Owners

Improvements to PFRSsThe omnibus amendments to PFRSs issued in May 2008 and April 2009 were issued primarily with a view of removing inconsistencies and clarifying wording. There are separate transitional provisions for each standard.

Issued in April 2009PFRS 8, Operating Segments, clarifies that segment assets and liabilities need only be reported when those assets and liabilities are included in measures that are used by the chief operating decision maker (CODM). Since the Bank’s CODM reviews segment assets and liabilities, the Bank has continued to disclose these information in Note 6.

Other amendments resulting from improvements to PFRSs to the following standards did not have any impact on the accounting policies, financial position or performance of the Bank.

Issued in 2008• PFRS 5, Non-current Assets Held for Sale and Discontinued Operations

Issued in 2009• PFRS 2, Share-based Payment• PFRS 5, Non-current Assets Held for Sale and Discontinued Operations• PAS 1, Presentation of Financial Statements• PAS 7, Statements of Cash Flows • PAS 17, Leases• PAS 36, Impairment of Assets• PAS 38, Intangible Assets• PAS 39, Financial Instruments: Recognition and Measurement• Philippine Interpretation IFRIC 9, Reassessment of Embedded Derivatives• Philippine Interpretation IFRIC 16, Hedge of a Net Investment in a Foreign Operation

Significant Accounting PoliciesForeign Currency TranslationThe financial statements are presented in Philippine pesos, which is the Bank’s presentation currency.

The books of accounts of the RBU are maintained in Philippine pesos, while those of the FCDU are maintained in USD.

RBUAs at statement of financial position date, foreign currency-denominated monetary assets and liabilities of the RBU are translated in Philippine peso based on the Philippine Dealing System (PDS) closing rate prevailing at end of the year and foreign currency-denominated income and expenses, based on the PDS weighted average rate (WAR) for the year. Foreign exchange differences arising from the restatement of foreign currency-denominated assets and liabilities in the RBU are credited to or charged against profit or loss in the year in which the rates change. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined.

FCDUAs at statement of financial position date, the assets and liabilities of the Bank’s FCDU are translated into the Bank's presentation currency (the Philippine peso) at the PDS closing rate prevailing at the statement of financial position date, and their income and expenses are translated at PDS WAR for the year. Exchange differences arising on translation are taken directly to the statement of comprehensive income as


Cash Flows FRom opERatiNG aCtiVitiEsIncome before income taxAdjustments to reconcile income before income tax to net cash generated from (used in) operations: Accretion of interest on bills payable (Note 18) Provision for credit and impairment losses (Note 16) Depreciation and amortization (Notes 12, 13, 14 and 15) Amortization of premium on held-to-maturity investments Equity in net losses (earnings) of an associate (Note 11) Gain from foreclosures and dacion (Note 13) Fair value gain on derivative asset (Note 23) Loss (gain) on sale of investment properties and foreclosed chattel (Notes 13 and 15) Amortization of unearned income credited to interest income - others (Note 20) Trading gains from sale of available-for sale investments (Notes 8 and 25) Reversal of provision for tax assessments (Note 28) Changes in operating assets and liabilities: Decrease (increase) in the amounts of: Financial assets at fair value through profit and loss Loans and receivables Other assets Increase (decrease) in the amounts of: Deposit liabilities Manager’s checks Accrued interest, taxes and other expenses Other liabilitiesNet cash used in operationsIncome taxes paidNet cash used in operating activitiesCash Flows FRom iNVEstiNG aCtiVitiEsAcquisitions of: Interbank loans receivable (Notes 7 and 33) Available-for-sale investments Property and equipment (Note 12) Software cost (Note 14)Proceeds from: Maturities of interbank loans receivable Sale of available-for-sale investments Disposal of property and equipment (Note 12) Disposal of investment properties (Note 13) Dividends received from associate (Note 11) Disposal of chattel mortgage (Note 15)Net cash provided by (used in) investing activitiesCash Flows FRom FiNaNCiNG aCtiVitiEsAvailments of: Bills payable Outstanding acceptances Marginal depositsSettlements of: Bills payable Outstanding acceptances Marginal deposits Self insuranceNet cash provided by (used in) financing activitiesEFFECt oF FoREiGN CuRRENCy tRaNslatioN aDJustmENtNEt iNCREasE (DECREasE) iN Cash aND Cash EquiValENtsCash aND Cash EquiValENts at bEGiNNiNG oF yEaRCash and other cash itemsDue from Bangko Sentral ng PilipinasDue from other banksInterbank loans receivable and securities purchased under resale agreements (Notes 7 and 33)

Cash aND Cash EquiValENts at END oF yEaRCash and other cash itemsDue from Bangko Sentral ng PilipinasDue from other banksInterbank loans receivable and securities purchased under resale agreements (Notes 7 and 33)

opERatioNal Cash Flows FRom iNtEREst

philippiNE baNk oF CommuNiCatioNsstatEmENts oF Cash Flows

2010

p651,582,233

551,013,332377,793,501131,078,948

6,339,591(257,260)

(5,040,334)(1,881,829)

2,068,137

(515,354,449)(500,900,079)

–

–(763,280,540)

20,383,666

(954,926,843)(7,829,139)

(66,285,144)35,435,339

(1,040,060,870)(274,371,253)

(1,314,432,123)

(43,840,000)(53,725,879,063)

(19,781,161)(5,714,646)

–55,143,320,266

4,884,817194,446,717

600,000–

1,548,036,930

p18,506,795,761308,926,371

11,757,708

(19,145,331,330)(296,378,731)

(7,540,258)–

(621,770,479)22,682,635

(365,483,037)

395,600,9742,082,639,243

578,317,738

1,790,111,7074,846,669,662

379,603,6922,439,553,972

556,586,784

1,105,442,177p4,481,186,625

2009

P312,705,951

486,562,847346,495,064151,902,631

1,407,71845,200

––

6,377,267

(480,157,793)(115,413,579)(169,663,646)

–526,988,559(10,444,541)

(3,050,726,217)(13,241,978)

20,497,813(8,299,129)

(1,994,963,833)(288,144,244)

(2,283,108,077)

–(20,747,166,983)

(24,243,456)(10,333,778)

–23,101,735,659

4,703,835433,197,254

–36,356,692

2,794,249,223

P22,954,508,834196,366,683

–

(23,369,945,419) (187,139,075)

––

(406,208,977)(3,380,923)

101,551,246

420,581,6423,185,217,3011,139,319,473

–4,745,118,416

395,600,9742,082,639,243

578,317,738

1,790,111,707P4,846,669,662

2008

P606,656,729

429,650,95650,195,011

103,822,258690,097

(1,218,454)(61,372,698)

–

(36,614,368)

(429,650,956)(110,997,422)

–

45,253,833(267,143,013)

174,682,962

(1,666,731,073)(158,575,732)

130,580,662(115,756,037)

(1,306,527,245)(294,600,289)

(1,601,127,534)

–(26,127,479,200)

(41,909,463)(14,411,964)

600,000,00024,516,036,297

48,622,39192,296,261

––

(926,845,678)

P6,567,705,8041,737,503,752

262,867,644

(5,284,093,243)(1,758,810,036)

(263,411,393)(296,775)

1,261,465,75310,049,679

(1,256,457,780)

504,880,7273,757,027,651

583,827,818

1,155,840,0006,001,576,196

420,581,6423,185,217,3011,139,319,473

–P4,745,118,416


Interest receivedInterest paid


2010

p2,676,791,8111,061,612,561

2009

P2,808,076,2071,430,138,524

2008

P2,905,821,9521,499,993,087


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‘Cumulative translation adjustment’.

Cash and Cash EquivalentsFor purposes of reporting cash flows, cash and cash equivalents include cash and other cash items, amounts due from BSP and other banks, and interbank loans receivable and securities purchased under resale agreements (SPURA) with original maturities of three months or less from dates of placements and that are subject to insignificant risks of changes in value.

SPURAThe Bank enters into short-term purchases of securities under resale agreements of identical securities with the BSP. Resale agreements are contracts under which a party purchases securities and resells such securities to the same selling party at a specified future date at a fixed price. The amounts advanced under resale agreements are carried as SPURA in the statement of financial position. SPURA are carried at cost. Interest earned on resale agreements is reported as ‘Interest income’ in the statement of income.

Financial Instruments - Initial recognition and subsequent measurement Date of recognitionRegular way purchases and sales of financial assets, except for derivatives, are recognized on the settlement date. Settlement date accounting refers to (a) the recognition of an asset on the day it is received by the Bank, and (b) the derecognition of an asset and recognition of any gain or loss on disposal on the day that such asset is delivered by the Bank. Any change in fair value of unrecognized financial asset is recognized in the statement of income for assets classified as financial assets at fair value through profit or loss (FVPL); and it is recognized in equity for assets classified as AFS investments. Loans and receivables are recognized when cash is advanced to the borrowers.

Initial recognition of financial instrumentsAll financial instruments are recognized initially at fair value. Transaction costs are included in the initial measurement of all financial instruments, except for financial assets and financial liabilities at FVPL. The Bank classifies its financial assets in the following categories: financial assets at FVPL, HTM investments, loans and receivables and AFS investments. Financial liabilities are classified into financial liabilities at FVPL and other financial liabilities at amortized cost. The classification of financial instruments at initial recognition depends on the purpose for which the financial instruments are acquired and their characteristics. Management determines the classification of its financial instruments at initial recognition and where appropriate, re-evaluates such designation at every statement of financial position date.

Reclassification of financial assetsA financial asset is reclassified out of the FVPL category when the following conditions are met:

• the financial asset is no longer held for the purpose of selling or repurchasing it in the near term; and

• there is a rare circumstance.

A financial asset that is reclassified out of the FVPL category is reclassified at its fair value on the date of reclassification. Any gain or loss already recognized in the statement of income is not reversed. The fair value of the financial asset on the date of reclassification becomes its new amortized cost, as applicable.

Determination of fair valueThe fair value of financial instruments traded in active markets at the statement of financial position date is based on their quoted market prices or dealer price quotations (bid price for long positions and asking price for short positions), without any deduction for transaction costs. Where the current bid and asking prices are not available, the price of the most recent transaction provides evidence of the current fair value as long as there has not been a significant change in economic circumstances since the time of the transaction. For all other financial instruments not listed in an active market, the fair value is determined by using valuation techniques, which includes discounted cash flow technique and comparison to similar instruments for which observable market prices exists.

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

Financial instruments held for tradingFinancial instruments held for trading include government debt securities purchased and held principally with the intention of selling them in the near term. These securities are carried at fair value; realized and unrealized gains and losses on these instruments are recognized as ‘Trading and securities gain - net’ in the statement of income. Interest earned or incurred on financial instruments held for trading is reported under ‘Interest income’ (for financial assets) and ‘Interest expense’ (for financial liabilities).

As of December 31, 2010 and 2009, the Bank has no financial instruments that are held for trading.

Financial instruments designated at FVPLFinancial instruments classified in this category are designated by management on initial recognition when any of the following criteria is met:

• the designation eliminates or significantly reduces the inconsistent treatment that would otherwise arise from measuring the assets or liabilities or recognizing gains or losses on them on a different basis;

• the assets and liabilities are part of a group of financial assets, financial liabilities or

both which are managed and their performance evaluated on a fair value basis, in accordance with a documented risk management or investment strategy; or

• the financial instrument contains an embedded derivative, unless the embedded derivative does not significantly modify the cash flows or it is clear, with little or no analysis, that it would not be separately recorded.

Financial instruments designated at FVPL are initially recognized in the statement of financial position at fair value. Changes in fair value of financial instruments designated at FVPL are recorded in ‘Trading and securities gain - net’ in the statement of income. Interest earned or incurred is recognized as ‘Interest income’ or ‘Interest expense’, respectively, in the statement of income.

As of December 31, 2010 and 2009, the Bank has no financial instruments designated at FVPL.

Derivative instrumentsThe Bank uses derivative instruments such as currency forward contracts. These derivatives are entered into as a means of reducing or managing their respective foreign exchange exposures. Such derivative instruments are initially recorded at fair value on the date at which the derivative contract is entered into and are subsequently remeasured at fair value. Derivative instruments are carried as assets when the fair value is positive and as liabilities when the fair value is negative.

Any gains or losses arising from changes in fair value of derivative instruments that do not qualify for hedge accounting are taken directly to the statement of income.

The fair value of currency forward contracts is calculated by reference to current forward exchange rates for contracts with similar maturity profiles.

Embedded derivatives The Bank assesses the existence of an embedded derivative when it first becomes a party to the contract and performs reassessment if there is a change in the terms of the contract that significantly modifies the cash flows that would otherwise be required.

An embedded derivative is separated from the host financial or nonfinancial contract and accounted for as a derivative if all of the following conditions are met:

• the economic characteristics and risks of the embedded derivative are not closely related to the economic characteristic of the host contract;

• a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative; and

• the hybrid or combined instrument is not recognized at FVPL.

The Bank determines whether a modification to cash flows is significant by considering the extent to which the expected future cash flows associated with the embedded derivative, the host contract or both have changed and whether the change is significantly relative to the previously expected cash flows on the contract.

Embedded derivatives that are bifurcated from the host contracts are accounted for as financial assets or liabilities at FVPL. Changes in fair values of embedded derivatives are included in the statement of income. Derivatives are carried as assets when the fair value is positive and as liabilities when the fair value is negative.

As of December 31, 2010 and 2009, the Bank has no derivatives that are embedded in its financial and nonfinancial contracts.

HTM investmentsHTM investments are quoted non-derivative financial assets with fixed or determinable payments and with fixed maturities for which the Bank has the positive intention and ability to hold to maturity. If the Bank were to sell more than an insignificant amount of HTM investments before maturity (other than in certain specific circumstances), the entire category would be tainted and would have to be reclassified as AFS investments. Furthermore, the Bank would be prohibited to classify any financial assets as HTM investments for the following two years.

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

The tainting policy, however, does not apply to HTM investments disposed through the bond exchange program of the Philippine government. These investments are accounted for under Philippine GAAP for banks which requires the new investment received through the bond exchange and the remaining investments are to be retained under HTM and carried at amortized cost. The gain resulting from disposals is deferred and recorded in the statement of financial position under ‘Unearned income’. The gain is amortized over the term of the new investment based on effective interest method.

Loans and receivablesThis accounting policy relates to the statement of financial position captions ‘Due from BSP’, ‘Due from other banks’, ‘Interbank loans and receivable and SPURA’ and ‘Loans and receivable’. These are financial assets with fixed or determinable payments and fixed maturities that are not quoted in an active market. They are not entered into with the intention of immediate or short-term resale and are not classified as financial assets at FVPL or designated as AFS investments.

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

AFS investmentsAFS investments are those which are designated as such or do not qualify to be classified as designated as financial assets at FVPL, HTM investments or loans and receivables. They are purchased and held indefinitely, and may be sold in response to liquidity requirements or changes in market conditions. They include government securities, treasury notes and shares of stock.

After initial measurement, AFS investments are subsequently measured at fair value. The effective yield component of AFS debt securities, as well as the impact of restatement on foreign currency-denominated AFS debt securities, is reported in the statement of income. The unrealized gains and losses arising from the fair valuation of AFS investments are excluded from reported earnings and are reported as ‘Net unrealized loss on AFS investments’ under ‘Other Comprehensive Income’ (OCI) in the statement of comprehensive income.

When the security is disposed of, the cumulative gain or loss previously recognized in OCI is recognized as ‘Trading and securities gain - net’ in the statement of income. Where the Bank holds more than one investment in the same security, these are deemed to be disposed of on a weighted average basis. Interest earned on holding AFS investments are reported as ‘Interest income’ using the EIR. Dividends earned on holding AFS investments are recognized in the statement of income as ‘Miscellaneous income’ when the right of payment has been established. The losses arising from impairment of such investments are recognized as ‘Provisions for credit and impairment losses’ in the statement of income.

Financial liabilities at amortized costThis accounting policy relates to the statement of financial position caption ‘deposit liabilities’, ‘bills payable’ and ‘other borrowed funds’, which are not designated at FVPL. They are classified as such when the substance of the contractual arrangement results in the Bank having an obligation either to deliver cash or another financial asset to the holder, or to satisfy the obligation other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of own equity shares. The components of issued financial instruments that contain both liability and equity elements are accounted for separately, with the equity component being assigned the residual amount after deducting from the instrument as a whole the amount separately determined as the fair value of the liability component on the date of issue.

After initial measurement, deposit liabilities, bills payable and similar financial liabilities not qualified as and not designated as at FVPL, are subsequently measured at amortized cost using the effective interest method. Amortized cost is calculated by taking into account any discount or premium on the issue and fees that are an integral part of the EIR.

Derecognition of Financial Assets and LiabilitiesFinancial assetA financial asset (or, where applicable a part of a financial asset or part of a group of financial assets) is derecognized when:

• the rights to receive cash flows from the asset have expired; • the Bank retains the right to receive cash flows from the asset, but has assumed

an obligation to pay them in full without material delay to a third party under a pass-through arrangement; or

• the Bank has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained the risk and rewards of the asset but has transferred the control over the asset.

Where the Bank has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement, and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control over the asset, the asset is recognized to the extent of the Bank’s continuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of original carrying amount of the asset and the maximum amount of consideration that the Bank could be required to repay.

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

Impairment of Financial AssetsThe Bank assesses at each statement of financial position date whether there is any objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset (an incurred ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated.

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

Financial assets carried at amortized costFor financial assets carried at amortized cost, which includes HTM investments and loans and receivables, the Bank first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, or collectively for financial assets that are not individually significant. If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of the estimated future cash flows (excluding future credit losses that have not been incurred). The estimated future cash flows are discounted at the financial asset’s original EIR. If a financial asset carried at amortized cost has a variable interest rate, the discount rate for measuring any impairment loss is the current EIR, adjusted for the original

credit risk premium. 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 foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable. The carrying amount of the asset is reduced through use of an allowance account and the amount of loss is charged to the statement of income. Interest income continues to be recognized based on the original EIR of the asset. Loans, together with the associated allowance accounts, are written off when there is no realistic prospect of future recovery and all collateral has been realized. If, in a subsequent year, the amount of the estimated impairment loss decreases because of an event occurring after the impairment was recognized, the previously recognized impairment loss is reduced by adjusting the allowance account. If a future write-off is later recovered, any amounts formerly charged are credited to the ‘Provision for credit and impairment losses’ in the statement of income.

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

For the purpose of a collective evaluation of impairment, financial assets are grouped on the basis of such credit risk characteristics as industry, past-due status and term. Future cash flows in a group of financial assets that are collectively evaluated for impairment are estimated on the basis of historical loss experience for assets with credit risk characteristics similar to those in the group. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the period in which the historical loss experience is based and to remove the effects of conditions in the historical period that do not exist currently.

Estimates of changes in future cash flows reflect, and are directionally consistent with changes in related observable data from period to period (such as changes in unemployment rates, property prices, commodity prices, payment status, or other factors that are indicative of incurred losses in the group and their magnitude). The methodology and assumptions used for estimating future cash flows are reviewed regularly by the Bank to reduce any differences between loss estimates and actual loss experience.

AFS investmentsFor AFS investments, the Bank assesses at each statement of financial position date whether there is objective evidence that a financial asset or group of financial assets is impaired.

In case of equity investments classified as AFS investments, this would include a significant or prolonged decline in the fair value of the investments below its cost. Where there is evidence of impairment, the cumulative loss - measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognized in the statement of income - is removed from OCI and recognized in the statement of income. Impairment losses on equity investments are not reversed through the statement of income. Increases in fair value after impairment are recognized in OCI. In the case of debt instruments classified as AFS investments, impairment is assessed based on the same criteria as financial assets carried at amortized cost. Future interest income is based on the reduced carrying amount and is accrued based on the rate of interest used to discount future cash flows for the purpose of measuring impairment loss. Such accrual is recorded as part of interest income in the statement of income. If subsequently, the fair value of a debt instrument increases and the increase can be objectively related to an event occurring after the impairment loss was recognized in the statement of income, the impairment loss is reversed through the statement of comprehensive income.

Restructured loansWhere possible, the Bank seeks to restructure loans rather than to take possession of collateral. This may involve extending the payment arrangements and the agreement of new loan conditions. Once the terms have been renegotiated, the loan is no longer considered past due. Management continuously reviews restructured loans to ensure that all criteria are met and that future payments are likely to occur. The loans continue to be subject to an individual or collective impairment assessment, calculated using the loan’s original effective interest rate. The difference between the recorded value of the original loan and the present value of the restructured cash flows, discounted at the original effective interest rate, is recognized in ‘Provision for credit and impairment losses’ in the statement of income.

Offsetting Financial InstrumentsFinancial instruments are offset and the net amount reported in the statement of financial position if, and only if, there is a currently enforceable legal right to offset the recognized amounts and there is an intention to settle on a net basis, or to realize the asset and settle the liability simultaneously.

Financial GuaranteesIn the ordinary course of business, the Bank gives financial guarantees consisting of letters of credit, letters of guarantees, and acceptances. Financial guarantees are initially recognized in the statement of financial position at fair value in ‘Other liabilities’. Subsequent to initial recognition, the Bank’s liabilities under such guarantees are each measured at the higher of the initial fair value less, when appropriate, cumulative amortization calculated to recognize the fee under ‘Service charges, fees and commissions’ in the statement of income, over the term of the guarantee, and the best estimate of the expenditure required to settle any financial obligation arising as a result of the guarantee.

Any increase in the liability relating to financial guarantees is charged against the statement of income in ‘Miscellaneous expense’. Any financial guarantee liability remaining is recognized under ‘Service charges, fees and commissions’ in the statement of income, when the guarantee is discharged, cancelled or has expired.

Investment in an AssociateAn associate is an entity over which the Bank has significant influence but not control, generally accompanying a shareholding of between 20.00% and 50.00% of the voting

NotEs to FiNaNCial statEmENts


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‘Cumulative translation adjustment’.

Cash and Cash EquivalentsFor purposes of reporting cash flows, cash and cash equivalents include cash and other cash items, amounts due from BSP and other banks, and interbank loans receivable and securities purchased under resale agreements (SPURA) with original maturities of three months or less from dates of placements and that are subject to insignificant risks of changes in value.

SPURAThe Bank enters into short-term purchases of securities under resale agreements of identical securities with the BSP. Resale agreements are contracts under which a party purchases securities and resells such securities to the same selling party at a specified future date at a fixed price. The amounts advanced under resale agreements are carried as SPURA in the statement of financial position. SPURA are carried at cost. Interest earned on resale agreements is reported as ‘Interest income’ in the statement of income.

Financial Instruments - Initial recognition and subsequent measurement Date of recognitionRegular way purchases and sales of financial assets, except for derivatives, are recognized on the settlement date. Settlement date accounting refers to (a) the recognition of an asset on the day it is received by the Bank, and (b) the derecognition of an asset and recognition of any gain or loss on disposal on the day that such asset is delivered by the Bank. Any change in fair value of unrecognized financial asset is recognized in the statement of income for assets classified as financial assets at fair value through profit or loss (FVPL); and it is recognized in equity for assets classified as AFS investments. Loans and receivables are recognized when cash is advanced to the borrowers.

Initial recognition of financial instrumentsAll financial instruments are recognized initially at fair value. Transaction costs are included in the initial measurement of all financial instruments, except for financial assets and financial liabilities at FVPL. The Bank classifies its financial assets in the following categories: financial assets at FVPL, HTM investments, loans and receivables and AFS investments. Financial liabilities are classified into financial liabilities at FVPL and other financial liabilities at amortized cost. The classification of financial instruments at initial recognition depends on the purpose for which the financial instruments are acquired and their characteristics. Management determines the classification of its financial instruments at initial recognition and where appropriate, re-evaluates such designation at every statement of financial position date.

Reclassification of financial assetsA financial asset is reclassified out of the FVPL category when the following conditions are met:

• the financial asset is no longer held for the purpose of selling or repurchasing it in the near term; and

• there is a rare circumstance.

A financial asset that is reclassified out of the FVPL category is reclassified at its fair value on the date of reclassification. Any gain or loss already recognized in the statement of income is not reversed. The fair value of the financial asset on the date of reclassification becomes its new amortized cost, as applicable.

Determination of fair valueThe fair value of financial instruments traded in active markets at the statement of financial position date is based on their quoted market prices or dealer price quotations (bid price for long positions and asking price for short positions), without any deduction for transaction costs. Where the current bid and asking prices are not available, the price of the most recent transaction provides evidence of the current fair value as long as there has not been a significant change in economic circumstances since the time of the transaction. For all other financial instruments not listed in an active market, the fair value is determined by using valuation techniques, which includes discounted cash flow technique and comparison to similar instruments for which observable market prices exists.

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

Financial instruments held for tradingFinancial instruments held for trading include government debt securities purchased and held principally with the intention of selling them in the near term. These securities are carried at fair value; realized and unrealized gains and losses on these instruments are recognized as ‘Trading and securities gain - net’ in the statement of income. Interest earned or incurred on financial instruments held for trading is reported under ‘Interest income’ (for financial assets) and ‘Interest expense’ (for financial liabilities).

As of December 31, 2010 and 2009, the Bank has no financial instruments that are held for trading.

Financial instruments designated at FVPLFinancial instruments classified in this category are designated by management on initial recognition when any of the following criteria is met:

• the designation eliminates or significantly reduces the inconsistent treatment that would otherwise arise from measuring the assets or liabilities or recognizing gains or losses on them on a different basis;

• the assets and liabilities are part of a group of financial assets, financial liabilities or

both which are managed and their performance evaluated on a fair value basis, in accordance with a documented risk management or investment strategy; or

• the financial instrument contains an embedded derivative, unless the embedded derivative does not significantly modify the cash flows or it is clear, with little or no analysis, that it would not be separately recorded.

Financial instruments designated at FVPL are initially recognized in the statement of financial position at fair value. Changes in fair value of financial instruments designated at FVPL are recorded in ‘Trading and securities gain - net’ in the statement of income. Interest earned or incurred is recognized as ‘Interest income’ or ‘Interest expense’, respectively, in the statement of income.

As of December 31, 2010 and 2009, the Bank has no financial instruments designated at FVPL.

Derivative instrumentsThe Bank uses derivative instruments such as currency forward contracts. These derivatives are entered into as a means of reducing or managing their respective foreign exchange exposures. Such derivative instruments are initially recorded at fair value on the date at which the derivative contract is entered into and are subsequently remeasured at fair value. Derivative instruments are carried as assets when the fair value is positive and as liabilities when the fair value is negative.

Any gains or losses arising from changes in fair value of derivative instruments that do not qualify for hedge accounting are taken directly to the statement of income.

The fair value of currency forward contracts is calculated by reference to current forward exchange rates for contracts with similar maturity profiles.

Embedded derivatives The Bank assesses the existence of an embedded derivative when it first becomes a party to the contract and performs reassessment if there is a change in the terms of the contract that significantly modifies the cash flows that would otherwise be required.

An embedded derivative is separated from the host financial or nonfinancial contract and accounted for as a derivative if all of the following conditions are met:

• the economic characteristics and risks of the embedded derivative are not closely related to the economic characteristic of the host contract;

• a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative; and

• the hybrid or combined instrument is not recognized at FVPL.

The Bank determines whether a modification to cash flows is significant by considering the extent to which the expected future cash flows associated with the embedded derivative, the host contract or both have changed and whether the change is significantly relative to the previously expected cash flows on the contract.

Embedded derivatives that are bifurcated from the host contracts are accounted for as financial assets or liabilities at FVPL. Changes in fair values of embedded derivatives are included in the statement of income. Derivatives are carried as assets when the fair value is positive and as liabilities when the fair value is negative.

As of December 31, 2010 and 2009, the Bank has no derivatives that are embedded in its financial and nonfinancial contracts.

HTM investmentsHTM investments are quoted non-derivative financial assets with fixed or determinable payments and with fixed maturities for which the Bank has the positive intention and ability to hold to maturity. If the Bank were to sell more than an insignificant amount of HTM investments before maturity (other than in certain specific circumstances), the entire category would be tainted and would have to be reclassified as AFS investments. Furthermore, the Bank would be prohibited to classify any financial assets as HTM investments for the following two years.

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

The tainting policy, however, does not apply to HTM investments disposed through the bond exchange program of the Philippine government. These investments are accounted for under Philippine GAAP for banks which requires the new investment received through the bond exchange and the remaining investments are to be retained under HTM and carried at amortized cost. The gain resulting from disposals is deferred and recorded in the statement of financial position under ‘Unearned income’. The gain is amortized over the term of the new investment based on effective interest method.

Loans and receivablesThis accounting policy relates to the statement of financial position captions ‘Due from BSP’, ‘Due from other banks’, ‘Interbank loans and receivable and SPURA’ and ‘Loans and receivable’. These are financial assets with fixed or determinable payments and fixed maturities that are not quoted in an active market. They are not entered into with the intention of immediate or short-term resale and are not classified as financial assets at FVPL or designated as AFS investments.

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

AFS investmentsAFS investments are those which are designated as such or do not qualify to be classified as designated as financial assets at FVPL, HTM investments or loans and receivables. They are purchased and held indefinitely, and may be sold in response to liquidity requirements or changes in market conditions. They include government securities, treasury notes and shares of stock.

After initial measurement, AFS investments are subsequently measured at fair value. The effective yield component of AFS debt securities, as well as the impact of restatement on foreign currency-denominated AFS debt securities, is reported in the statement of income. The unrealized gains and losses arising from the fair valuation of AFS investments are excluded from reported earnings and are reported as ‘Net unrealized loss on AFS investments’ under ‘Other Comprehensive Income’ (OCI) in the statement of comprehensive income.

When the security is disposed of, the cumulative gain or loss previously recognized in OCI is recognized as ‘Trading and securities gain - net’ in the statement of income. Where the Bank holds more than one investment in the same security, these are deemed to be disposed of on a weighted average basis. Interest earned on holding AFS investments are reported as ‘Interest income’ using the EIR. Dividends earned on holding AFS investments are recognized in the statement of income as ‘Miscellaneous income’ when the right of payment has been established. The losses arising from impairment of such investments are recognized as ‘Provisions for credit and impairment losses’ in the statement of income.

Financial liabilities at amortized costThis accounting policy relates to the statement of financial position caption ‘deposit liabilities’, ‘bills payable’ and ‘other borrowed funds’, which are not designated at FVPL. They are classified as such when the substance of the contractual arrangement results in the Bank having an obligation either to deliver cash or another financial asset to the holder, or to satisfy the obligation other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of own equity shares. The components of issued financial instruments that contain both liability and equity elements are accounted for separately, with the equity component being assigned the residual amount after deducting from the instrument as a whole the amount separately determined as the fair value of the liability component on the date of issue.

After initial measurement, deposit liabilities, bills payable and similar financial liabilities not qualified as and not designated as at FVPL, are subsequently measured at amortized cost using the effective interest method. Amortized cost is calculated by taking into account any discount or premium on the issue and fees that are an integral part of the EIR.

Derecognition of Financial Assets and LiabilitiesFinancial assetA financial asset (or, where applicable a part of a financial asset or part of a group of financial assets) is derecognized when:

• the rights to receive cash flows from the asset have expired; • the Bank retains the right to receive cash flows from the asset, but has assumed

an obligation to pay them in full without material delay to a third party under a pass-through arrangement; or

• the Bank has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained the risk and rewards of the asset but has transferred the control over the asset.

Where the Bank has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement, and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control over the asset, the asset is recognized to the extent of the Bank’s continuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of original carrying amount of the asset and the maximum amount of consideration that the Bank could be required to repay.

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

Impairment of Financial AssetsThe Bank assesses at each statement of financial position date whether there is any objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset (an incurred ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated.

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

Financial assets carried at amortized costFor financial assets carried at amortized cost, which includes HTM investments and loans and receivables, the Bank first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, or collectively for financial assets that are not individually significant. If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of the estimated future cash flows (excluding future credit losses that have not been incurred). The estimated future cash flows are discounted at the financial asset’s original EIR. If a financial asset carried at amortized cost has a variable interest rate, the discount rate for measuring any impairment loss is the current EIR, adjusted for the original

credit risk premium. 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 foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable. The carrying amount of the asset is reduced through use of an allowance account and the amount of loss is charged to the statement of income. Interest income continues to be recognized based on the original EIR of the asset. Loans, together with the associated allowance accounts, are written off when there is no realistic prospect of future recovery and all collateral has been realized. If, in a subsequent year, the amount of the estimated impairment loss decreases because of an event occurring after the impairment was recognized, the previously recognized impairment loss is reduced by adjusting the allowance account. If a future write-off is later recovered, any amounts formerly charged are credited to the ‘Provision for credit and impairment losses’ in the statement of income.

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

For the purpose of a collective evaluation of impairment, financial assets are grouped on the basis of such credit risk characteristics as industry, past-due status and term. Future cash flows in a group of financial assets that are collectively evaluated for impairment are estimated on the basis of historical loss experience for assets with credit risk characteristics similar to those in the group. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the period in which the historical loss experience is based and to remove the effects of conditions in the historical period that do not exist currently.

Estimates of changes in future cash flows reflect, and are directionally consistent with changes in related observable data from period to period (such as changes in unemployment rates, property prices, commodity prices, payment status, or other factors that are indicative of incurred losses in the group and their magnitude). The methodology and assumptions used for estimating future cash flows are reviewed regularly by the Bank to reduce any differences between loss estimates and actual loss experience.

AFS investmentsFor AFS investments, the Bank assesses at each statement of financial position date whether there is objective evidence that a financial asset or group of financial assets is impaired.

In case of equity investments classified as AFS investments, this would include a significant or prolonged decline in the fair value of the investments below its cost. Where there is evidence of impairment, the cumulative loss - measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognized in the statement of income - is removed from OCI and recognized in the statement of income. Impairment losses on equity investments are not reversed through the statement of income. Increases in fair value after impairment are recognized in OCI. In the case of debt instruments classified as AFS investments, impairment is assessed based on the same criteria as financial assets carried at amortized cost. Future interest income is based on the reduced carrying amount and is accrued based on the rate of interest used to discount future cash flows for the purpose of measuring impairment loss. Such accrual is recorded as part of interest income in the statement of income. If subsequently, the fair value of a debt instrument increases and the increase can be objectively related to an event occurring after the impairment loss was recognized in the statement of income, the impairment loss is reversed through the statement of comprehensive income.

Restructured loansWhere possible, the Bank seeks to restructure loans rather than to take possession of collateral. This may involve extending the payment arrangements and the agreement of new loan conditions. Once the terms have been renegotiated, the loan is no longer considered past due. Management continuously reviews restructured loans to ensure that all criteria are met and that future payments are likely to occur. The loans continue to be subject to an individual or collective impairment assessment, calculated using the loan’s original effective interest rate. The difference between the recorded value of the original loan and the present value of the restructured cash flows, discounted at the original effective interest rate, is recognized in ‘Provision for credit and impairment losses’ in the statement of income.

Offsetting Financial InstrumentsFinancial instruments are offset and the net amount reported in the statement of financial position if, and only if, there is a currently enforceable legal right to offset the recognized amounts and there is an intention to settle on a net basis, or to realize the asset and settle the liability simultaneously.

Financial GuaranteesIn the ordinary course of business, the Bank gives financial guarantees consisting of letters of credit, letters of guarantees, and acceptances. Financial guarantees are initially recognized in the statement of financial position at fair value in ‘Other liabilities’. Subsequent to initial recognition, the Bank’s liabilities under such guarantees are each measured at the higher of the initial fair value less, when appropriate, cumulative amortization calculated to recognize the fee under ‘Service charges, fees and commissions’ in the statement of income, over the term of the guarantee, and the best estimate of the expenditure required to settle any financial obligation arising as a result of the guarantee.

Any increase in the liability relating to financial guarantees is charged against the statement of income in ‘Miscellaneous expense’. Any financial guarantee liability remaining is recognized under ‘Service charges, fees and commissions’ in the statement of income, when the guarantee is discharged, cancelled or has expired.

Investment in an AssociateAn associate is an entity over which the Bank has significant influence but not control, generally accompanying a shareholding of between 20.00% and 50.00% of the voting



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rights. The Bank’s investment in an associate represents its 40.00% interest in PBCom Finance Corporation, an entity registered with the SEC. Investment in an associate is accounted for under the equity method of accounting. Under the equity method, an investment in an associate is carried in the statement of financial position at cost plus post-acquisition changes in the Bank’s share of the net assets of the associate. Goodwill, if any, relating to an associate is included in the carrying value of the investment and is not amortized. The Bank’s share in an associate’s post-acquisition profits or losses is recognized in the statement of income, and its share of post-acquisition movements in the associate’s equity reserves is recognized directly in equity. When the Bank’s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the Bank does not recognize further losses, unless it has incurred obligations or made payments on behalf of the associate. Profits and losses resulting from transactions between the Bank and an associate are eliminated to the extent of the interest in the associate. Dividends received, if any, are treated as a reduction in the carrying value of the investment.

Property and EquipmentProperty and equipment are stated at cost less accumulated depreciation and amortization and impairment in value.

The initial cost of property and equipment consists of its purchase price, including import duties, taxes and any directly attributable costs of bringing the asset to its working condition and location for its intended use. Expenditures incurred after the property and equipment have been put into operation, such as repairs and maintenance are charged against operations in the year in which the costs are incurred. In situations where it can be clearly demonstrated that the expenditures have resulted in an increase in the future economic benefits expected to be obtained from the use of an item of property and equipment beyond its originally assessed standard of performance, the expenditures are capitalized as an additional cost of property and equipment. When assets are retired or otherwise disposed of, the cost and the related accumulated depreciation and amortization and any impairment in value are removed from the accounts, and any resulting gain or loss is reflected as income or loss in the statement of income.

Land is stated at appraised value less any impairment in value. The appraisal values were determined by professionally qualified, independent appraisers. The revaluation increment resulting from revaluation is credited to ‘Revaluation increment on land’ under OCI, net of applicable deferred tax.

Depreciation is computed using the straight-line method based on the estimated useful life (EUL) of the depreciable assets. Leasehold improvements are amortized over the EUL of the improvements or the terms of the related leases, whichever is shorter.

EUL of components of property and equipment are as follows:

The useful life and the depreciation and amortization method are reviewed periodically to ensure that the period and the method of depreciation and amortization are consistent with the expected pattern of economic benefits from items of property and equipment. The carrying values of property and equipment are reviewed for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. If any such indication exists and where the carrying values exceed the estimated recoverable amount, the assets or cash-generating units to which the assets are related to are written down to their recoverable amounts (see accounting policy on Impairment of Nonfinancial Assets).

An item of property and equipment is derecognized upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the statement of income in the year the asset is derecognized.

The asset’s residual values, useful lives and methods of depreciation are reviewed, and adjusted if appropriate, at each financial year end.

Investment PropertiesInvestment properties include real properties acquired in settlement of loans and receivables, and investments in real estate.

Real properties acquiredReal properties acquired are carried at cost, which is the fair value at acquisition date, less accumulated depreciation and impairment in value. Transaction costs, which include nonrefundable capital gains tax and documentary stamp tax, incurred in connection with foreclosure are capitalized as part of the carrying values of the cost of the real properties acquired.

The Bank applies the cost model in accounting for investment properties. Depreciation is computed on a straight-line basis over the EUL from the time of acquisition of the investment properties but not to exceed:

Investments in real estateInvestments in real estate consist of investments in land and building. Investment in land is carried at cost less impairment in value. Building is carried at cost less accumulated depreciation and impairment in value. All costs that are directly attributable to the acquisition and development of property are capitalized, including borrowing costs incurred to finance the property development. Depreciation is computed on a straight-line basis over 15 years.

The EUL of investment properties and the depreciation method are reviewed

periodically to ensure that the period and the method of depreciation are consistent with the expected pattern of economic benefits from items of investment properties.

The carrying values of the investment properties are reviewed for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable. If any such indication exists and where the carrying values exceed the estimated recoverable amount, the investment property or cash-generating units it is related to are written down to their recoverable amounts (see accounting policy on Impairment of Nonfinancial Assets). Investment properties are derecognized when they have either been disposed of or when they are permanently withdrawn from use and no future benefit is expected from its disposal. Any gains or losses on retirement or disposal of investment properties are recognized in the statement of income in the year of retirement or disposal under ‘Profit (loss) from assets sold or exchanged’.

Transfers are made to investment property when, and only when, there is a change in use, evidenced by ending of owner-occupation, commencement of an operating lease to another party or ending of construction or development. Transfers are made from investment property when, and only when, there is a change in use, evidenced by commencement of owner-occupation or commencement of development with a view to sale.

Intangible AssetsIntangible assets consist of software costs and branch licenses.

Software costsCosts related to software purchased by the Bank for use in operations are recognized as ‘Intangible assets’ in the statement of financial position. Capitalized computer software costs are amortized on a straight-line basis over two to five years.

Branch licensesThese intangible assets were determined to have indefinite useful lives. These are tested for impairment annually either individually or at the cash-generating unit level. Such intangibles are not amortized. The useful life is reviewed annually to determine whether indefinite life assessment continues to be supportable. If not, the change in the useful life assessment from indefinite to finite is made on a prospective basis.

Impairment of Nonfinancial Assets Investment in an associate, property and equipment and investment propertiesAt each statement of financial position date, the Bank assesses whether there is any indication that its nonfinancial assets may be impaired. When an indicator of impairment exists or when an annual impairment testing for an asset is required, the Bank makes a formal estimate of the recoverable amount. Recoverable amount is the higher of an asset’s (or cash-generating unit’s (CGU’s)) fair value less costs to sell and its value in use and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent from those other assets or groups of assets, in which case the recoverable amount is assessed as part of the CGU to which it belongs. Where the carrying amount of an asset (or CGU) exceeds its recoverable amount, the asset (or CGU) is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset (or CGU).

An impairment loss is recognized only if the carrying amount of an asset exceeds its recoverable amount. An impairment loss is charged against the statement of income in the period in which it arises, unless the asset is carried at a revalued amount in which case the impairment loss is charged against the revaluation increment of the said asset. A previously recognized impairment loss is reversed only if there has been a change in the estimates used to determine the recoverable amount of an asset, but not to an amount higher than the carrying amount that would have been determined (net of any depreciation) had no impairment loss been recognized for the asset in prior years. A reversal of an impairment loss is credited to current operations, unless the asset is carried at a revalued amount in which case the reversal of the impairment loss is credited to the revaluation increment of the said asset.

Intangible assets Branch licences are tested for impairment annually at the statement of financial position date either individually or at the CGU level, as appropriate.

Software costs are assessed for impairment whenever there is an indication that the intangible asset may be impaired.

Deferred ChargesDeferred charges representing deferred SPV losses are amortized over ten years based on the schedule discussed in Note 15. The annual amortization is reported as an adjustment against retained earnings on a retroactive basis.

Government loans with low interest ratesGovernment loans with low interest rates are recognized initially at fair value and the difference between the fair value of the loan and the proceeds of the loan is considered a form of government grant and is recognized as income over the period of the loan using the effective interest method.

Revenue RecognitionRevenue is recognized to the extent that it is probable that the economic benefits will flow to the Bank and the revenue can be reliably measured, regardless of when the payment is being made. Revenue is measured at the fair value of the consideration received or receivable, taking into account contractually defined terms of payment and excluding taxes or duty. The Bank assesses its revenue arrangements against specific criteria in order to determine if it is acting as principal or agent. The following specific recognition criteria must also be met before revenue is recognized:

Interest incomeInterest on financial instruments is recognized based on the effective interest method of accounting.

The effective interest method is a method of calculating the amortized cost of a financial asset or a financial liability and allocating the interest income or interest

expense over the relevant period. The EIR is the rate that exactly discounts estimated future cash payments or 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 EIR, the Bank estimates cash flows considering all contractual terms of the financial instrument (for example, prepayment options) including any fees or incremental costs that are directly attributable to the instrument and are an integral part of the EIR, but not future credit losses.

Once 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 thereafter using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. Service charges and penaltiesService charges and penalties are recognized only upon collection or accrued when there is reasonable degree of certainty as to its collectability.

Fees and commissionsLoan fees that are directly related to acquisition and origination of loans are included in the cost of the loan and are amortized using effective interest method over the term of the loan. Loan commitment fees are recognized as earned over the term of the credit lines granted to each borrower. Loan syndication fees are recognized upon completion of all syndication activities and where the Bank does not have further obligation to perform under the syndication agreement.

Trading and securities gain - netTrading and securities gain - net represents results arising from trading activities including gains and losses from changes in fair value of financial assets at FVPL and disposal of AFS investments.

DividendsDividends are recognized when the Bank’s right to receive the payments is established.

RentalRental income arising on leased premises is accounted for on a straight-line basis over the lease terms on ongoing leases.

Retirement BenefitsThe Bank’s retirement cost is determined using the projected unit credit method. The retirement cost is generally funded through payments to a trustee-administered fund, determined by periodic actuarial calculations. The Bank has a noncontributory defined benefit plan. A defined benefit plan is a retirement plan that defines an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation.

The liability recognized in the statement of financial position in respect of defined benefit retirement plans is the present value of the defined benefit obligation at the statement of financial position date less the fair value of plan assets, together with adjustments for unrecognized actuarial gains or losses and past service costs. The defined benefit obligation is calculated annually by an independent actuary. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates on government bonds that have terms to maturity approximating the terms of the related retirement liability.

Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are recognized in the statement of income when the net cumulative unrecognized actuarial gains and losses of the plan at the end of the previous reporting year exceeded 10.00% of the higher of the defined benefit obligation and the fair value of plan assets at that date. These gains and losses are recognized over the expected average remaining working lives of the employees participating in the plan.

Past service costs are recognized immediately in the statement of income, unless the changes to the pension plan are conditional on the employees remaining in service for a specified period of time (the vesting period). In this case, the past service costs are amortized on a straight-line basis over the vesting period. The defined benefit asset or liability comprises the present value of the defined benefit obligation less past service costs not yet recognized and less the fair value of plan assets out of which the obligations are to be settled directly. The value of any asset is restricted to the sum of any past service cost not yet recognized and the present value of any economic benefits available in the form of any economic benefits available in the form of refunds from the plan or reductions in the future contributions to the plan.

The Bank also contributes to its contributory, defined-contribution type staff provident plan based on a fixed percentage of the employees’ salaries as defined in the plan.

LeasesThe determination of whether an arrangement is, or contains a lease is based on the substance of the arrangement and requires an assessment of whether the fulfillment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset. A reassessment is made after inception of the lease only if one of the following applies:

a. there is a change in contractual terms, other than a renewal or extension of thearrangement;

b. a renewal option is exercised or extension granted, unless that term of the renewalor extension was initially included in the lease term;

c. there is a change in the determination of whether fulfillment is dependent on a specified asset; or

d. there is a substantial change to the asset.

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

Bank as lesseeLeases where the lessor retains substantially all the risks and benefits of ownership of the asset are classified as operating leases. Operating lease payments are recognized as an expense in the statement of income on a straight-line basis over the lease term.

Bank as lessorLeases where the Bank does not transfer substantially all the risk and benefits of ownership of the assets are classified as operating leases. Initial direct costs incurred in negotiating operating leases are added to the carrying amount of the leased asset and recognized over the lease term on the same basis as the rental income. Contingent rents are recognized as revenue in the period in which they are earned.

Income TaxesCurrent taxCurrent tax assets and liabilities for the current period are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted at the statement of financial position date.

Deferred taxDeferred tax is provided using the balance sheet liability method on all temporary differences at the statement of financial position date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax liabilities are recognized for all taxable temporary differences, with certain exceptions. Deferred tax assets are recognized for all deductible temporary differences, carryforward of unused tax credits from excess minimum corporate income tax (MCIT) over regular corporate income tax (RCIT) and unused net operating loss carryover (NOLCO), to the extent that it is probable that taxable income will be available against which the deductible temporary differences and carryforward of unused MCIT and unused NOLCO can be utilized. Deferred tax, however, is not recognized when it arises from the initial recognition of an asset or liability in atransaction that is not a business combination and, at the time of the transaction, affects neither the accounting income nor taxable income.

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

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

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

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

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

Interest ExpenseInterest expense for all interest-bearing financial liabilities are recognized in ‘Interest expense’ in the statement of income using the EIR of the financial liabilities to which they relate.

Contingent Assets and LiabilitiesContingent liabilities are not recognized in the financial statements but are disclosed unless the possibility of an outflow of assets embodying economic benefits is remote. Contingent assets are not recognized but are disclosed in the financial statements when an inflow of economic benefits is probable. Earnings Per ShareBasic earnings per share (EPS) is computed by dividing the net income for the year by the weighted average number of common shares and preferred shares outstanding during the year after giving retroactive effect to stock dividends declared and stock rights exercised during the year, if any.

Diluted EPS is calculated by dividing the net income attributable to common shareholders by the weighted average number of common shares outstanding during the year adjusted for the effects of any dilutive potential common shares. As of December 31, 2010, 2009 and 2008, the Bank does not have dilutive potential common shares.

Dividends on Common and Preferred SharesDividends on common or preferred shares are recognized as a liability and deducted from equity when approved by the respective stockholders’ of the Bank. Dividends for the year that are approved after the statement of financial position date are dealt with as an event after the statement of financial position date.

Segment ReportingThe Bank’s operating businesses are organized and managed separately according to the nature of the products and services provided, with each segment representing a strategic business unit that offers different products and serves different markets. Financial information on business segments is presented in Note 6. The Bank’s assets producing revenues are located in the Philippines (i.e., one geographical location). Therefore, geographical segment information is no longer presented.

Fiduciary ActivitiesAssets and income arising from fiduciary activities together with related undertakings to return such assets to customers are excluded from the financial statements where the Bank acts in a fiduciary capacity such as nominee, trustee or agent.

Condominium propertyBuildings and improvementsFurniture, fixtures and equipmentLeasehold improvements

Years5050

520

BuildingsCondominium units

Years5040



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rights. The Bank’s investment in an associate represents its 40.00% interest in PBCom Finance Corporation, an entity registered with the SEC. Investment in an associate is accounted for under the equity method of accounting. Under the equity method, an investment in an associate is carried in the statement of financial position at cost plus post-acquisition changes in the Bank’s share of the net assets of the associate. Goodwill, if any, relating to an associate is included in the carrying value of the investment and is not amortized. The Bank’s share in an associate’s post-acquisition profits or losses is recognized in the statement of income, and its share of post-acquisition movements in the associate’s equity reserves is recognized directly in equity. When the Bank’s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the Bank does not recognize further losses, unless it has incurred obligations or made payments on behalf of the associate. Profits and losses resulting from transactions between the Bank and an associate are eliminated to the extent of the interest in the associate. Dividends received, if any, are treated as a reduction in the carrying value of the investment.

Property and EquipmentProperty and equipment are stated at cost less accumulated depreciation and amortization and impairment in value.

The initial cost of property and equipment consists of its purchase price, including import duties, taxes and any directly attributable costs of bringing the asset to its working condition and location for its intended use. Expenditures incurred after the property and equipment have been put into operation, such as repairs and maintenance are charged against operations in the year in which the costs are incurred. In situations where it can be clearly demonstrated that the expenditures have resulted in an increase in the future economic benefits expected to be obtained from the use of an item of property and equipment beyond its originally assessed standard of performance, the expenditures are capitalized as an additional cost of property and equipment. When assets are retired or otherwise disposed of, the cost and the related accumulated depreciation and amortization and any impairment in value are removed from the accounts, and any resulting gain or loss is reflected as income or loss in the statement of income.

Land is stated at appraised value less any impairment in value. The appraisal values were determined by professionally qualified, independent appraisers. The revaluation increment resulting from revaluation is credited to ‘Revaluation increment on land’ under OCI, net of applicable deferred tax.

Depreciation is computed using the straight-line method based on the estimated useful life (EUL) of the depreciable assets. Leasehold improvements are amortized over the EUL of the improvements or the terms of the related leases, whichever is shorter.

EUL of components of property and equipment are as follows:

The useful life and the depreciation and amortization method are reviewed periodically to ensure that the period and the method of depreciation and amortization are consistent with the expected pattern of economic benefits from items of property and equipment. The carrying values of property and equipment are reviewed for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. If any such indication exists and where the carrying values exceed the estimated recoverable amount, the assets or cash-generating units to which the assets are related to are written down to their recoverable amounts (see accounting policy on Impairment of Nonfinancial Assets).

An item of property and equipment is derecognized upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the statement of income in the year the asset is derecognized.

The asset’s residual values, useful lives and methods of depreciation are reviewed, and adjusted if appropriate, at each financial year end.

Investment PropertiesInvestment properties include real properties acquired in settlement of loans and receivables, and investments in real estate.

Real properties acquiredReal properties acquired are carried at cost, which is the fair value at acquisition date, less accumulated depreciation and impairment in value. Transaction costs, which include nonrefundable capital gains tax and documentary stamp tax, incurred in connection with foreclosure are capitalized as part of the carrying values of the cost of the real properties acquired.

The Bank applies the cost model in accounting for investment properties. Depreciation is computed on a straight-line basis over the EUL from the time of acquisition of the investment properties but not to exceed:

Investments in real estateInvestments in real estate consist of investments in land and building. Investment in land is carried at cost less impairment in value. Building is carried at cost less accumulated depreciation and impairment in value. All costs that are directly attributable to the acquisition and development of property are capitalized, including borrowing costs incurred to finance the property development. Depreciation is computed on a straight-line basis over 15 years.

The EUL of investment properties and the depreciation method are reviewed

periodically to ensure that the period and the method of depreciation are consistent with the expected pattern of economic benefits from items of investment properties.

The carrying values of the investment properties are reviewed for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable. If any such indication exists and where the carrying values exceed the estimated recoverable amount, the investment property or cash-generating units it is related to are written down to their recoverable amounts (see accounting policy on Impairment of Nonfinancial Assets). Investment properties are derecognized when they have either been disposed of or when they are permanently withdrawn from use and no future benefit is expected from its disposal. Any gains or losses on retirement or disposal of investment properties are recognized in the statement of income in the year of retirement or disposal under ‘Profit (loss) from assets sold or exchanged’.

Transfers are made to investment property when, and only when, there is a change in use, evidenced by ending of owner-occupation, commencement of an operating lease to another party or ending of construction or development. Transfers are made from investment property when, and only when, there is a change in use, evidenced by commencement of owner-occupation or commencement of development with a view to sale.

Intangible AssetsIntangible assets consist of software costs and branch licenses.

Software costsCosts related to software purchased by the Bank for use in operations are recognized as ‘Intangible assets’ in the statement of financial position. Capitalized computer software costs are amortized on a straight-line basis over two to five years.

Branch licensesThese intangible assets were determined to have indefinite useful lives. These are tested for impairment annually either individually or at the cash-generating unit level. Such intangibles are not amortized. The useful life is reviewed annually to determine whether indefinite life assessment continues to be supportable. If not, the change in the useful life assessment from indefinite to finite is made on a prospective basis.

Impairment of Nonfinancial Assets Investment in an associate, property and equipment and investment propertiesAt each statement of financial position date, the Bank assesses whether there is any indication that its nonfinancial assets may be impaired. When an indicator of impairment exists or when an annual impairment testing for an asset is required, the Bank makes a formal estimate of the recoverable amount. Recoverable amount is the higher of an asset’s (or cash-generating unit’s (CGU’s)) fair value less costs to sell and its value in use and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent from those other assets or groups of assets, in which case the recoverable amount is assessed as part of the CGU to which it belongs. Where the carrying amount of an asset (or CGU) exceeds its recoverable amount, the asset (or CGU) is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset (or CGU).

An impairment loss is recognized only if the carrying amount of an asset exceeds its recoverable amount. An impairment loss is charged against the statement of income in the period in which it arises, unless the asset is carried at a revalued amount in which case the impairment loss is charged against the revaluation increment of the said asset. A previously recognized impairment loss is reversed only if there has been a change in the estimates used to determine the recoverable amount of an asset, but not to an amount higher than the carrying amount that would have been determined (net of any depreciation) had no impairment loss been recognized for the asset in prior years. A reversal of an impairment loss is credited to current operations, unless the asset is carried at a revalued amount in which case the reversal of the impairment loss is credited to the revaluation increment of the said asset.

Intangible assets Branch licences are tested for impairment annually at the statement of financial position date either individually or at the CGU level, as appropriate.

Software costs are assessed for impairment whenever there is an indication that the intangible asset may be impaired.

Deferred ChargesDeferred charges representing deferred SPV losses are amortized over ten years based on the schedule discussed in Note 15. The annual amortization is reported as an adjustment against retained earnings on a retroactive basis.

Government loans with low interest ratesGovernment loans with low interest rates are recognized initially at fair value and the difference between the fair value of the loan and the proceeds of the loan is considered a form of government grant and is recognized as income over the period of the loan using the effective interest method.

Revenue RecognitionRevenue is recognized to the extent that it is probable that the economic benefits will flow to the Bank and the revenue can be reliably measured, regardless of when the payment is being made. Revenue is measured at the fair value of the consideration received or receivable, taking into account contractually defined terms of payment and excluding taxes or duty. The Bank assesses its revenue arrangements against specific criteria in order to determine if it is acting as principal or agent. The following specific recognition criteria must also be met before revenue is recognized:

Interest incomeInterest on financial instruments is recognized based on the effective interest method of accounting.

The effective interest method is a method of calculating the amortized cost of a financial asset or a financial liability and allocating the interest income or interest

expense over the relevant period. The EIR is the rate that exactly discounts estimated future cash payments or 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 EIR, the Bank estimates cash flows considering all contractual terms of the financial instrument (for example, prepayment options) including any fees or incremental costs that are directly attributable to the instrument and are an integral part of the EIR, but not future credit losses.

Once 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 thereafter using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. Service charges and penaltiesService charges and penalties are recognized only upon collection or accrued when there is reasonable degree of certainty as to its collectability.

Fees and commissionsLoan fees that are directly related to acquisition and origination of loans are included in the cost of the loan and are amortized using effective interest method over the term of the loan. Loan commitment fees are recognized as earned over the term of the credit lines granted to each borrower. Loan syndication fees are recognized upon completion of all syndication activities and where the Bank does not have further obligation to perform under the syndication agreement.

Trading and securities gain - netTrading and securities gain - net represents results arising from trading activities including gains and losses from changes in fair value of financial assets at FVPL and disposal of AFS investments.

DividendsDividends are recognized when the Bank’s right to receive the payments is established.

RentalRental income arising on leased premises is accounted for on a straight-line basis over the lease terms on ongoing leases.

Retirement BenefitsThe Bank’s retirement cost is determined using the projected unit credit method. The retirement cost is generally funded through payments to a trustee-administered fund, determined by periodic actuarial calculations. The Bank has a noncontributory defined benefit plan. A defined benefit plan is a retirement plan that defines an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation.

The liability recognized in the statement of financial position in respect of defined benefit retirement plans is the present value of the defined benefit obligation at the statement of financial position date less the fair value of plan assets, together with adjustments for unrecognized actuarial gains or losses and past service costs. The defined benefit obligation is calculated annually by an independent actuary. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates on government bonds that have terms to maturity approximating the terms of the related retirement liability.

Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are recognized in the statement of income when the net cumulative unrecognized actuarial gains and losses of the plan at the end of the previous reporting year exceeded 10.00% of the higher of the defined benefit obligation and the fair value of plan assets at that date. These gains and losses are recognized over the expected average remaining working lives of the employees participating in the plan.

Past service costs are recognized immediately in the statement of income, unless the changes to the pension plan are conditional on the employees remaining in service for a specified period of time (the vesting period). In this case, the past service costs are amortized on a straight-line basis over the vesting period. The defined benefit asset or liability comprises the present value of the defined benefit obligation less past service costs not yet recognized and less the fair value of plan assets out of which the obligations are to be settled directly. The value of any asset is restricted to the sum of any past service cost not yet recognized and the present value of any economic benefits available in the form of any economic benefits available in the form of refunds from the plan or reductions in the future contributions to the plan.

The Bank also contributes to its contributory, defined-contribution type staff provident plan based on a fixed percentage of the employees’ salaries as defined in the plan.

LeasesThe determination of whether an arrangement is, or contains a lease is based on the substance of the arrangement and requires an assessment of whether the fulfillment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset. A reassessment is made after inception of the lease only if one of the following applies:

a. there is a change in contractual terms, other than a renewal or extension of thearrangement;

b. a renewal option is exercised or extension granted, unless that term of the renewalor extension was initially included in the lease term;

c. there is a change in the determination of whether fulfillment is dependent on a specified asset; or

d. there is a substantial change to the asset.

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

Bank as lesseeLeases where the lessor retains substantially all the risks and benefits of ownership of the asset are classified as operating leases. Operating lease payments are recognized as an expense in the statement of income on a straight-line basis over the lease term.

Bank as lessorLeases where the Bank does not transfer substantially all the risk and benefits of ownership of the assets are classified as operating leases. Initial direct costs incurred in negotiating operating leases are added to the carrying amount of the leased asset and recognized over the lease term on the same basis as the rental income. Contingent rents are recognized as revenue in the period in which they are earned.

Income TaxesCurrent taxCurrent tax assets and liabilities for the current period are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted at the statement of financial position date.

Deferred taxDeferred tax is provided using the balance sheet liability method on all temporary differences at the statement of financial position date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax liabilities are recognized for all taxable temporary differences, with certain exceptions. Deferred tax assets are recognized for all deductible temporary differences, carryforward of unused tax credits from excess minimum corporate income tax (MCIT) over regular corporate income tax (RCIT) and unused net operating loss carryover (NOLCO), to the extent that it is probable that taxable income will be available against which the deductible temporary differences and carryforward of unused MCIT and unused NOLCO can be utilized. Deferred tax, however, is not recognized when it arises from the initial recognition of an asset or liability in atransaction that is not a business combination and, at the time of the transaction, affects neither the accounting income nor taxable income.

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

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

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

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

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

Interest ExpenseInterest expense for all interest-bearing financial liabilities are recognized in ‘Interest expense’ in the statement of income using the EIR of the financial liabilities to which they relate.

Contingent Assets and LiabilitiesContingent liabilities are not recognized in the financial statements but are disclosed unless the possibility of an outflow of assets embodying economic benefits is remote. Contingent assets are not recognized but are disclosed in the financial statements when an inflow of economic benefits is probable. Earnings Per ShareBasic earnings per share (EPS) is computed by dividing the net income for the year by the weighted average number of common shares and preferred shares outstanding during the year after giving retroactive effect to stock dividends declared and stock rights exercised during the year, if any.

Diluted EPS is calculated by dividing the net income attributable to common shareholders by the weighted average number of common shares outstanding during the year adjusted for the effects of any dilutive potential common shares. As of December 31, 2010, 2009 and 2008, the Bank does not have dilutive potential common shares.

Dividends on Common and Preferred SharesDividends on common or preferred shares are recognized as a liability and deducted from equity when approved by the respective stockholders’ of the Bank. Dividends for the year that are approved after the statement of financial position date are dealt with as an event after the statement of financial position date.

Segment ReportingThe Bank’s operating businesses are organized and managed separately according to the nature of the products and services provided, with each segment representing a strategic business unit that offers different products and serves different markets. Financial information on business segments is presented in Note 6. The Bank’s assets producing revenues are located in the Philippines (i.e., one geographical location). Therefore, geographical segment information is no longer presented.

Fiduciary ActivitiesAssets and income arising from fiduciary activities together with related undertakings to return such assets to customers are excluded from the financial statements where the Bank acts in a fiduciary capacity such as nominee, trustee or agent.

Condominium propertyBuildings and improvementsFurniture, fixtures and equipmentLeasehold improvements

Years5050

520

BuildingsCondominium units

Years5040



www.pbcom.com.ph

Events after the Reporting PeriodPost-year-end events that provide additional information about the Bank’s position at the statement of financial position date (adjusting event) are reflected in the financial statements. Post-year-end events that are not adjusting events, if any, are disclosed when material to the financial statements.

Future Changes in accounting policies The Bank will adopt the Standards and Interpretations enumerated below when these become effective. Except as otherwise indicated, the Bank does not expect the adoption of these new and amended PFRS and Philippine Interpretations to have significant impact on its financial statements.

Effective in 2011PAS 24 (Amended), Related Party DisclosuresThe amended standard is effective for annual periods beginning on or after January 1, 2011. It clarified the definition of a related party to simplify the identification of such relationships and to eliminate inconsistencies in its application. The revised standard introduces a partial exemption of disclosure requirements for government-related entities. PAS 32, Financial Instruments: Presentation (Amendment) - Classification of Rights Issues The amendment to PAS 32 is effective for annual periods beginning on or after February 1, 2010 and amended the definition of a financial liability in order to classify rights issues (and certain options or warrants) as equity instruments in cases where such rights are given pro rata to all of the existing owners of the same class of an entity’s non-derivative equity instruments, or to acquire a fixed number of the entity’s own equity instruments for a fixed amount in any currency.

Philippine Interpretation IFRIC 14, Prepayments of a Minimum Funding Requirement (Amendment) The amendment to Philippine Interpretation IFRIC 14 is effective for annual periods beginning on or after January 1, 2011 with retrospective application. The amendment provides guidance on assessing the recoverable amount of a net pension asset. The amendment permits an entity to treat the prepayment of a minimum funding requirement as an asset.

Philippine Interpretation IFRIC 19, Extinguishing Financial Liabilities with Equity Instruments Philippine Interpretation IFRIC 19 is effective for annual periods beginning on or after July 1, 2010. The interpretation clarifies that equity instruments issued to a creditor to extinguish a financial liability qualify as consideration paid. The equity instruments issued are measured at their fair value. In case this cannot be reliably measured, they are measured at the fair value of the liability extinguished. Any gain or loss is recognized immediately in profit or loss.

Effective in 2012PFRS 7, Financial Instruments: Disclosures (Amendments) – Disclosures – Transfers of Financial AssetsThe amendments to PFRS 7 are effective for annual periods beginning on or after July 1, 2011. The amendments will allow users of financial statements to improve their understanding of transfer transactions of financial assets (for example, securitizations), including understanding the possible effects of any risks that may remain with the entity that transferred the assets. The amendments also require additional disclosures if a disproportionate amount of transfer transactions are undertaken around the end of a reporting period.

PAS 12, Income Taxes (Amendment) - Deferred Tax: Recovery of Underlying AssetsThe amendment to PAS 12 is effective for annual periods beginning on or after January 1, 2012. It provides a practical solution to the problem of assessing whether recovery of an asset will be through use or sale. It introduces a presumption that recovery of the carrying amount of an asset will normally be through sale.

Philippine Interpretation IFRIC 15, Agreement for Construction of Real EstateThis Interpretation, effective for annual periods beginning on or after January 1, 2012, covers accounting for revenue and associated expenses by entities that undertake the construction of real estate directly or through subcontractors. The Interpretation requires that revenue on construction of real estate be recognized only upon completion, except when such contract qualifies as construction contract to be accounted for under PAS 11, Construction Contracts, or involves rendering of services in which case revenue is recognized based on stage of completion. Contracts involving provision of services with the construction materials and where the risks and reward of ownership are transferred to the buyer on a continuous basis will also be accounted for based on stage of completion. Effective in 2013PFRS 9, Financial Instruments: Classification and Measurement PFRS 9, as issued in 2010, reflects the first phase of the work on the replacement of PAS 39 and applies to classification and measurement of financial assets and liabilities as defined in PAS 39. The standard is effective for annual periods beginning on or after January 1, 2013. In subsequent phases, impairment, hedge accounting and derecognition will be addressed. The completion of this project is expected in the middle of 2011. The adoption of the first phase of PFRS 9 will have an effect on the classification and measurement of the Bank’s financial assets and liabilities. The Bank will quantify the effect of the first phase in conjunction with the other phases, when issued, to present a comprehensive picture of the impact of adoption of PFRS 9 on the Bank’s financial position and performance.

Improvements to PFRSs 2010 Improvements to PFRSs is an omnibus of amendments to PFRSs. The amendments have not been adopted as they become effective for annual periods on or after either July 1, 2010 or January 1, 2011. The amendments are listed below:

• PFRS 3, Business Combinations• PFRS 7, Financial Instruments: Disclosures• PAS 1, Presentation of Financial Statements• PAS 27, Consolidated and Separate Financial Statements• Philippine Interpretation IFRIC 13, Customer Loyalty Programmes

Except for the amendments to PFRS 7 which is expected to have limited impact on the disclosure of credit risk, the Bank expects no impact from the adoption of the improvements on its financial position or performance.

3. Significant Accounting Judgments and Estimates

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

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

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

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

Bank as lessorThe Bank has entered into commercial property leases on its investment property portfolio. The Bank has determined that it retains all the significant risks and rewards of ownership of these properties which are leased out on operating leases.

Bank as lesseeThe Bank has entered into lease on premises it uses for its operations. The Bank has determined that all significant risks and rewards of ownerships of the properties it leases on operating lease are not transferrable to the Bank.

b) Fair value of financial instrumentsWhere the fair values of financial assets and financial liabilities recorded in the statement of financial position cannot be derived from active markets, they are determined using a variety of valuation techniques that include the use of mathematical models. The input to these models is taken from observable markets where possible, but where this is not feasible, a degree of judgment is required in establishing fair values.

The carrying values and corresponding fair values of financial assets and financial liabilities as well as the manner in which fair values were determined are discussed in more detail in Note 4.

c) HTM investmentsThe Bank classifies non-derivative financial assets with fixed or determinable payments and fixed maturity as HTM investments. This classification requires significant judgment. In making this judgment, the Bank evaluates its intention and ability to hold such investments to maturity.

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

e) ContingenciesThe Bank is currently involved in various legal proceedings. The estimate of the probable costs for the resolution of these claims has been developed in consultation with outside counsel handling the Bank’s defense in these matters and is based upon an analysis of potential results. The Bank currently does not believe that these proceedings will have a material adverse effect on the financial statements. It is possible, however, that future results of operations could be materially affected by changes in the estimates or in the effectiveness of the strategies relating to these proceedings (Note 23).

f) Functional CurrencyPAS 21 requires management to use its judgment to determine the entity’s functional currency such that it most faithfully represents the economic effects of the underlying transactions, events and conditions that are relevant to the entity. In making this judgment, the Bank considers the following:

a) the currency that mainly influences sales prices for financial instruments and services (this will often be the currency in which sales prices for its financial instruments and services are denominated and settled)

b) the currency in which funds from financing activities are generated; andc) the currency in which receipts from operating activities are usually retained.

Estimatesa) Credit losses on loans and receivables

The Bank reviews its loans and receivables at each reporting date to assess whether an allowance for credit losses should be recorded in the statement of income. In particular, judgment by management is required in the estimation of the amount and timing of future cash flows when determining the level of allowance required. Such estimates are based on assumptions about a number of factors and actual results may differ, resulting in future changes to the allowance.

In addition to specific allowance against individually significant loans and receivables, the Bank also makes a collective impairment allowance against exposures which, although not specifically identified as requiring a specific allowance, have a greater risk of default than when originally granted. This collective allowance is based on any deterioration in the internal rating of the loan or investment since it was granted or acquired. These internal ratings take into consideration factors such as any

deterioration in country risk, industry, and technological obsolescence, as well as identified structural weaknesses or deterioration in cash flows.

The carrying value of loans and receivables and allowance for credit losses on loans and receivables are disclosed in Notes 10 and 16, respectively.

b) Impairment of AFS equity investmentsThe Bank determines that AFS equity investments are impaired when there has been a significant or prolonged decline in the fair value below its cost. The determination of what is ‘significant’ or ‘prolonged’ requires judgment. The Bank treats ‘significant’ generally as 20.00% or more and ‘prolonged’ as greater than 12 months. In addition, the Bank evaluates among other factors, the normal volatility in share price and evidence of deterioration in the financial health of the investee, industry and sector performance, changes in technology, and operational and financing cash flows.

The carrying value of AFS equity investments and related allowance for impairment losses are disclosed in Notes 8 and 16, respectively.

c) Impairment of AFS debt investmentsThe Bank determines that AFS debt investments are impaired based on the same criteria as loans and receivables.

As of December 31, 2010 and 2009, no impairment losses were recognized on AFS debt investments, which comprise of bonds issued by the Philippine Government. The carrying value of AFS debt investments is disclosed in Note 8.

d) Impairment of nonfinancial assets

Investment in an associate, property and equipment and investment properties The Bank assesses impairment on nonfinancial assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The factors that the Bank considers important which could trigger an impairment review include the following:

• significant underperformance relative to expected historical or projected future operating results;

• significant changes in the manner of use of the acquired assets or the strategy for overall business; and

• significant negative industry or economic trends.

The Bank recognizes an impairment loss whenever the carrying amount of an asset exceeds its recoverable amount. The recoverable amount is computed using the value-in-use (VIU) approach for investment in an associate and fair value less cost to sell approach for property and equipment and investment properties. Recoverable amounts are estimated for individual assets or, if it is not possible, for the cash-generating unit to which the asset belongs.

The carrying values of the Bank’s investment in an associate, property and equipment and investment properties are disclosed in Notes 11, 12 and 13, respectively.

Intangible assetsThe Bank’s management conducts an annual review for any impairment in value of its intangible assets. Intangible assets are written down for impairment where the recoverable amount is insufficient to support its carrying value. The carrying value of intangible assets is disclosed in Note 14.

e) Estimated useful lives of property and equipment and investment propertiesThe Bank reviews on an annual basis the estimated useful lives of property and equipment and investment properties based on expected asset utilization as anchored on business plans and strategies that also consider expected future technological developments and market behavior. It is possible that future results of operations could be materially affected by changes in these estimates brought about by changes in the factors mentioned. A reduction in the estimated useful lives of property and equipment and investment property would increase the recorded depreciation expense and decrease noncurrent assets. The estimated useful lives of property and equipment and investment properties are disclosed in Note 2.

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

The Bank has been in a tax loss position over the past several years. The recognized net deferred tax liability and unrecognized deferred tax assets are disclosed in Note 29.

g) Present value of retirement obligationThe cost of defined benefit retirement plan and other post employment benefits is determined using actuarial valuations. The actuarial valuation involves making assumptions about discount rates, expected rates of return on assets, future salary increases, mortality rates and future pension increases. Due to the long term nature of these plans, such estimates are subject to significant uncertainty.

The expected rate of return on plan assets of the Bank was based on the average historical premium of the fund assets. The assumed discount rates were determined using the market yields on Philippine government bonds with terms consistent with the expected employee benefit payout as of statements of condition dates. Refer to Note 26 for the details of assumption used in the calculation.

The present value of the retirement obligation and fair value of plan assets are disclosed in Note 26.

4. Fair Value measurement

The following table presents a comparison by category of carrying amounts and estimated fair values of the Bank’s financial instruments as of December 31, 2010 and 2009, respectively (amounts in thousands):

The methods and assumptions used by the Bank in estimating the fair value of the financial instruments are:

Cash and other cash items, amounts due from BSP and other banks and interbank loans receivable and SPURAThe carrying amounts approximate fair values considering that these accounts consist mostly of overnight deposits and floating rate placements.

Debt securitiesFair values are generally based on quoted market prices. If the market prices are not readily available, fair values are estimated using either values obtained from independent parties offering pricing services or adjusted quoted market prices of comparable investments or using the discounted cash flow methodology.

Quoted equity securitiesFair values are based on quoted prices published in markets.

Unquoted equity securitiesFair values could not be reliably determined due to an unpredictable nature of future cash flows and the lack of suitable methods of carrying at a reliable fair value. These are carried at cost less any allowance for impairment losses.

Receivables from customersFair values of loans and receivables are estimated using the discounted cash flow methodology, using the Bank’s current incremental lending rates for similar types of loans and receivables.

Unquoted debt securities classified as loans For unquoted debt securities with nil coupon interest rates, fair values are estimated based on the discounted cash flow methodology using the interpolated risk-free rate. For unquoted debt securities with floating interest rates, fair values are estimated using discounted cash flow methodology using the prevailing rate of return.

Deposit liabilities Fair values of time deposits are estimated based on the discounted cash flow methodology using the current incremental borrowing rates for similar types of borrowings. The carrying amount of demand and savings deposit liabilities approximate fair value considering that these are due and demandable.

Where no active market price or rate is available, fair values are estimated using present value or other valuation techniques, using inputs based on market data and conditions, and reflect appropriate adjustments that market participants would make for credit and liquidity risks existing at the statement of financial position dates.

Bills payableFair value is estimated using the discounted cash flow methodology using the Bank’s current incremental borrowing rates for similar borrowings with maturities consistent with those remaining for the liability being valued. Where the instrument has a relatively short maturity, the carrying amounts approximate fair values.

2010 2009

Financial assets Derivative assets AFS investments: Government securities Equity securities: Quoted Unquoted

Sub-total

HTM investments Loans and receivables: Cash and other cash items Due from BSP Due from other banks Interbank loans receivable and SPURA Subtotal Receivables from customers: Corporate loans Consumer loans

Subtotal Unquoted debt securities Accrued interest receivable Accounts receivable Sales contracts receivable Subtotal RCOCI Refundable deposits Subtotal

Total financial assets

Financial liabilitiesFinancial liabilities at amortized cost: Deposit liabilities: Demand Savings Time Subtotal Bills payable: PDIC Private firms and individuals Banks and other financial institutions Subtotal Outstanding acceptances Manager’s checks Accrued interest payable Accrued other expenses Other liabilities: Accounts payable Due to the Treasurer of the Philippines Marginal deposits Refundable deposits SubtotalTotal financial liabilities

Fair Value

p1,882

6,348,497

22,81612,26035,076

6,383,5739,678,776

379,6042,439,554

556,5871,149,2824,525,027

7,217,78898,813

7,316,6016,105,771

309,91862,327

112,0886,590,104

13,61715,71429,331

18,461,063p34,525,294

p4,487,8722,375,465

20,744,70227,608,039

p6,623,0621,694,739

285,3448,603,145

53,18234,02071,54067,119

102,58312,217

4,21787,399

432,277p36,643,461

Carrying Value

P

7,191,551

19,75012,26032,010

7,223,5617,794,493

395,6012,082,639

578,3181,790,1124,846,670

6,843,841120,862

6,964,7035,078,379

383,666102,993

79,2455,644,283

7,37614,39421,770

17,477,426P32,495,480

P3,858,1002,270,264

22,434,21128,562,575

P4,860,2041,928,679

584,7897,373,672

40,63441,84987,35253,792

78,28712,489

–86,791

401,194P36,337,441

Fair Value

P

7,191,551

19,75012,26032,010

7,223,5617,633,172

395,6012,082,639

578,3181,790,1124,846,670

7,080,193118,298

7,198,4915,937,247

383,666102,993

79,2456,503,151

7,37614,39421,770

18,570,082P33,426,815

P3,858,1002,270,264

22,499,06928,627,433

P6,140,8741,928,679

584,7898,654,342

40,63441,84987,35253,792

78,28712,489

–86,791

401,194P37,682,969

Carrying Value

p1,882

6,348,497

22,81612,26035,076

6,383,5737,811,130

379,6042,439,554

556,5871,149,2824,525,027

6,986,53995,935

7,082,4745,618,541

309,91862,327

112,0886,102,874

13,61715,71429,331

17,739,706p31,936,291

p4,487,8722,375,465

20,744,31127,607,648

p5,306,0671,694,739

285,3447,286,150

53,18234,02071,54067,119

102,58312,217

4,21787,399

432,277p35,326,075



www.pbcom.com.ph

Events after the Reporting PeriodPost-year-end events that provide additional information about the Bank’s position at the statement of financial position date (adjusting event) are reflected in the financial statements. Post-year-end events that are not adjusting events, if any, are disclosed when material to the financial statements.

Future Changes in accounting policies The Bank will adopt the Standards and Interpretations enumerated below when these become effective. Except as otherwise indicated, the Bank does not expect the adoption of these new and amended PFRS and Philippine Interpretations to have significant impact on its financial statements.

Effective in 2011PAS 24 (Amended), Related Party DisclosuresThe amended standard is effective for annual periods beginning on or after January 1, 2011. It clarified the definition of a related party to simplify the identification of such relationships and to eliminate inconsistencies in its application. The revised standard introduces a partial exemption of disclosure requirements for government-related entities. PAS 32, Financial Instruments: Presentation (Amendment) - Classification of Rights Issues The amendment to PAS 32 is effective for annual periods beginning on or after February 1, 2010 and amended the definition of a financial liability in order to classify rights issues (and certain options or warrants) as equity instruments in cases where such rights are given pro rata to all of the existing owners of the same class of an entity’s non-derivative equity instruments, or to acquire a fixed number of the entity’s own equity instruments for a fixed amount in any currency.

Philippine Interpretation IFRIC 14, Prepayments of a Minimum Funding Requirement (Amendment) The amendment to Philippine Interpretation IFRIC 14 is effective for annual periods beginning on or after January 1, 2011 with retrospective application. The amendment provides guidance on assessing the recoverable amount of a net pension asset. The amendment permits an entity to treat the prepayment of a minimum funding requirement as an asset.

Philippine Interpretation IFRIC 19, Extinguishing Financial Liabilities with Equity Instruments Philippine Interpretation IFRIC 19 is effective for annual periods beginning on or after July 1, 2010. The interpretation clarifies that equity instruments issued to a creditor to extinguish a financial liability qualify as consideration paid. The equity instruments issued are measured at their fair value. In case this cannot be reliably measured, they are measured at the fair value of the liability extinguished. Any gain or loss is recognized immediately in profit or loss.

Effective in 2012PFRS 7, Financial Instruments: Disclosures (Amendments) – Disclosures – Transfers of Financial AssetsThe amendments to PFRS 7 are effective for annual periods beginning on or after July 1, 2011. The amendments will allow users of financial statements to improve their understanding of transfer transactions of financial assets (for example, securitizations), including understanding the possible effects of any risks that may remain with the entity that transferred the assets. The amendments also require additional disclosures if a disproportionate amount of transfer transactions are undertaken around the end of a reporting period.

PAS 12, Income Taxes (Amendment) - Deferred Tax: Recovery of Underlying AssetsThe amendment to PAS 12 is effective for annual periods beginning on or after January 1, 2012. It provides a practical solution to the problem of assessing whether recovery of an asset will be through use or sale. It introduces a presumption that recovery of the carrying amount of an asset will normally be through sale.

Philippine Interpretation IFRIC 15, Agreement for Construction of Real EstateThis Interpretation, effective for annual periods beginning on or after January 1, 2012, covers accounting for revenue and associated expenses by entities that undertake the construction of real estate directly or through subcontractors. The Interpretation requires that revenue on construction of real estate be recognized only upon completion, except when such contract qualifies as construction contract to be accounted for under PAS 11, Construction Contracts, or involves rendering of services in which case revenue is recognized based on stage of completion. Contracts involving provision of services with the construction materials and where the risks and reward of ownership are transferred to the buyer on a continuous basis will also be accounted for based on stage of completion. Effective in 2013PFRS 9, Financial Instruments: Classification and Measurement PFRS 9, as issued in 2010, reflects the first phase of the work on the replacement of PAS 39 and applies to classification and measurement of financial assets and liabilities as defined in PAS 39. The standard is effective for annual periods beginning on or after January 1, 2013. In subsequent phases, impairment, hedge accounting and derecognition will be addressed. The completion of this project is expected in the middle of 2011. The adoption of the first phase of PFRS 9 will have an effect on the classification and measurement of the Bank’s financial assets and liabilities. The Bank will quantify the effect of the first phase in conjunction with the other phases, when issued, to present a comprehensive picture of the impact of adoption of PFRS 9 on the Bank’s financial position and performance.

Improvements to PFRSs 2010 Improvements to PFRSs is an omnibus of amendments to PFRSs. The amendments have not been adopted as they become effective for annual periods on or after either July 1, 2010 or January 1, 2011. The amendments are listed below:

• PFRS 3, Business Combinations• PFRS 7, Financial Instruments: Disclosures• PAS 1, Presentation of Financial Statements• PAS 27, Consolidated and Separate Financial Statements• Philippine Interpretation IFRIC 13, Customer Loyalty Programmes

Except for the amendments to PFRS 7 which is expected to have limited impact on the disclosure of credit risk, the Bank expects no impact from the adoption of the improvements on its financial position or performance.

3. Significant Accounting Judgments and Estimates

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

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

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

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

Bank as lessorThe Bank has entered into commercial property leases on its investment property portfolio. The Bank has determined that it retains all the significant risks and rewards of ownership of these properties which are leased out on operating leases.

Bank as lesseeThe Bank has entered into lease on premises it uses for its operations. The Bank has determined that all significant risks and rewards of ownerships of the properties it leases on operating lease are not transferrable to the Bank.

b) Fair value of financial instrumentsWhere the fair values of financial assets and financial liabilities recorded in the statement of financial position cannot be derived from active markets, they are determined using a variety of valuation techniques that include the use of mathematical models. The input to these models is taken from observable markets where possible, but where this is not feasible, a degree of judgment is required in establishing fair values.

The carrying values and corresponding fair values of financial assets and financial liabilities as well as the manner in which fair values were determined are discussed in more detail in Note 4.

c) HTM investmentsThe Bank classifies non-derivative financial assets with fixed or determinable payments and fixed maturity as HTM investments. This classification requires significant judgment. In making this judgment, the Bank evaluates its intention and ability to hold such investments to maturity.

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

e) ContingenciesThe Bank is currently involved in various legal proceedings. The estimate of the probable costs for the resolution of these claims has been developed in consultation with outside counsel handling the Bank’s defense in these matters and is based upon an analysis of potential results. The Bank currently does not believe that these proceedings will have a material adverse effect on the financial statements. It is possible, however, that future results of operations could be materially affected by changes in the estimates or in the effectiveness of the strategies relating to these proceedings (Note 23).

f) Functional CurrencyPAS 21 requires management to use its judgment to determine the entity’s functional currency such that it most faithfully represents the economic effects of the underlying transactions, events and conditions that are relevant to the entity. In making this judgment, the Bank considers the following:

a) the currency that mainly influences sales prices for financial instruments and services (this will often be the currency in which sales prices for its financial instruments and services are denominated and settled)

b) the currency in which funds from financing activities are generated; andc) the currency in which receipts from operating activities are usually retained.

Estimatesa) Credit losses on loans and receivables

The Bank reviews its loans and receivables at each reporting date to assess whether an allowance for credit losses should be recorded in the statement of income. In particular, judgment by management is required in the estimation of the amount and timing of future cash flows when determining the level of allowance required. Such estimates are based on assumptions about a number of factors and actual results may differ, resulting in future changes to the allowance.

In addition to specific allowance against individually significant loans and receivables, the Bank also makes a collective impairment allowance against exposures which, although not specifically identified as requiring a specific allowance, have a greater risk of default than when originally granted. This collective allowance is based on any deterioration in the internal rating of the loan or investment since it was granted or acquired. These internal ratings take into consideration factors such as any

deterioration in country risk, industry, and technological obsolescence, as well as identified structural weaknesses or deterioration in cash flows.

The carrying value of loans and receivables and allowance for credit losses on loans and receivables are disclosed in Notes 10 and 16, respectively.

b) Impairment of AFS equity investmentsThe Bank determines that AFS equity investments are impaired when there has been a significant or prolonged decline in the fair value below its cost. The determination of what is ‘significant’ or ‘prolonged’ requires judgment. The Bank treats ‘significant’ generally as 20.00% or more and ‘prolonged’ as greater than 12 months. In addition, the Bank evaluates among other factors, the normal volatility in share price and evidence of deterioration in the financial health of the investee, industry and sector performance, changes in technology, and operational and financing cash flows.

The carrying value of AFS equity investments and related allowance for impairment losses are disclosed in Notes 8 and 16, respectively.

c) Impairment of AFS debt investmentsThe Bank determines that AFS debt investments are impaired based on the same criteria as loans and receivables.

As of December 31, 2010 and 2009, no impairment losses were recognized on AFS debt investments, which comprise of bonds issued by the Philippine Government. The carrying value of AFS debt investments is disclosed in Note 8.

d) Impairment of nonfinancial assets

Investment in an associate, property and equipment and investment properties The Bank assesses impairment on nonfinancial assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The factors that the Bank considers important which could trigger an impairment review include the following:

• significant underperformance relative to expected historical or projected future operating results;

• significant changes in the manner of use of the acquired assets or the strategy for overall business; and

• significant negative industry or economic trends.

The Bank recognizes an impairment loss whenever the carrying amount of an asset exceeds its recoverable amount. The recoverable amount is computed using the value-in-use (VIU) approach for investment in an associate and fair value less cost to sell approach for property and equipment and investment properties. Recoverable amounts are estimated for individual assets or, if it is not possible, for the cash-generating unit to which the asset belongs.

The carrying values of the Bank’s investment in an associate, property and equipment and investment properties are disclosed in Notes 11, 12 and 13, respectively.

Intangible assetsThe Bank’s management conducts an annual review for any impairment in value of its intangible assets. Intangible assets are written down for impairment where the recoverable amount is insufficient to support its carrying value. The carrying value of intangible assets is disclosed in Note 14.

e) Estimated useful lives of property and equipment and investment propertiesThe Bank reviews on an annual basis the estimated useful lives of property and equipment and investment properties based on expected asset utilization as anchored on business plans and strategies that also consider expected future technological developments and market behavior. It is possible that future results of operations could be materially affected by changes in these estimates brought about by changes in the factors mentioned. A reduction in the estimated useful lives of property and equipment and investment property would increase the recorded depreciation expense and decrease noncurrent assets. The estimated useful lives of property and equipment and investment properties are disclosed in Note 2.

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

The Bank has been in a tax loss position over the past several years. The recognized net deferred tax liability and unrecognized deferred tax assets are disclosed in Note 29.

g) Present value of retirement obligationThe cost of defined benefit retirement plan and other post employment benefits is determined using actuarial valuations. The actuarial valuation involves making assumptions about discount rates, expected rates of return on assets, future salary increases, mortality rates and future pension increases. Due to the long term nature of these plans, such estimates are subject to significant uncertainty.

The expected rate of return on plan assets of the Bank was based on the average historical premium of the fund assets. The assumed discount rates were determined using the market yields on Philippine government bonds with terms consistent with the expected employee benefit payout as of statements of condition dates. Refer to Note 26 for the details of assumption used in the calculation.

The present value of the retirement obligation and fair value of plan assets are disclosed in Note 26.

4. Fair Value measurement

The following table presents a comparison by category of carrying amounts and estimated fair values of the Bank’s financial instruments as of December 31, 2010 and 2009, respectively (amounts in thousands):

The methods and assumptions used by the Bank in estimating the fair value of the financial instruments are:

Cash and other cash items, amounts due from BSP and other banks and interbank loans receivable and SPURAThe carrying amounts approximate fair values considering that these accounts consist mostly of overnight deposits and floating rate placements.

Debt securitiesFair values are generally based on quoted market prices. If the market prices are not readily available, fair values are estimated using either values obtained from independent parties offering pricing services or adjusted quoted market prices of comparable investments or using the discounted cash flow methodology.

Quoted equity securitiesFair values are based on quoted prices published in markets.

Unquoted equity securitiesFair values could not be reliably determined due to an unpredictable nature of future cash flows and the lack of suitable methods of carrying at a reliable fair value. These are carried at cost less any allowance for impairment losses.

Receivables from customersFair values of loans and receivables are estimated using the discounted cash flow methodology, using the Bank’s current incremental lending rates for similar types of loans and receivables.

Unquoted debt securities classified as loans For unquoted debt securities with nil coupon interest rates, fair values are estimated based on the discounted cash flow methodology using the interpolated risk-free rate. For unquoted debt securities with floating interest rates, fair values are estimated using discounted cash flow methodology using the prevailing rate of return.

Deposit liabilities Fair values of time deposits are estimated based on the discounted cash flow methodology using the current incremental borrowing rates for similar types of borrowings. The carrying amount of demand and savings deposit liabilities approximate fair value considering that these are due and demandable.

Where no active market price or rate is available, fair values are estimated using present value or other valuation techniques, using inputs based on market data and conditions, and reflect appropriate adjustments that market participants would make for credit and liquidity risks existing at the statement of financial position dates.

Bills payableFair value is estimated using the discounted cash flow methodology using the Bank’s current incremental borrowing rates for similar borrowings with maturities consistent with those remaining for the liability being valued. Where the instrument has a relatively short maturity, the carrying amounts approximate fair values.

2010 2009

Financial assets Derivative assets AFS investments: Government securities Equity securities: Quoted Unquoted

Sub-total

HTM investments Loans and receivables: Cash and other cash items Due from BSP Due from other banks Interbank loans receivable and SPURA Subtotal Receivables from customers: Corporate loans Consumer loans

Subtotal Unquoted debt securities Accrued interest receivable Accounts receivable Sales contracts receivable Subtotal RCOCI Refundable deposits Subtotal

Total financial assets

Financial liabilitiesFinancial liabilities at amortized cost: Deposit liabilities: Demand Savings Time Subtotal Bills payable: PDIC Private firms and individuals Banks and other financial institutions Subtotal Outstanding acceptances Manager’s checks Accrued interest payable Accrued other expenses Other liabilities: Accounts payable Due to the Treasurer of the Philippines Marginal deposits Refundable deposits SubtotalTotal financial liabilities

Fair Value

p1,882

6,348,497

22,81612,26035,076

6,383,5739,678,776

379,6042,439,554

556,5871,149,2824,525,027

7,217,78898,813

7,316,6016,105,771

309,91862,327

112,0886,590,104

13,61715,71429,331

18,461,063p34,525,294

p4,487,8722,375,465

20,744,70227,608,039

p6,623,0621,694,739

285,3448,603,145

53,18234,02071,54067,119

102,58312,217

4,21787,399

432,277p36,643,461

Carrying Value

P

7,191,551

19,75012,26032,010

7,223,5617,794,493

395,6012,082,639

578,3181,790,1124,846,670

6,843,841120,862

6,964,7035,078,379

383,666102,993

79,2455,644,283

7,37614,39421,770

17,477,426P32,495,480

P3,858,1002,270,264

22,434,21128,562,575

P4,860,2041,928,679

584,7897,373,672

40,63441,84987,35253,792

78,28712,489

–86,791

401,194P36,337,441

Fair Value

P

7,191,551

19,75012,26032,010

7,223,5617,633,172

395,6012,082,639

578,3181,790,1124,846,670

7,080,193118,298

7,198,4915,937,247

383,666102,993

79,2456,503,151

7,37614,39421,770

18,570,082P33,426,815

P3,858,1002,270,264

22,499,06928,627,433

P6,140,8741,928,679

584,7898,654,342

40,63441,84987,35253,792

78,28712,489

–86,791

401,194P37,682,969

Carrying Value

p1,882

6,348,497

22,81612,26035,076

6,383,5737,811,130

379,6042,439,554

556,5871,149,2824,525,027

6,986,53995,935

7,082,4745,618,541

309,91862,327

112,0886,102,874

13,61715,71429,331

17,739,706p31,936,291

p4,487,8722,375,465

20,744,31127,607,648

p5,306,0671,694,739

285,3447,286,150

53,18234,02071,54067,119

102,58312,217

4,21787,399

432,277p35,326,075



www.pbcom.com.ph

Accrued interest receivable and payable, RCOCI, outstanding acceptances, manager’s checks, accrued other expenses, accounts payable and marginal depositsCarrying amounts approximate fair values due to either the demand nature or relatively short-term maturities.

Accounts receivable, sales contracts receivable, refundable security deposits and due to Treasurer of the PhilippinesQuoted market prices are not readily available for these assets and liabilities. They are not reported at fair value and are not significant in relation to the Bank’s total portfolio of financial instruments.

The Bank uses the following hierarchy for determining and disclosing the fair value of financial instruments by valuation technique:

• Quoted prices in active markets for identical assets or liabilities (Level 1);• Those involving inputs other than quoted prices included in Level 1 that are

observable for the asset or liability, either directly (as prices) or indirectly (derived from prices) (Level 2); and

• Those with inputs for the asset or liability that are not based on observ able market data (unobservable inputs) (Level 3).

As of December 31, 2010 and 2009, the Bank held the following financial instruments measured at fair value based on Level 1 inputs (amounts in thousands):

As of December 31, 2010, derivative assets amounting to P1.88 million are measured at fair value based on Level 2 inputs.

As of December 31, 2010 and 2009, the Bank has no financial instruments carried at fair value which are measured based on Level 3. There were no transfers between levels in 2010 and 2009.

5. Financial Risk management objectives and policies

IntroductionRisk is inherent in the Bank’s activities but is managed through a continuing and pro-active process of identification, measurement and monitoring, subject to risk limits and other controls. This process of risk management is critical to the Bank’s continuing profitability and each individual within the Bank is accountable for the risk exposures relating to his or her responsibilities.

The Bank is exposed to the following risks from its financial instruments:

a. Credit riskb. Liquidity riskc. Market risk i. Interest rate risk ii. Foreign currency risk iii. Equity price risk

Risk management structureThe Bank’s risk management environment is characterized by a well-defined risk organizational structure, flow of risk information, risk-based audit coverage, and an established compliance system.

BODThe BOD is responsible for establishing and maintaining a sound risk management system and is ultimately accountable for identifying and controlling risks; there are, however, separate independent bodies responsible for managing and monitoring risks.

Risk Management Committee (RMC)The RMC has the overall responsibility for the development of the risk strategy and implementing principles, frameworks, policies and limits.

Risk Management Group (RMG)The RMG is an independent unit within the Bank directly reporting to the RMC. It is the responsibility of the group to identify, analyze and measure risks from the Bank’s trading, lending, borrowing and other transactional activities. It also recommends control policies and procedures to mitigate risk in identified risk areas in Treasury, Credit, Trust and other areas of operations.

Risk ControlThe Risk Control function performs the important day-to-day monitoring of risk exposures against approved limits and reporting of such exposures, and implementation of policies and control procedures.

Treasury GroupThe Treasury Group is responsible for managing the Bank’s assets and liabilities. It is also primarily responsible for the funding and liquidity risks of the Bank. Internal Audit Group (IAG)Risk management processes throughout the Bank are audited by the IAG which examines both the adequacy of the procedures and the Bank’s compliance with the procedures. IAG discusses the results of all assessments with management, and reports its findings and recommendations to the Audit Committee.

Risk measurement and reporting systemsThe Bank’s risks are measured using a method which reflects both the expected loss likely to arise in normal circumstances and unexpected losses, which are an estimate of the ultimate actual loss based on statistical models. The models make use of probabilities derived from historical experience, adjusted to reflect the economic environment. The Bank also runs worse case scenarios that would arise in the event that extreme events which are unlikely to occur do, in fact, occur.

Monitoring and controlling risks are primarily performed based on limits established by the Bank. These limits reflect the business strategy and market environment of the Bank as well as the level of risk that the Bank is willing to accept. In addition, the Bank monitors and measures the overall risk bearing capacity in relation to the aggregate risk exposure across all risk types and activities.

Information gathered from all the businesses is evaluated and processed in order to analyze, control and identify risks early. All significant information is presented to the BOD, the RMC, and the head of each business division. The report includes credit exposure to groups and industries, Value-at-Risk (VaR), liquidity ratios and risk profile changes. Senior management assesses the appropriateness of the allowance for credit losses on a semi-annual basis.

Credit Risk and Concentration of Assets and Liabilities and Off-Balance Sheet ItemsCredit risk is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss. The Bank’s credit risk arises from its lending and trading of securities and foreign exchange activities. The Bank manages and controls credit risk by setting limits on the amount of risk it is willing to accept for individual borrowers and groups of borrowers as well as limits on large lines and industry concentrations. The Bank’s RMG monitors exposures in relation to these limits.

Through the Bank’s Credit Analysis Unit under the Office of the Corporate Banking Group Head/Senior Credit Officer, the Bank is able to continually manage credit related risks in its risk asset portfolio through objective assessments/evaluations of credit proposals prior to presentation to the Credit Committee, ensuring the highest standards of credit due diligence and independence.

The Bank obtains security where appropriate, enters into collateral arrangements with counterparties, and limits the duration of exposures. The Bank’s credit risk management process is guided by policies and procedures established by the Credit Policy Committee and approved by the BOD.

The Bank has an internal credit risk rating system (ICRRS) for the purpose of measuring credit risk for every exposure in a consistent manner that is as accurate as possible and use the risk information for business and financial decision making. The system covers companies with asset size of more than P15.00 million and with financial statements audited by SEC accredited auditors starting reporting year 2005. The Bank adopted the Bankers Association of the Philippines model which has been approved by the BSP under BSP Circular No. 439 as a minimum standard for an internal risk rating system. The system has two components, namely: a) Borrower Risk Rating System which provides an assessment of credit risk without considering the security arrangements and b) Facility Risk Factor which is an account rating taking into account the collateral and other credit risk mitigants. The rating scale consists of 10 grades, 6 of which fall under unclassified accounts and 4 classified according to regulatory provisioning guidelines.

The Bank has in place a loan portfolio quality and credit process review that allows the Bank to continuously identify and assess the risks on credit exposures and take corrective actions. This function is carried out by the Bank’s Credit Review Unit under the Credit Policy and Review Group.

Maximum exposure to credit risk before collateral held or other credit enhancementsAn analysis of the maximum exposure to credit risk without taking into account of any collateral held or other credit enhancements is shown below (amounts in thousands):

Risk concentrations of the maximum exposure to credit riskConcentrations arise when a number of counterparties are engaged in similar business activities, or activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic, political or other conditions. Concentrations indicate the relative sensitivity of the Bank’s performance to developments affecting a particular industry. Group exposures and risk concentrations to industries are monitored and reported in accordance with the Bank’s policies on Group lending/inter-corporate earmarking and managing large exposure and credit risk concentrations.

The industry sector analysis of the Bank’s maximum exposure to credit risk follows (amounts in thousands):

Collateral and other credit enhancementsThe amount and type of collateral required depends on an assessment of the credit risk of the counterparty. Guidelines are implemented regarding the acceptability of types of collateral and valuation parameters.

The main types of collateral obtained are as follows:

• securities lending and reverse repurchase transactions: cash or securities• commercial lending: mortgages over real estate properties, machineries, inventory

and trade receivables• retail lending: mortgages over residential properties

It is the Bank’s policy to dispose of repossessed properties in an orderly fashion. The proceeds are used to reduce or repay the outstanding claim. In general, the Bank does not occupy repossessed properties for business use.

Credit quality per class of financial assets

Loans and receivablesDescription of the loan grades or Internal Credit Risk Rating (ICRR) used by the Bank for corporate commercial loans follows:

high Grade (iCRR 1 to 5)Under this category, the borrower has the apparent ability to satisfy its obligations in full and therefore, no loss in ultimate collection is anticipated. These loans or portions thereof are secured by hold-outs on deposits/deposit substitute, margin deposits or government-supported securities, other readily marketable collateral or are supported by sufficient credit and financial information of favorable nature to assure repayment as agreed.

standard Grade (iCRR 6 to 7) Under this category are accounts not considered adversely classified but require close supervision/monitoring due to some warning signals such as start-up business, substantial changes in the business affecting operation or management, three continuous years of substantial decline in income (exclusive of extraordinary income/losses).

substandard Grade (iCRR 8 to 10) Under this category are loans which exhibit unfavorable record or unsatisfactory characteristics, or where existing facts, conditions and values, make collection or liquidation in full improbable. Positive and vigorous management action is required to avert or minimize loss.

Due from other banks, interbank receivables and government securitiesThe Bank follows an internally developed risk rating system for local banks and external risk ratings [i.e. Standard and Poor’s (S&P)] for foreign banks and government securities. A description of the rating systems follows (local banks):

high Grade (tier 1)Tier 1 - Banks categorized under this tier are capable of withstanding very difficult market conditions for 2-3 years without deteriorating to a substandard credit classification by virtue of their size, reputation and ranking in the industry.

standard Grade (tier 2 to tier 3)These are accounts that have potential weaknesses that deserve management’s close attention. These potential weaknesses, if left uncorrected, may affect the repayment of the financial instrument thus increase credit risk to the Bank.

Tier 2 - Banks categorized under this tier may deteriorate to substandard within 1-2 years under very difficult market conditions.

Tier 3 - Banks categorized under this tier may deteriorate to substandard within one year under very difficult market conditions. These are banks, which fall short relative to size, in view of perceived concern of uncertainty about their portfolio, earnings, or market condition. Banks with total net worth of P3.00 billion to less than P4.50 billion and net income of P200.00 million to less than P400.00 million

are included in this category.

substandard Grade (tier 4) Tier 4 - Banks categorized under this tier may deteriorate to substandard within one year under very difficult market conditions. These are banks, which fall short relative to size, in view of perceived concern of uncertainty about their portfolio, earnings, or market condition. Banks with total net worth of P1.50 billion to less than P3.00 billion and net income of P70.00 million to less than P200.00 million are included in this category.

Foreign banks and other government securitiesThe following is the credit rating scale applicable for foreign banks, government, and corporate investment outlets (aligned with S&P ratings):

AAA - Obligor's capacity to meet its financial commitment is extremely strong.

AA - Obligor's capacity to meet its financial commitment is very strong. It differs from the highest-rated obligors at a minimal degree.

A - Obligor has strong capacity to meet its financial commitments but is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligors rated in higher-rated categories.

BBB and below:

BBB - Obligation rated has adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.

BB - Obligation is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions which could lead to the obligor's inadequate capacity to meet its financial commitment on the obligation.

B - Obligation rated is more vulnerable to nonpayment than obligations rated ‘BB’, but the obligor currently has the capacity to meet its financial commitment on the obligation. Adverse business, financial, or economic conditions will likely impair the obligor's capacity or willingness to meet its financial commitment on the obligation.

CCC - Obligation is currently vulnerable to nonpayment, and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation. In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation.

CC - Obligation is currently highly vulnerable to nonpayment.

C - Obligations are currently highly vulnerable to nonpayment, payment arrearages allowed by the terms of the documents, and subject of a bankruptcy petition or similar action which have not experienced a payment default. Among others, the ‘C’ rating may be assigned to subordinated debt, preferred stock or other obligations on which cash payments have been suspended in accordance with the instrument’s terms or when preferred stock is the subject of a distressed exchange offer, whereby some or all of the issue is either repurchased for an amount of cash or replaced by other instruments having a total value that is less than par.

D - Obligation is in payment default. Payments on an obligation are not made on the date due even if the applicable grace period has not expired. The ‘D’ rating also will be used upon the filing of a bankruptcy petition or the taking of similar action if payments on an obligation are jeopardized. An obligation's rating is lowered to ‘D’ upon completion of a distressed exchange offer, whereby some or all of the issue is either repurchased for an amount of cash or replaced by other instruments having a total value that is less than par.

The table below shows the credit quality by class of financial assets (at gross amount but net of unearned discounts) based on the Bank’s credit rating system (amounts in thousands).

AFS investments: Government securities Quoted equity securities

2009

P7,191,55119,750

P7,211,301

2010

p6,348,49722,816

p6,371,313

on-balance sheet itemsDerivative assetAFS Investments: Government securities Equity securities: Quoted Unquoted Sub-total

HTM InvestmentsLoans and receivables: Due from BSP Due from other banks Interbank loans receivable and SPURA Sub-total Receivables from customers: Corporate loans Consumer loans Sub-total Unquoted debt securities Accrued interest receivable Accounts receivable Sales contracts receivable Sub-total RCOCI Refundable deposits Sub-total

off-balance sheet itemsUnused commercial letters of credit (LC): Standby LC Sight import LC outstanding Domestic LC outstanding Usance import LC outstanding Sub-totalOutstanding shipping guaranteesUnused loan commitments

2010

p1,882

6,348,497

22,81612,26035,076

6,383,5737,811,130

2,439,554556,587

1,149,2824,145,423

6,986,53995,935

7,082,4745,618,541

309,91862,327

112,0886,102,874

13,61715,71429,331

17,360,10231,556,687

398,342146,745

98,36113,987

657,43545,945

1,00046,945

p32,261,067

2009

P–

7,191,551

19,75012,26032,010

7,223,5617,794,493

2,082,639578,318

1,790,1124,451,069

6,843,841120,862

6,964,7035,078,379

383,666102,993

79,2455,644,283

7,37614,39421,770

17,081,82532,099,879

335,374331,142188,516

19,217874,249

44,1354,000

48,135P33,022,263

December 31, 2010

GovernmentWholesale and retail tradeManufacturingTransportation, storage,

communicationConstruction and real estateBanks and financial institutionsOthers

Less allowance for credit and impairment losses

loans and receivablesp4,331,111

3,594,2522,983,436

2,379,397903,338296,449

1,373,21915,861,202

2,675,854p13,185,348

loans and advances to

banks*p2,439,554

––

––

1,705,869–

4,145,423

–p4,145,423

investmentsecurities**p14,159,627

––

––

20,24622,816

14,202,689

6,104p14,196,585

others***p–

523,000153,076

––

13,61744,018

733,711

–p733,711

totalp20,930,292

4,117,2523,136,512

2,379,397903,338

2,036,1811,440,053

34,943,025

2,681,958p32,261,067

* ** ***

Consist of due from BSP, due from other banks, and interbank loans receivable and SPURAConsist of derivative assets, AFS and HTM investmentsConsist of RCOCI, refundable deposits and commitments and contingencies

December 31, 2009

GovernmentWholesale and retail tradeManufacturingBanks and financial institutionsConstruction and real estateTransportation, storage,

communicationOthers

Less allowance for credit andimpairment losses

Loans and

receivablesP4,087,998

3,257,3203,013,212

196,8731,012,310

2,317,3171,223,488

15,108,518

2,499,532P12,608,986

Loans and advances to

banks*P2,682,639

––

1,768,430–

––

4,451,069

–P4,451,069

Investmentsecurities**

P14,986,044––

18,261–

–19,750

15,024,055

6,001P15,018,054

Others***P–

526,486295,785

7,37684,720

–29,787

944,154

–P944,154

TotalP21,756,681

3,783,8063,308,9971,990,9401,097,030

2,317,3171,273,025

35,527,796

2,505,533P33,022,263

* ** ***


December 31, 2010 Neither past Due nor impaired

Due from BSPDue from other banks

AFS investments: Equity securities Quoted Unquoted

Loans and receivables: Receivables from customers: Corporate Consumer Unquoted debt securities Accrued interest receivable Accounts receivable Sales contracts receivable RCOCI Refundable security deposits

Total*Financial instruments that are not rated (includes due from BSP, SPURA and equity securities)

high Grade

p–83,49783,497

–––

5,148,09989,566

163,000304,739

12,21893,14613,617

–5,824,385

p5,907,882

standard Grade

p–100,459100,459

–––

1,482,744517

–3,7996,275

–––

1,493,335p1,593,794

sub-standard

Gradep–

4,6374,637

–––

353,827352

–1,380

28,414–––

383,973p388,610

unrated*p2,439,554

–2,439,554

22,81611,30734,123

––

5,455,541––––

15,7145,471,255

p7,944,932

past Duebut Not

impairedp–

––

–––

93,7659,266

–––

18,942––

121,973p121,973

past Due and

impaired p–

––

–7,0577,057

1,459,394235,708

–503,741396,769

–––

2,595,612p2,602,669

totalp2,439,554

188,5932,628,147

22,81618,36441,180

8,537,829335,409

5,618,541813,659443,676112,08813,61715,714

15,890,533p18,559,860

Due from other banksInterbank loans receivableDerivative assetAFS investments Government securitiesHTM investments Government securities

aap367,994

688,962–

–

–p1,056,956

ap–

460,3201,882

–

–p462,202

bbb and belowp–

––

6,348,497

7,811,130p14,159,627

totalp367,9941,149,282

1,882

6,348,497

7,811,130p15,678,785



www.pbcom.com.ph

Accrued interest receivable and payable, RCOCI, outstanding acceptances, manager’s checks, accrued other expenses, accounts payable and marginal depositsCarrying amounts approximate fair values due to either the demand nature or relatively short-term maturities.

Accounts receivable, sales contracts receivable, refundable security deposits and due to Treasurer of the PhilippinesQuoted market prices are not readily available for these assets and liabilities. They are not reported at fair value and are not significant in relation to the Bank’s total portfolio of financial instruments.

The Bank uses the following hierarchy for determining and disclosing the fair value of financial instruments by valuation technique:

• Quoted prices in active markets for identical assets or liabilities (Level 1);• Those involving inputs other than quoted prices included in Level 1 that are

observable for the asset or liability, either directly (as prices) or indirectly (derived from prices) (Level 2); and

• Those with inputs for the asset or liability that are not based on observ able market data (unobservable inputs) (Level 3).

As of December 31, 2010 and 2009, the Bank held the following financial instruments measured at fair value based on Level 1 inputs (amounts in thousands):

As of December 31, 2010, derivative assets amounting to P1.88 million are measured at fair value based on Level 2 inputs.

As of December 31, 2010 and 2009, the Bank has no financial instruments carried at fair value which are measured based on Level 3. There were no transfers between levels in 2010 and 2009.

5. Financial Risk management objectives and policies

IntroductionRisk is inherent in the Bank’s activities but is managed through a continuing and pro-active process of identification, measurement and monitoring, subject to risk limits and other controls. This process of risk management is critical to the Bank’s continuing profitability and each individual within the Bank is accountable for the risk exposures relating to his or her responsibilities.

The Bank is exposed to the following risks from its financial instruments:

a. Credit riskb. Liquidity riskc. Market risk i. Interest rate risk ii. Foreign currency risk iii. Equity price risk

Risk management structureThe Bank’s risk management environment is characterized by a well-defined risk organizational structure, flow of risk information, risk-based audit coverage, and an established compliance system.

BODThe BOD is responsible for establishing and maintaining a sound risk management system and is ultimately accountable for identifying and controlling risks; there are, however, separate independent bodies responsible for managing and monitoring risks.

Risk Management Committee (RMC)The RMC has the overall responsibility for the development of the risk strategy and implementing principles, frameworks, policies and limits.

Risk Management Group (RMG)The RMG is an independent unit within the Bank directly reporting to the RMC. It is the responsibility of the group to identify, analyze and measure risks from the Bank’s trading, lending, borrowing and other transactional activities. It also recommends control policies and procedures to mitigate risk in identified risk areas in Treasury, Credit, Trust and other areas of operations.

Risk ControlThe Risk Control function performs the important day-to-day monitoring of risk exposures against approved limits and reporting of such exposures, and implementation of policies and control procedures.

Treasury GroupThe Treasury Group is responsible for managing the Bank’s assets and liabilities. It is also primarily responsible for the funding and liquidity risks of the Bank. Internal Audit Group (IAG)Risk management processes throughout the Bank are audited by the IAG which examines both the adequacy of the procedures and the Bank’s compliance with the procedures. IAG discusses the results of all assessments with management, and reports its findings and recommendations to the Audit Committee.

Risk measurement and reporting systemsThe Bank’s risks are measured using a method which reflects both the expected loss likely to arise in normal circumstances and unexpected losses, which are an estimate of the ultimate actual loss based on statistical models. The models make use of probabilities derived from historical experience, adjusted to reflect the economic environment. The Bank also runs worse case scenarios that would arise in the event that extreme events which are unlikely to occur do, in fact, occur.

Monitoring and controlling risks are primarily performed based on limits established by the Bank. These limits reflect the business strategy and market environment of the Bank as well as the level of risk that the Bank is willing to accept. In addition, the Bank monitors and measures the overall risk bearing capacity in relation to the aggregate risk exposure across all risk types and activities.

Information gathered from all the businesses is evaluated and processed in order to analyze, control and identify risks early. All significant information is presented to the BOD, the RMC, and the head of each business division. The report includes credit exposure to groups and industries, Value-at-Risk (VaR), liquidity ratios and risk profile changes. Senior management assesses the appropriateness of the allowance for credit losses on a semi-annual basis.

Credit Risk and Concentration of Assets and Liabilities and Off-Balance Sheet ItemsCredit risk is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss. The Bank’s credit risk arises from its lending and trading of securities and foreign exchange activities. The Bank manages and controls credit risk by setting limits on the amount of risk it is willing to accept for individual borrowers and groups of borrowers as well as limits on large lines and industry concentrations. The Bank’s RMG monitors exposures in relation to these limits.

Through the Bank’s Credit Analysis Unit under the Office of the Corporate Banking Group Head/Senior Credit Officer, the Bank is able to continually manage credit related risks in its risk asset portfolio through objective assessments/evaluations of credit proposals prior to presentation to the Credit Committee, ensuring the highest standards of credit due diligence and independence.

The Bank obtains security where appropriate, enters into collateral arrangements with counterparties, and limits the duration of exposures. The Bank’s credit risk management process is guided by policies and procedures established by the Credit Policy Committee and approved by the BOD.

The Bank has an internal credit risk rating system (ICRRS) for the purpose of measuring credit risk for every exposure in a consistent manner that is as accurate as possible and use the risk information for business and financial decision making. The system covers companies with asset size of more than P15.00 million and with financial statements audited by SEC accredited auditors starting reporting year 2005. The Bank adopted the Bankers Association of the Philippines model which has been approved by the BSP under BSP Circular No. 439 as a minimum standard for an internal risk rating system. The system has two components, namely: a) Borrower Risk Rating System which provides an assessment of credit risk without considering the security arrangements and b) Facility Risk Factor which is an account rating taking into account the collateral and other credit risk mitigants. The rating scale consists of 10 grades, 6 of which fall under unclassified accounts and 4 classified according to regulatory provisioning guidelines.

The Bank has in place a loan portfolio quality and credit process review that allows the Bank to continuously identify and assess the risks on credit exposures and take corrective actions. This function is carried out by the Bank’s Credit Review Unit under the Credit Policy and Review Group.

Maximum exposure to credit risk before collateral held or other credit enhancementsAn analysis of the maximum exposure to credit risk without taking into account of any collateral held or other credit enhancements is shown below (amounts in thousands):

Risk concentrations of the maximum exposure to credit riskConcentrations arise when a number of counterparties are engaged in similar business activities, or activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic, political or other conditions. Concentrations indicate the relative sensitivity of the Bank’s performance to developments affecting a particular industry. Group exposures and risk concentrations to industries are monitored and reported in accordance with the Bank’s policies on Group lending/inter-corporate earmarking and managing large exposure and credit risk concentrations.

The industry sector analysis of the Bank’s maximum exposure to credit risk follows (amounts in thousands):

Collateral and other credit enhancementsThe amount and type of collateral required depends on an assessment of the credit risk of the counterparty. Guidelines are implemented regarding the acceptability of types of collateral and valuation parameters.

The main types of collateral obtained are as follows:

• securities lending and reverse repurchase transactions: cash or securities• commercial lending: mortgages over real estate properties, machineries, inventory

and trade receivables• retail lending: mortgages over residential properties

It is the Bank’s policy to dispose of repossessed properties in an orderly fashion. The proceeds are used to reduce or repay the outstanding claim. In general, the Bank does not occupy repossessed properties for business use.

Credit quality per class of financial assets

Loans and receivablesDescription of the loan grades or Internal Credit Risk Rating (ICRR) used by the Bank for corporate commercial loans follows:

high Grade (iCRR 1 to 5)Under this category, the borrower has the apparent ability to satisfy its obligations in full and therefore, no loss in ultimate collection is anticipated. These loans or portions thereof are secured by hold-outs on deposits/deposit substitute, margin deposits or government-supported securities, other readily marketable collateral or are supported by sufficient credit and financial information of favorable nature to assure repayment as agreed.

standard Grade (iCRR 6 to 7) Under this category are accounts not considered adversely classified but require close supervision/monitoring due to some warning signals such as start-up business, substantial changes in the business affecting operation or management, three continuous years of substantial decline in income (exclusive of extraordinary income/losses).

substandard Grade (iCRR 8 to 10) Under this category are loans which exhibit unfavorable record or unsatisfactory characteristics, or where existing facts, conditions and values, make collection or liquidation in full improbable. Positive and vigorous management action is required to avert or minimize loss.

Due from other banks, interbank receivables and government securitiesThe Bank follows an internally developed risk rating system for local banks and external risk ratings [i.e. Standard and Poor’s (S&P)] for foreign banks and government securities. A description of the rating systems follows (local banks):

high Grade (tier 1)Tier 1 - Banks categorized under this tier are capable of withstanding very difficult market conditions for 2-3 years without deteriorating to a substandard credit classification by virtue of their size, reputation and ranking in the industry.

standard Grade (tier 2 to tier 3)These are accounts that have potential weaknesses that deserve management’s close attention. These potential weaknesses, if left uncorrected, may affect the repayment of the financial instrument thus increase credit risk to the Bank.

Tier 2 - Banks categorized under this tier may deteriorate to substandard within 1-2 years under very difficult market conditions.

Tier 3 - Banks categorized under this tier may deteriorate to substandard within one year under very difficult market conditions. These are banks, which fall short relative to size, in view of perceived concern of uncertainty about their portfolio, earnings, or market condition. Banks with total net worth of P3.00 billion to less than P4.50 billion and net income of P200.00 million to less than P400.00 million

are included in this category.

substandard Grade (tier 4) Tier 4 - Banks categorized under this tier may deteriorate to substandard within one year under very difficult market conditions. These are banks, which fall short relative to size, in view of perceived concern of uncertainty about their portfolio, earnings, or market condition. Banks with total net worth of P1.50 billion to less than P3.00 billion and net income of P70.00 million to less than P200.00 million are included in this category.

Foreign banks and other government securitiesThe following is the credit rating scale applicable for foreign banks, government, and corporate investment outlets (aligned with S&P ratings):

AAA - Obligor's capacity to meet its financial commitment is extremely strong.

AA - Obligor's capacity to meet its financial commitment is very strong. It differs from the highest-rated obligors at a minimal degree.

A - Obligor has strong capacity to meet its financial commitments but is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligors rated in higher-rated categories.

BBB and below:

BBB - Obligation rated has adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.

BB - Obligation is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions which could lead to the obligor's inadequate capacity to meet its financial commitment on the obligation.

B - Obligation rated is more vulnerable to nonpayment than obligations rated ‘BB’, but the obligor currently has the capacity to meet its financial commitment on the obligation. Adverse business, financial, or economic conditions will likely impair the obligor's capacity or willingness to meet its financial commitment on the obligation.

CCC - Obligation is currently vulnerable to nonpayment, and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation. In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation.

CC - Obligation is currently highly vulnerable to nonpayment.

C - Obligations are currently highly vulnerable to nonpayment, payment arrearages allowed by the terms of the documents, and subject of a bankruptcy petition or similar action which have not experienced a payment default. Among others, the ‘C’ rating may be assigned to subordinated debt, preferred stock or other obligations on which cash payments have been suspended in accordance with the instrument’s terms or when preferred stock is the subject of a distressed exchange offer, whereby some or all of the issue is either repurchased for an amount of cash or replaced by other instruments having a total value that is less than par.

D - Obligation is in payment default. Payments on an obligation are not made on the date due even if the applicable grace period has not expired. The ‘D’ rating also will be used upon the filing of a bankruptcy petition or the taking of similar action if payments on an obligation are jeopardized. An obligation's rating is lowered to ‘D’ upon completion of a distressed exchange offer, whereby some or all of the issue is either repurchased for an amount of cash or replaced by other instruments having a total value that is less than par.

The table below shows the credit quality by class of financial assets (at gross amount but net of unearned discounts) based on the Bank’s credit rating system (amounts in thousands).

AFS investments: Government securities Quoted equity securities

2009

P7,191,55119,750

P7,211,301

2010

p6,348,49722,816

p6,371,313

on-balance sheet itemsDerivative assetAFS Investments: Government securities Equity securities: Quoted Unquoted Sub-total

HTM InvestmentsLoans and receivables: Due from BSP Due from other banks Interbank loans receivable and SPURA Sub-total Receivables from customers: Corporate loans Consumer loans Sub-total Unquoted debt securities Accrued interest receivable Accounts receivable Sales contracts receivable Sub-total RCOCI Refundable deposits Sub-total

off-balance sheet itemsUnused commercial letters of credit (LC): Standby LC Sight import LC outstanding Domestic LC outstanding Usance import LC outstanding Sub-totalOutstanding shipping guaranteesUnused loan commitments

2010

p1,882

6,348,497

22,81612,26035,076

6,383,5737,811,130

2,439,554556,587

1,149,2824,145,423

6,986,53995,935

7,082,4745,618,541

309,91862,327

112,0886,102,874

13,61715,71429,331

17,360,10231,556,687

398,342146,745

98,36113,987

657,43545,945

1,00046,945

p32,261,067

2009

P–

7,191,551

19,75012,26032,010

7,223,5617,794,493

2,082,639578,318

1,790,1124,451,069

6,843,841120,862

6,964,7035,078,379

383,666102,993

79,2455,644,283

7,37614,39421,770

17,081,82532,099,879

335,374331,142188,516

19,217874,249

44,1354,000

48,135P33,022,263

December 31, 2010

GovernmentWholesale and retail tradeManufacturingTransportation, storage,

communicationConstruction and real estateBanks and financial institutionsOthers

Less allowance for credit and impairment losses

loans and receivablesp4,331,111

3,594,2522,983,436

2,379,397903,338296,449

1,373,21915,861,202

2,675,854p13,185,348

loans and advances to

banks*p2,439,554

––

––

1,705,869–

4,145,423

–p4,145,423

investmentsecurities**p14,159,627

––

––

20,24622,816

14,202,689

6,104p14,196,585

others***p–

523,000153,076

––

13,61744,018

733,711

–p733,711

totalp20,930,292

4,117,2523,136,512

2,379,397903,338

2,036,1811,440,053

34,943,025

2,681,958p32,261,067

* ** ***


December 31, 2009

GovernmentWholesale and retail tradeManufacturingBanks and financial institutionsConstruction and real estateTransportation, storage,

communicationOthers

Less allowance for credit andimpairment losses

Loans and

receivablesP4,087,998

3,257,3203,013,212

196,8731,012,310

2,317,3171,223,488

15,108,518

2,499,532P12,608,986

Loans and advances to

banks*P2,682,639

––

1,768,430–

––

4,451,069

–P4,451,069

Investmentsecurities**

P14,986,044––

18,261–

–19,750

15,024,055

6,001P15,018,054

Others***P–

526,486295,785

7,37684,720

–29,787

944,154

–P944,154

TotalP21,756,681

3,783,8063,308,9971,990,9401,097,030

2,317,3171,273,025

35,527,796

2,505,533P33,022,263

* ** ***


December 31, 2010 Neither past Due nor impaired

Due from BSPDue from other banks




high Grade

p–83,49783,497

–––

5,148,09989,566

163,000304,739

12,21893,14613,617

–5,824,385

p5,907,882

standard Grade

p–100,459100,459

–––

1,482,744517

–3,7996,275

–––

1,493,335p1,593,794

sub-standard

Gradep–

4,6374,637

–––

353,827352

–1,380

28,414–––

383,973p388,610

unrated*p2,439,554

–2,439,554

22,81611,30734,123

––

5,455,541––––

15,7145,471,255

p7,944,932

past Duebut Not

impairedp–

––

–––

93,7659,266

–––

18,942––

121,973p121,973

past Due and

impaired p–

––

–7,0577,057

1,459,394235,708

–503,741396,769

–––

2,595,612p2,602,669

totalp2,439,554

188,5932,628,147

22,81618,36441,180

8,537,829335,409

5,618,541813,659443,676112,08813,61715,714

15,890,533p18,559,860

Due from other banksInterbank loans receivableDerivative assetAFS investments Government securitiesHTM investments Government securities

aap367,994

688,962–

–

–p1,056,956

ap–

460,3201,882

–

–p462,202

bbb and belowp–

––

6,348,497

7,811,130p14,159,627

totalp367,9941,149,282

1,882

6,348,497

7,811,130p15,678,785



www.pbcom.com.ph

As of December 31, 2010 and 2009, restructured loans by the Bank which are neither past due nor impaired are as follows:

Impaired loans and receivables and investment securitiesImpaired loans and receivables and investment securities are those for which the Bank determines that it is probable that it will be unable to collect all principal and interest due based on the contractual terms of the promissory note and securities agreements.

Past due but not impaired loans and receivables and investment securitiesThese represent loans and receivables and investment securities where contractual interest or principal payments are past due but the Bank believes that impairment is not appropriate on the basis of the level of collateral available and/or status of collection of amounts owed to the Bank.

The Bank holds collateral against loans and receivables in the form of real estate and chattel mortgages, guarantees, and other registered securities over assets. Estimates of fair value are based on the value of collateral assessed at the time of borrowing and generally are not updated except when a loan is assessed to be impaired. Generally, collateral is not held over loans and advances to banks except for reverse repurchase agreements. The Bank is not allowed to sell or pledge collateral held for reverse repurchase agreements. Collateral usually is not held against investment securities, and no such collateral was held as of December 31, 2010 and 2009. The following table shows the fair value of collateral held against past due and/or impaired loans and receivables as of December 31, 2010 and 2009 (amounts in thousands):

Aging analysis of past due but not impaired loans per class of financial assetsAging analyses of past due but not impaired financial assets are shown below (amounts in thousands):

Liquidity Risk and Funding ManagementLiquidity risk is the risk that the Bank will be unable to meet its payment obligations when they fall due under normal and stress circumstances. To limit this risk, management has arranged diversified funding sources in addition to its core deposit base, manages assets with liquidity in mind, and monitors future cash flows and liquidity on a daily basis. This incorporates an assessment of expected cash flows and the availability of high grade collateral which could be used to secure additional funding if required. In addition, the Bank makes use of a monthly system generated Liquidity Gap Report in analyzing its liquidity position where the difference between the Bank’s maturing assets and liabilities is captured. A Maximum Cumulative Outflow limit is likewise established to control the liquidity gap for each currency. The Asset and Liability Committee meets weekly to discuss among others the liquidity state of the Bank.

The Bank maintains a portfolio of highly marketable and diverse assets that can be easily liquidated in the event of an unforeseen interruption of cash flow. The Bank also has committed lines of credit that it can access to meet liquidity needs. In addition, the Bank maintains a statutory deposit with the BSP equal to 8.00% of customer deposits. The liquidity position is assessed and managed under a variety of scenarios, giving due consideration to stress factors relating to both the market in general and specifically to the Bank. The most important of these is to maintain limits on the ratio of liquid assets to deposit liabilities, set to reflect market conditions. Liquid assets consists of cash and cash equivalents, due from other banks, due from BSP, interbank call loans receivables and AFS investments.

Analysis of financial instruments by remaining contractual maturitiesThe tables below summarize the maturity profile of the Bank’s financial instruments as of December 31, 2010 and 2009 based on undiscounted contractual payments. Repayments which are subject to notice are treated as if notice were to be given immediately. However, the Bank expects that many customers will not request repayment on the earliest date the Bank could be required to pay and the table does not reflect the expected cash flows indicated by the Bank’s deposit retention history (amounts in millions).

The table below shows the contractual expiry by maturity of the Bank’s commitments and contingent liabilities as of December 31, 2010 and 2009 (amounts in thousands):

Market Risk ManagementMarket 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, foreign currency exchange rates, commodity prices, equity prices and other market changes. The Bank’s market risk originates from its holdings of foreign exchange instruments, debt securities and derivatives.

VaRThe VaR method is a procedure for estimating the probability of portfolio losses exceeding some specified proportion based on a statistical analysis of historical market price trends, correlations and volatilities. VaR estimates the potential decline in the value of a portfolio, under normal market conditions, for a given “confidence level” over a specified time horizon.

VaR is used to alert senior management whenever the potential for losses in the Bank’s portfolios exceeds the VaR limit. This allows management to react quickly and adjust its portfolio strategies in different market conditions in accordance with the Bank’s risk philosophy and appetite.

In 2002, the Bank commenced using Bloomberg’s Parametric VaR (PVaR) module in its VaR computation. Bloomberg’s PVaR is run on a Parametric VaR model whose data set contains 1 year of historical prices and a daily update of its variance/covariance matrix. In accordance with BSP standards, the Bank uses a 99.00% confidence level and a 10-day defeasance period. This means, that statistically, the Bank’s losses on trading operations will exceed VaR on at least 1 out of 100 trading business days.

The Treasury Risk Control Officer runs VaR on a daily basis, monitors the VaR against the Board approved VaR limit and submits Daily VaR Reports to concerned division/group/segment heads.

To verify the validity of the VaR model used, the Treasury Risk Manager through its quarterly back testing procedure examines how frequently actual daily losses exceeds the daily VaR. Backtesting results are reviewed by the Chief Risk Officer. Exceptions, if any, are reported to the RMC and the BOD. There was no recorded breach in the VaR limit in 2010 and only one recorded breach in the VaR limit during 2009 (due to high market volatility). Since VaR is designed to describe risk in normal market conditions (i.e. 99.00% of the time), “outliers” or events that occur in the tail of normal curve and those extreme movements in the past are no longer captured in the historical data window. Stress testing is done to address extreme market conditions.

Stress testing The Bank likewise performs stress testing on its FX trading position and on its AFS investment portfolios. Stress testing is a technique used to determine the impact on earnings of above position/portfolios from conditions or scenarios deemed “extreme” but plausible. Stress testing is used to inform senior management as to where vulnerabilities in the Bank’s portfolio actually lie. It helps them evaluate the Bank’s tolerance for risks and understand the combinations of risks that can produce large losses.

Unlike VaR, which reflects price behavior in everyday markets, stress tests simulate portfolio performance during abnormal market periods. Accordingly, they provide information about risks falling outside those typically captured by the VaR framework. Hence, losses resulting from stress tests are larger than the losses predicted by the VaR model.

The Bank’s Treasury Risk Manager performs the stress testing of traded securities using the scenario and sensitivity tests, anchored on historical and hypothetical events. The stress testing is conducted quarterly and its results reported to the RMC and BOD. Interest Rate Risk ManagementInterest rate risk arises from the possibility that changes in the interest rates will affect future cash flows or the fair value of financial instruments. The Bank follows a prudent policy on managing its assets and liabilities so as to ensure that the exposure to fluctuations in interest rates is kept within acceptable limits.

A substantial proportion of the total loan portfolio is for a term of less than one year, and the majority of the balance of its medium-term portfolio is on a floating-rate basis. As of December 31, 2010 and 2009, 87.72% and 82.11%, respectively, of the Bank’s total loan portfolio comprised of floating rate loans which are repriced periodically by reference to the transfer pool rate which reflects the Bank’s internal cost of funds. As a result of these factors, the Bank’s exposure to interest rate fluctuations, and other market risks, is significantly reduced.

The Bank, in keeping with banking industry practice, aims to achieve stability and lengthen the term structure of its deposit base, while providing adequate liquidity to cover transactional banking requirements of customers. No interest is paid on demand accounts, which as of December 31, 2010 and 2009 accounted for 16.26% and 13.51%, respectively, of total deposits, except for a demand account product which pays a rate of interest equal to that payable on regular savings accounts of the Bank. Rates on savings accounts and time deposit accounts, which constituted 8.60% and 75.14%, respectively, of total deposits as of December 31, 2010 and 7.95% and 78.54%, respectively, of total deposits as of December 31, 2009 are set by different criteria. Savings account rates are set by reference to prevailing market rates, while rates on time deposits and special savings accounts are usually priced by reference to rates applicable to prevailing rates on Philippine Treasury Bills and other money market instruments or, in the case of foreign currency deposits, Singapore Interbank Offer Rate and other benchmark dollar deposit rates in the Asian and international money markets with similar maturities.

The following table provides for the average EIR by period of maturity or repricing of the Bank as of December 31, 2010 and 2009:

The method by which the Bank measures the sensitivity of its assets and liabilities to interest rate fluctuations is by way of interest rates on the accrual portfolio i.e. the risk exposure of future accounting income. The repricing gap is calculated by distributing the statement of financial position into tenor buckets according to the time remaining to maturity or next repricing date and then obtaining the difference between the total of the repricing (interest sensitive) assets and repricing (interest sensitive) liabilities.

A gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. Accordingly, during a period of rising interest rates, a bank with a positive gap would be better positioned than one with a negative gap to invest in or hold higher yielding assets more quickly than it would need to refinance its interest-bearing liabilities. During a period of falling interest rates, a bank with a positive gap would tend to see its assets repricing at a faster rate than one with a negative gap, which may restrain the growth of its net income or result in a decline in net interest income.

The following tables set forth the asset-liability gap position of the Bank as of December 31, 2010 and 2009 (amounts in millions):

December 31, 2009 Neither Past Due nor Impaired

Due from BSPDue from other banksInterbank loans receivable and SPURA




High Grade

P–121,415

–121,415

–––

4,726,40294,500

–374,535

16,28842,691

7,376–

5,261,792P5,383,207

Standard Grade

P–25,898

–25,898

–––

1,464,6423,623

–4,8224,630

–––

1,477,717P1,503,615

Sub-standard

GradeP–

36,954

–36,954

–––

959,4681,845

–4,309

82,075–––

1,047,697P1,084,651

Unrated*P2,082,639

–

600,0002,682,639

19,75012,26032,010

––

5,078,379––––

14,3945,092,773

P7,807,422

Past Duebut Not

ImpairedP–

–

––

–––

244,16321,933

–––

25,462––

291,558P291,558

Past Due or

Impaired P–

–

––

–6,0016,001

994,809136,463

–514,009300,067

13,404––

1,958,752P1,964,753

TotalP2,082,639

184,267

600,0002,866,906

19,75018,26138,011

8,389,484258,364

5,078,379897,675403,060

81,5577,376

14,39415,130,289

P18,035,206

Due from other banksInterbank loans receivable and SPURAAFS investments Government securitiesHTM investments Government securities

AAP334,065

–

–

–P334,065

AP59,860

1,190,112

–

–P1,249,972

BBB and belowP126

–

7,191,551

7,794,493P14,986,170

TotalP394,0511,190,112

7,191,551

7,794,493P16,570,207

Receivable from customers: Corporate Consumer

2010

p62,114,14079,773

2008

P106,633,933–

2009

P80,084,682882,363

Against past due but not impaired: Hold-out on deposits Property OthersAgainst past due and impaired: Property Other

2010

p12,764122,137

3,384,555

453,219121,314

p4,093,989

2009

P12,460210,399

2,051,283

117,014924,202

P3,315,358

December 31, 2010

Receivable from customer:Corporate loansConsumer loans

Sales contract receivable

up to 1month

p11,016382

–p11,398

1 to 3months

p–573

–p573

3 to 6months

p723650

–p1,373

6 to 12months

p2,586123

5,105p7,814

Greaterthan 1 year

p79,4407,538

13,837p100,815

total

p93,7659,266

18,942p121,973

December 31, 2009



Up to 1month

P14,044844

–P14,888

1 to 3months

P5,771162

–P5,933

3 to 6months

P19,1312,700

–P21,831

6 to 12months

P26,4033,750

–P30,153

Greaterthan 1 year

P178,81414,47725,462

P218,753

Total

P244,16321,93325,462

P291,558

December 31, 2010

Financial assetsAFS investments: Government securities Equity securities Quoted UnquotedHTM investmentsLoans and receivables: Due from BSP Due from other banks Interbank loans receivable and SPURA Receivables from customers: Corporate Consumer Unquoted debt securities Accounts receivable Accrued interest receivable Sales contracts receivable RCOCI Refundable security depositsTotal financial assets

on demand

p–

–––

2,440557

–

11––

47433

–14

–p3,502

less than 3 months

p31

––

223

––

1,105

4,7064––

121––

p6,082

3-12months

p272

––

480

––

44

1,99313

3,008–51––

p5,816

beyond 1 year*

p10,294

2312

10,385

––

–

2,181337

5,287397364118

–16

p29,414

total

p10,597

2312

11,088

2,440557

1,149

8,891354

8,295444814120

1416

p44,814

Financial liabilitiesDeposit liabilities Demand Savings TimeBills payable PDIC Banks and other financial institutions Private firms and individualsOutstanding acceptancesManager’s checksAccrued interest payableAccrued other expenseOther liabilities: Accounts payable Marginal deposits Refundable security deposits Due to the Treasurer of the PhilippinesTotal financial liabilities*Including nonperforming loans and receivables

p4,4882,375

–

–––

5334

–67

103––

–p7,120

p––

20,276

191,700

1––

70–

–4–

12p22,082

p––

470

57–3––––

–––

–p530

p––

47

7,887–

328––2–

––

87

–p8,351

p4,4882,375

20,793

7,9631,700

33253347267

1034

87

12p38,083

December 31, 2009

Financial assetsAFS investments: Government securities Equity securities Quoted UnquotedHTM investmentsLoans and receivables: Due from BSP Due from other banks Interbank loans receivable and SPURA Receivables from customers: Corporate Consumer Unquoted debt securities Accounts receivable Accrued interest receivable Sales contracts receivable RCOCITotal financial assets

On demand

P–

–––

2,083578

–

13–––

60217

P3,284

Less than 3 months

P57

––

221

––

1,790

4,3701–

17–––

P6,456

3-12Months

P300

––

490

––

–

1,8025–

261–2–

P2,860

Beyond 1 Year*

P10,874

2018

11,285

––

–

2,611303

8,301125294130

–P33,961

Total

P11,231

2018

11,996

2,083578

1,790

8,796309

8,301403896133

7P46,561

Financial liabilitiesDeposit liabilities Demand Savings TimeBills payable PDIC Banks and other financial institutions Private firms and individualsOutstanding acceptancesManager’s checksAccrued interest payableAccrued other expenseOther liabilities: Accounts payable Refundable security deposits Due to the Treasurer of the PhilippinesTotal financial liabilities*Including nonperforming loans and receivables

P3,8582,270

–

–––

2242

–54

78–

–P6,324

P––

20,982

19–

1,93419

–63

–

––

12P23,029

P––

288

57234

–––

24–

––

–P603

P––

1,347

7,964470

–––––

–87

–P9,868

P3,8582,270

22,617

8,040704

1,93441428754

7887

12P39,824

December 31, 2009

Unused Commercial LC: Standby LC Sight import LC outstanding Domestic LC outstanding Usance import LC outstandingOutstanding shipping guaranteesUnused loan commitments

On demand

P1,00024,70277,813

5,45013,824

–P122,789

Less than 3 months

P122,270231,068110,70313,76730,3113,000

P511,119

3 to 12months

P212,10475,372

–––

1,000P288,476

Total

P335,374331,142188,516

19,21744,135

4,000P922,384

December 31, 2010


on demand

p15,0007,130

51,2375,066

––

p78,433

less than 3 months

p141,804129,198

47,1248,9212,419

–p329,466

3 to 12months

p241,53810,417

––

43,5261,000

p296,481

total

p398,342146,745

98,36113,98745,945

1,000p704,380

interest Rate

2010-31 December2010-Average Daily2010-Highest2010-Lowest

usD Rop(in usD mm)

2.4142.3123.4050.774

peso Gs(in peso mm)

74.39972.746

116.78941.230

Interest Rate


USD ROP(In USD MM)

3.0455.3057.3662.304

Peso GS(In Peso MM)

86.537252.825383.305

76.112

Interest Rate


USD ROP(In USD MM)

4.5763.5127.1032.009

Peso GS(In Peso MM)

216.884145.933264.745

54.522

peso-Denominatedassets

Due from banksAFS investmentsHTM investmentsLoans and receivablesliabilitiesDeposit liabilitiesBills payableForeign Currency-Denominated

assetsDue from banksInterbank loansAFS investmentsHTM investmentsLoans and receivablesliabilitiesDeposit liabilitiesBills payable

less than3 months

0.82%––

12.99%

1.34%3.44%

0.29%0.18%

––

7.91%

1.4%–

20103 months to 1 year

–––

11.91%

3.39%–

–0.50%

––

8.14%

2.0%–

Greater than 1 year

–6.66%

12.38%10.28%

8.35%1.0%

––

7.38%6.77%6.50%

–1.16%

Less than 3 months

3.25%5.50%

–13.31%

3.74%3.95%

0.42%0.15%

–––

3.10%–

20093 months to

1 year

–––

9.00%

3.01%–

–––––

4.34%0.74%

Greater than1 year

–7.96%

12.38%21.91%

9.02%1.00%

––

7.61%9.17%8.92%

–1.40%

December 31, 2010

assetsDue from BSPDue from other banksInterbank loan receivables and SPURAAFS investmentsHTM investmentsLoans and receivables

Total assetsliabilities

Deposit liabilitiesBills payable

Total liabilitiesAsset-liability gap

up to 1 month

p2,440557

1,105––

114,113

6,863–

6,863(p2,750)

more than 1to 3 months

p–––––

4,7114,711

20,2411,695

21,936(p17,225)

more than 3 to 12 months

p––

44––

1,8971,941

462–

462p1,479

beyond 12months

p–––

5,7127,7942,370

15,876

427,9317,973

p7,903

total

p2,440557

1,1495,7127,7948,989

26,641

27,6089,626

37,234(p10,593)

December 31, 2009





Up to 1 month

P2,083578

1,790––

134,464

6,128–

6,128(P1,664)


P–––––

4,4674,467

20,93310,02530,958

(P26,491)


P–––––

1,7201,720

284–

284P1,436

beyond 12months

P–––

6,7737,6862,539

16,998

1,2188,3309,548

P7,450

Total

P2,083578

1,7906,7737,6868,739

27,649

28,5638,330

36,893(P9,244)



www.pbcom.com.ph

As of December 31, 2010 and 2009, restructured loans by the Bank which are neither past due nor impaired are as follows:

Impaired loans and receivables and investment securitiesImpaired loans and receivables and investment securities are those for which the Bank determines that it is probable that it will be unable to collect all principal and interest due based on the contractual terms of the promissory note and securities agreements.

Past due but not impaired loans and receivables and investment securitiesThese represent loans and receivables and investment securities where contractual interest or principal payments are past due but the Bank believes that impairment is not appropriate on the basis of the level of collateral available and/or status of collection of amounts owed to the Bank.

The Bank holds collateral against loans and receivables in the form of real estate and chattel mortgages, guarantees, and other registered securities over assets. Estimates of fair value are based on the value of collateral assessed at the time of borrowing and generally are not updated except when a loan is assessed to be impaired. Generally, collateral is not held over loans and advances to banks except for reverse repurchase agreements. The Bank is not allowed to sell or pledge collateral held for reverse repurchase agreements. Collateral usually is not held against investment securities, and no such collateral was held as of December 31, 2010 and 2009. The following table shows the fair value of collateral held against past due and/or impaired loans and receivables as of December 31, 2010 and 2009 (amounts in thousands):

Aging analysis of past due but not impaired loans per class of financial assetsAging analyses of past due but not impaired financial assets are shown below (amounts in thousands):

Liquidity Risk and Funding ManagementLiquidity risk is the risk that the Bank will be unable to meet its payment obligations when they fall due under normal and stress circumstances. To limit this risk, management has arranged diversified funding sources in addition to its core deposit base, manages assets with liquidity in mind, and monitors future cash flows and liquidity on a daily basis. This incorporates an assessment of expected cash flows and the availability of high grade collateral which could be used to secure additional funding if required. In addition, the Bank makes use of a monthly system generated Liquidity Gap Report in analyzing its liquidity position where the difference between the Bank’s maturing assets and liabilities is captured. A Maximum Cumulative Outflow limit is likewise established to control the liquidity gap for each currency. The Asset and Liability Committee meets weekly to discuss among others the liquidity state of the Bank.

The Bank maintains a portfolio of highly marketable and diverse assets that can be easily liquidated in the event of an unforeseen interruption of cash flow. The Bank also has committed lines of credit that it can access to meet liquidity needs. In addition, the Bank maintains a statutory deposit with the BSP equal to 8.00% of customer deposits. The liquidity position is assessed and managed under a variety of scenarios, giving due consideration to stress factors relating to both the market in general and specifically to the Bank. The most important of these is to maintain limits on the ratio of liquid assets to deposit liabilities, set to reflect market conditions. Liquid assets consists of cash and cash equivalents, due from other banks, due from BSP, interbank call loans receivables and AFS investments.

Analysis of financial instruments by remaining contractual maturitiesThe tables below summarize the maturity profile of the Bank’s financial instruments as of December 31, 2010 and 2009 based on undiscounted contractual payments. Repayments which are subject to notice are treated as if notice were to be given immediately. However, the Bank expects that many customers will not request repayment on the earliest date the Bank could be required to pay and the table does not reflect the expected cash flows indicated by the Bank’s deposit retention history (amounts in millions).

The table below shows the contractual expiry by maturity of the Bank’s commitments and contingent liabilities as of December 31, 2010 and 2009 (amounts in thousands):

Market Risk ManagementMarket 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, foreign currency exchange rates, commodity prices, equity prices and other market changes. The Bank’s market risk originates from its holdings of foreign exchange instruments, debt securities and derivatives.

VaRThe VaR method is a procedure for estimating the probability of portfolio losses exceeding some specified proportion based on a statistical analysis of historical market price trends, correlations and volatilities. VaR estimates the potential decline in the value of a portfolio, under normal market conditions, for a given “confidence level” over a specified time horizon.

VaR is used to alert senior management whenever the potential for losses in the Bank’s portfolios exceeds the VaR limit. This allows management to react quickly and adjust its portfolio strategies in different market conditions in accordance with the Bank’s risk philosophy and appetite.

In 2002, the Bank commenced using Bloomberg’s Parametric VaR (PVaR) module in its VaR computation. Bloomberg’s PVaR is run on a Parametric VaR model whose data set contains 1 year of historical prices and a daily update of its variance/covariance matrix. In accordance with BSP standards, the Bank uses a 99.00% confidence level and a 10-day defeasance period. This means, that statistically, the Bank’s losses on trading operations will exceed VaR on at least 1 out of 100 trading business days.

The Treasury Risk Control Officer runs VaR on a daily basis, monitors the VaR against the Board approved VaR limit and submits Daily VaR Reports to concerned division/group/segment heads.

To verify the validity of the VaR model used, the Treasury Risk Manager through its quarterly back testing procedure examines how frequently actual daily losses exceeds the daily VaR. Backtesting results are reviewed by the Chief Risk Officer. Exceptions, if any, are reported to the RMC and the BOD. There was no recorded breach in the VaR limit in 2010 and only one recorded breach in the VaR limit during 2009 (due to high market volatility). Since VaR is designed to describe risk in normal market conditions (i.e. 99.00% of the time), “outliers” or events that occur in the tail of normal curve and those extreme movements in the past are no longer captured in the historical data window. Stress testing is done to address extreme market conditions.

Stress testing The Bank likewise performs stress testing on its FX trading position and on its AFS investment portfolios. Stress testing is a technique used to determine the impact on earnings of above position/portfolios from conditions or scenarios deemed “extreme” but plausible. Stress testing is used to inform senior management as to where vulnerabilities in the Bank’s portfolio actually lie. It helps them evaluate the Bank’s tolerance for risks and understand the combinations of risks that can produce large losses.

Unlike VaR, which reflects price behavior in everyday markets, stress tests simulate portfolio performance during abnormal market periods. Accordingly, they provide information about risks falling outside those typically captured by the VaR framework. Hence, losses resulting from stress tests are larger than the losses predicted by the VaR model.

The Bank’s Treasury Risk Manager performs the stress testing of traded securities using the scenario and sensitivity tests, anchored on historical and hypothetical events. The stress testing is conducted quarterly and its results reported to the RMC and BOD. Interest Rate Risk ManagementInterest rate risk arises from the possibility that changes in the interest rates will affect future cash flows or the fair value of financial instruments. The Bank follows a prudent policy on managing its assets and liabilities so as to ensure that the exposure to fluctuations in interest rates is kept within acceptable limits.

A substantial proportion of the total loan portfolio is for a term of less than one year, and the majority of the balance of its medium-term portfolio is on a floating-rate basis. As of December 31, 2010 and 2009, 87.72% and 82.11%, respectively, of the Bank’s total loan portfolio comprised of floating rate loans which are repriced periodically by reference to the transfer pool rate which reflects the Bank’s internal cost of funds. As a result of these factors, the Bank’s exposure to interest rate fluctuations, and other market risks, is significantly reduced.

The Bank, in keeping with banking industry practice, aims to achieve stability and lengthen the term structure of its deposit base, while providing adequate liquidity to cover transactional banking requirements of customers. No interest is paid on demand accounts, which as of December 31, 2010 and 2009 accounted for 16.26% and 13.51%, respectively, of total deposits, except for a demand account product which pays a rate of interest equal to that payable on regular savings accounts of the Bank. Rates on savings accounts and time deposit accounts, which constituted 8.60% and 75.14%, respectively, of total deposits as of December 31, 2010 and 7.95% and 78.54%, respectively, of total deposits as of December 31, 2009 are set by different criteria. Savings account rates are set by reference to prevailing market rates, while rates on time deposits and special savings accounts are usually priced by reference to rates applicable to prevailing rates on Philippine Treasury Bills and other money market instruments or, in the case of foreign currency deposits, Singapore Interbank Offer Rate and other benchmark dollar deposit rates in the Asian and international money markets with similar maturities.

The following table provides for the average EIR by period of maturity or repricing of the Bank as of December 31, 2010 and 2009:

The method by which the Bank measures the sensitivity of its assets and liabilities to interest rate fluctuations is by way of interest rates on the accrual portfolio i.e. the risk exposure of future accounting income. The repricing gap is calculated by distributing the statement of financial position into tenor buckets according to the time remaining to maturity or next repricing date and then obtaining the difference between the total of the repricing (interest sensitive) assets and repricing (interest sensitive) liabilities.

A gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. Accordingly, during a period of rising interest rates, a bank with a positive gap would be better positioned than one with a negative gap to invest in or hold higher yielding assets more quickly than it would need to refinance its interest-bearing liabilities. During a period of falling interest rates, a bank with a positive gap would tend to see its assets repricing at a faster rate than one with a negative gap, which may restrain the growth of its net income or result in a decline in net interest income.

The following tables set forth the asset-liability gap position of the Bank as of December 31, 2010 and 2009 (amounts in millions):

December 31, 2009 Neither Past Due nor Impaired

Due from BSPDue from other banksInterbank loans receivable and SPURA




High Grade

P–121,415

–121,415

–––

4,726,40294,500

–374,535

16,28842,691

7,376–

5,261,792P5,383,207

Standard Grade

P–25,898

–25,898

–––

1,464,6423,623

–4,8224,630

–––

1,477,717P1,503,615

Sub-standard

GradeP–

36,954

–36,954

–––

959,4681,845

–4,309

82,075–––

1,047,697P1,084,651

Unrated*P2,082,639

–

600,0002,682,639

19,75012,26032,010

––

5,078,379––––

14,3945,092,773

P7,807,422

Past Duebut Not

ImpairedP–

–

––

–––

244,16321,933

–––

25,462––

291,558P291,558

Past Due or

Impaired P–

–

––

–6,0016,001

994,809136,463

–514,009300,067

13,404––

1,958,752P1,964,753

TotalP2,082,639

184,267

600,0002,866,906

19,75018,26138,011

8,389,484258,364

5,078,379897,675403,060

81,5577,376

14,39415,130,289

P18,035,206

Due from other banksInterbank loans receivable and SPURAAFS investments Government securitiesHTM investments Government securities

AAP334,065

–

–

–P334,065

AP59,860

1,190,112

–

–P1,249,972

BBB and belowP126

–

7,191,551

7,794,493P14,986,170

TotalP394,0511,190,112

7,191,551

7,794,493P16,570,207

Receivable from customers: Corporate Consumer

2010

p62,114,14079,773

2008

P106,633,933–

2009

P80,084,682882,363

Against past due but not impaired: Hold-out on deposits Property OthersAgainst past due and impaired: Property Other

2010

p12,764122,137

3,384,555

453,219121,314

p4,093,989

2009

P12,460210,399

2,051,283

117,014924,202

P3,315,358

December 31, 2010



up to 1month

p11,016382

–p11,398

1 to 3months

p–573

–p573

3 to 6months

p723650

–p1,373

6 to 12months

p2,586123

5,105p7,814

Greaterthan 1 year

p79,4407,538

13,837p100,815

total

p93,7659,266

18,942p121,973

December 31, 2009



Up to 1month

P14,044844

–P14,888

1 to 3months

P5,771162

–P5,933

3 to 6months

P19,1312,700

–P21,831

6 to 12months

P26,4033,750

–P30,153

Greaterthan 1 year

P178,81414,47725,462

P218,753

Total

P244,16321,93325,462

P291,558

December 31, 2010

Financial assetsAFS investments: Government securities Equity securities Quoted UnquotedHTM investmentsLoans and receivables: Due from BSP Due from other banks Interbank loans receivable and SPURA Receivables from customers: Corporate Consumer Unquoted debt securities Accounts receivable Accrued interest receivable Sales contracts receivable RCOCI Refundable security depositsTotal financial assets

on demand

p–

–––

2,440557

–

11––

47433

–14

–p3,502

less than 3 months

p31

––

223

––

1,105

4,7064––

121––

p6,082

3-12months

p272

––

480

––

44

1,99313

3,008–51––

p5,816

beyond 1 year*

p10,294

2312

10,385

––

–

2,181337

5,287397364118

–16

p29,414

total

p10,597

2312

11,088

2,440557

1,149

8,891354

8,295444814120

1416

p44,814

Financial liabilitiesDeposit liabilities Demand Savings TimeBills payable PDIC Banks and other financial institutions Private firms and individualsOutstanding acceptancesManager’s checksAccrued interest payableAccrued other expenseOther liabilities: Accounts payable Marginal deposits Refundable security deposits Due to the Treasurer of the PhilippinesTotal financial liabilities*Including nonperforming loans and receivables

p4,4882,375

–

–––

5334

–67

103––

–p7,120

p––

20,276

191,700

1––

70–

–4–

12p22,082

p––

470

57–3––––

–––

–p530

p––

47

7,887–

328––2–

––

87

–p8,351

p4,4882,375

20,793

7,9631,700

33253347267

1034

87

12p38,083

December 31, 2009

Financial assetsAFS investments: Government securities Equity securities Quoted UnquotedHTM investmentsLoans and receivables: Due from BSP Due from other banks Interbank loans receivable and SPURA Receivables from customers: Corporate Consumer Unquoted debt securities Accounts receivable Accrued interest receivable Sales contracts receivable RCOCITotal financial assets

On demand

P–

–––

2,083578

–

13–––

60217

P3,284

Less than 3 months

P57

––

221

––

1,790

4,3701–

17–––

P6,456

3-12Months

P300

––

490

––

–

1,8025–

261–2–

P2,860

Beyond 1 Year*

P10,874

2018

11,285

––

–

2,611303

8,301125294130

–P33,961

Total

P11,231

2018

11,996

2,083578

1,790

8,796309

8,301403896133

7P46,561

Financial liabilitiesDeposit liabilities Demand Savings TimeBills payable PDIC Banks and other financial institutions Private firms and individualsOutstanding acceptancesManager’s checksAccrued interest payableAccrued other expenseOther liabilities: Accounts payable Refundable security deposits Due to the Treasurer of the PhilippinesTotal financial liabilities*Including nonperforming loans and receivables

P3,8582,270

–

–––

2242

–54

78–

–P6,324

P––

20,982

19–

1,93419

–63

–

––

12P23,029

P––

288

57234

–––

24–

––

–P603

P––

1,347

7,964470

–––––

–87

–P9,868

P3,8582,270

22,617

8,040704

1,93441428754

7887

12P39,824

December 31, 2009


On demand

P1,00024,70277,813

5,45013,824

–P122,789

Less than 3 months

P122,270231,068110,70313,76730,3113,000

P511,119

3 to 12months

P212,10475,372

–––

1,000P288,476

Total

P335,374331,142188,516

19,21744,135

4,000P922,384

December 31, 2010


on demand

p15,0007,130

51,2375,066

––

p78,433

less than 3 months

p141,804129,198

47,1248,9212,419

–p329,466

3 to 12months

p241,53810,417

––

43,5261,000

p296,481

total

p398,342146,745

98,36113,98745,945

1,000p704,380

interest Rate


usD Rop(in usD mm)

2.4142.3123.4050.774

peso Gs(in peso mm)

74.39972.746

116.78941.230

Interest Rate


USD ROP(In USD MM)

3.0455.3057.3662.304

Peso GS(In Peso MM)

86.537252.825383.305

76.112

Interest Rate


USD ROP(In USD MM)

4.5763.5127.1032.009

Peso GS(In Peso MM)

216.884145.933264.745

54.522

peso-Denominatedassets

Due from banksAFS investmentsHTM investmentsLoans and receivablesliabilitiesDeposit liabilitiesBills payableForeign Currency-Denominated

assetsDue from banksInterbank loansAFS investmentsHTM investmentsLoans and receivablesliabilitiesDeposit liabilitiesBills payable

less than3 months

0.82%––

12.99%

1.34%3.44%

0.29%0.18%

––

7.91%

1.4%–

20103 months to 1 year

–––

11.91%

3.39%–

–0.50%

––

8.14%

2.0%–

Greater than 1 year

–6.66%

12.38%10.28%

8.35%1.0%

––

7.38%6.77%6.50%

–1.16%

Less than 3 months

3.25%5.50%

–13.31%

3.74%3.95%

0.42%0.15%

–––

3.10%–

20093 months to

1 year

–––

9.00%

3.01%–

–––––

4.34%0.74%

Greater than1 year

–7.96%

12.38%21.91%

9.02%1.00%

––

7.61%9.17%8.92%

–1.40%

December 31, 2010





up to 1 month

p2,440557

1,105––

114,113

6,863–

6,863(p2,750)


p–––––

4,7114,711

20,2411,695

21,936(p17,225)


p––

44––

1,8971,941

462–

462p1,479

beyond 12months

p–––

5,7127,7942,370

15,876

427,9317,973

p7,903

total

p2,440557

1,1495,7127,7948,989

26,641

27,6089,626

37,234(p10,593)

December 31, 2009





Up to 1 month

P2,083578

1,790––

134,464

6,128–

6,128(P1,664)


P–––––

4,4674,467

20,93310,02530,958

(P26,491)


P–––––

1,7201,720

284–

284P1,436

beyond 12months

P–––

6,7737,6862,539

16,998

1,2188,3309,548

P7,450

Total

P2,083578

1,7906,7737,6868,739

27,649

28,5638,330

36,893(P9,244)



www.pbcom.com.ph

The Bank also monitors its exposure to fluctuations in interest rates by measuring the impact of interest rate movements on its interest income. This is done by modeling the impact of various changes in interest rates to the Bank’s interest-related income and expenses.

The following table demonstrates the sensitivity of the cumulative net position of risk-sensitive assets and risk-sensitive liabilities to a reasonable change in interest rates, with all other variables held constant, on the Bank’s statement of income.

As of December 31, 2010 and 2009, there is no other impact on the Bank’s OCI other than those already affecting the profit and loss.

Foreign Currency Risk ManagementCurrency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates.

Foreign currency liabilities generally consist of foreign currency-deposits in the Bank’s FCDU account made in the Philippines or which are generated from remittances to the Philippines by Filipino expatriates and overseas Filipino workers who retain for their own benefit or for the benefit of a third party, foreign currency deposit accounts with the Bank and foreign currency-denominated borrowings appearing in the regular books of the Bank.

Foreign currency deposits are generally used to fund the Bank’s foreign currency-denominated loan and investment portfolio in the FCDU. Banks are required by the BSP to match the foreign currency assets with the foreign currency liabilities held through FCDUs. In addition, the BSP requires a 30.00% liquidity reserve on all foreign currency liabilities held through FCDUs.

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

The table summarizes the Bank’s exposure to foreign exchange risk as of December 31, 2010 and 2009. Included in the table are the Bank’s assets and liabilities at carrying amounts, categorized by currency (amounts in thousands and in Philippine peso equivalent).

The table below indicates the exposure of the Bank in USD on its non-trading monetary assets and liabilities. The analysis calculates the effect of a reasonable possible movement of the base currency rate against the USD, with all other variables held constant on the statement of income and statement of comprehensive income. A negative amount in the table reflects a potential net reduction in income or comprehensive income, while a positive amount reflects a potential net increase. The Bank’s exposure in currencies other than USD is minimal.

As of December 31, 2010 and 2009, there is no impact on the Bank’s OCI other than those already affecting profit and loss.

Equity Price Risk ManagementEquity price risk is the risk that the fair values of equities decrease as a result of changes in the levels of equity indices and the value of individual stocks. The Bank holds a minimal amount of equity securities, hence any changes to equity prices is deemed to not significantly affect its financial performance.

6. segment information

The Bank’s operating businesses are organized and managed separately according to the nature of services provided and the different markets served with segment representing a strategic business unit. The Bank’s business segments are as follows:

Consumer Banking - principally handling individual customers’ deposits, and providing consumer type loans, overdrafts and fund transfer facilities;

Corporate Banking - principally handling loans and other credit facilities and deposit and current accounts for corporate and institutional customers;

Treasury - principally providing money market, trading and treasury services, as well as the management of the Bank’s funding operations by use of treasury bills, government securities and placements and acceptances with other banks, through treasury and wholesale banking.

Interest income is reported net as management primarily relies on net interest revenue as a performance measure, not the gross interest income and expense.

No revenue from transactions with a single external customer or counterparty amounted to 10.00% or more of the Bank’s total revenue in 2010, 2009, and 2008.

For management purposes, business segment information provided to the CODM is based on the Regulatory Accounting Principles (RAP) submitted to BSP in compliance with the reportorial requirements under the Financial Reporting Package (FRP) for banks, which differ from PFRS.

The following table presents income and profit and certain asset and liability information regarding the Bank’s operating segments as of and for the years ended December 31, 2010, 2009 and 2008 (amounts in thousands):

Net operating loss reported to the CODM which is based on RAP amounted to P179.21 million, P660.65 million and P846.82 million in 2010, 2009 and 2008, respectively. The difference in the net operating income (loss) based on RAP and PFRS primarily represents the annual amortization of SPV losses and difference in the accounting treatment for investments properties and related transactions under RAP and PFRS.

7. interbank loans Receivable and securities purchased under Resale agreements

This account consists of:

As of December 31, 2010 and 2009, interbank loans receivable comprise of USD-denominated loans amounting to $25.22 million and $25.76 million, respectively. As of December 31, 2010, interbank loans receivable also includes placement granted to a local bank amounting to $1.00 million carrying a term of one year.

Interest income on interbank loans receivable and SPURA follows:

Interbank loans receivable bears nominal annual interest rate ranging from 0.15% to 0.50% in 2010, from 0.06% to 0.26% in 2009 and from 1.90% to 5.00% in 2008, while SPURA bears nominal annual interest rates ranging from 3.50% to 4.75% in 2010, from 4.00% to 5.25% in 2009 and from 5.00% to 6.00% in 2008.

The Bank is not permitted to sell or repledge the related collateral on interbank lending in the absence of default by the counterparty.

8. available-for-sale investments

This account consists of investments in:

As of December 31, 2010 and 2009, net unrealized losses on AFS investments amounted to P100.33 million and P176.99 million, respectively.

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

2010 Changes in interest rates (in basis points)Changes in interest rates (in basis points)Change in annualized net interest income

+50(p6,596)

-50p6,596

+100(p13,192)

-100p13,192


+50(P12,348)

–50P12,348

+100(P24,697)

–100P24,697

assetsLoans and receivables:

Due from other banksCorporate loans

Accrued interest receivableAccounts receivableOther assets

Total assetsliabilitiesDeposit liabilities:

SavingsTime

Outstanding acceptancesOther liabilities:

Accounts payableOthersTotal liabilities

Net exposure

usD

p90,992437,286

831190313

529,612

––

53,182

13,477

56,660p472,952

2010others

p36,660–––

24136,901

6,2505,046

–

–4

11,300p25,601

total

p127,652437,286

831190554

566,513

6,2505,046

53,182

13,481

67,960p498,553

USD

P92,56166,671

184201

71159,688

––

34,418

–34

34,452P125,236

2009Others

P22,2736,216

––

27728,766

1,1445,7156,216

–1

13,076P15,690

Total

P114,83472,887

184201348

188,454

1,1445,715

40,634

–35

47,528P140,926

2010 Changes in foreign exchange ratesChanges in foreign exchange ratesChange in annualized net income

+3.00%p18,667

-3.00%(p18,667)

+4.00%p24,902

-4.00%(p24,902)


+3.00%P4,185

-3.00%(P4,185)

+4.00%P5,581

-4.00%(P5,581)

segment RevenueThird partyIntersegmentTotal operating incomeCompensation and fringe benefitsProvision for credit and impairment losses - netTaxes and licensesDepreciation and amortizationOccupancy and equipment-related costsOther operating expensesNet operating income (loss)

segment ResultsNet interest incomeRent incomeService charges, fees, and commissionsTrading and securities gain - netOther operating income (loss)total operating incomeCompensation and fringe benefitsProvision for credit and impairment losses - netTaxes and licensesDepreciation and amortizationOccupancy and other equipment-related costsOther operating expensesSegment profit (loss)Provision for income taxNet income (loss)

segment assetsInvestment in an associateProperty and equipmentInvestment propertiesUnallocated assetstotal segment assets

total segment liabilities

Consumerbanking

p563,786–

563,786125,311

–76,40331,625

103,767138,721p87,959

p558,770–

62,8385

(57,827)563,786125,311

–76,40331,625

103,767138,721

87,95929,976

p57,983

p–259,762

–4,269,123

p4,528,885

p26,209,176

Corporatebanking

p247,787–

247,78718,110

–60

2,913

1,91630,594

p194,194

p110,300–

63,886–

73,601247,787

18,110

–60

2,913

1,91630,594

194,194992

p193,202

p–––

6,843,797p6,843,797

p86,137

2010

treasury

p684,447–

684,44713,613

–9,5661,474

1,42379,825

p578,546

p178,205–

81506,130

31684,447

13,613

–9,5661,474

1,42379,825

578,54657,438

p521,108

p–––

12,980,401p12,980,401

p3,450,203

unallocated

p1,106,793–

1,106,793448,640

212,136237,882

95,067

(36,283)1,189,258

(p1,039,907)

p670,558302,864

8,773906

123,6921,106,793

448,640

212,136237,882105,035

(36,283)1,179,290

(1,039,907)185,812

(p1,225,719)

p11,300756,953537,394

18,294,505p19,600,152

p9,431,130

Eliminations and

adjustments

(p111,358)–

(111,358)1,537

165,658(9,528)

–

(3,653)(1,096,162)

p830,790

(p12,418)–

––

(98,940)(111,358)

1,537

165,658(9,528)(9,968)

(3,653)(1,086,194)

830,79060

p830,730

p–(24,372)

2,130,381(4,400,126)

(p2,294,117)

(p1,092,449)

total

p2,491,455–

2,491,455607,211

377,794314,383131,079

67,170342,236

p651,582

p1,505,415302,864

135,578507,041

40,5572,491,455

607,211

377,794314,383131,079

67,170342,236651,582274,278

p377,304

p11,300992,343

2,667,77537,987,700

p41,659,118

p38,084,197


segment ResultsNet interest incomeRent incomeService charges, fees, and commissionsTrading and securities gain - netOther operating income (loss)Total operating income (loss)Compensation and fringe benefitsProvision for credit and impairment losses Depreciation and amortizationTaxes and licensesOccupancy and other equipment-related costsOther operating expensesSegment profit (loss)Provision for income taxNet income (loss)



ConsumerBanking

P743,467–

743,467223,494

–96,79831,956

93,822125,439

P171,958

P637,918–

67,147389

38,013743,467223,494

–31,95696,798

93,822125,439171,958

28,568P143,390

P–276,223

–4,698,324

P4,974,547

P26,939,373

CorporateBanking

P189,302–

189,30238,811

–41,173

3,420

1,7213,335

P100,842

P126,061–

73,758–

(10,517)189,302

38,811

–3,420

41,173

1,7213,335

100,8421,077

P99,765

P–––

6,821,012P6,821,012

P440,268

Treasury

P331,581–

331,58126,559

–104,746

1,846

1,13821,998

P175,294

P213,361–

54118,797

(631)331,581

26,559

–1,846

104,746

1,13821,998

175,29416,466

P158,828

P–––

11,120,625P11,120,625

P3,931,008

Unallocated

P860,428–

860,428282,376

212,13680,125

120,689

(39,734)1,313,581

(P1,108,745)

P312,009308,390

7,0393

232,987860,428282,376

212,136120,689

80,125

(39,734)1,313,581

(1,108,745)241,881

(P1,350,626)

P11,612781,762613,783

22,145,544P23,552,701

P9,843,676

Eliminations and

adjustments

(P193,444)–

(193,444)44,805

134,359(9,528)(6,008)

883(1,331,312)

P973,357

P16,792(1,916)

1(4)

(208,317)(193,444)

44,805

134,359(6,008)(9,528)

883(1,331,312)

973,357(77,479)

P1,050,836

P30(135,291)2,472,739

(6,180,737)(P3,843,259)

(P1,547,399)

Total

P1,931,334–

1,931,334616,045

346,495313,314151,903

57,830133,041

P312,706

P1,306,141306,474

147,999119,18551,535

1,931,334616,045

346,495151,903313,314

57,830133,041312,706210,513

P102,193

P11,642922,694

3,086,52238,604,768

P42,625,626

P39,606,926

2009 (As restated - Note 32)

Interbank loans receivableSPURA

2010p1,149,282,177

–p1,149,282,177

2009P1,190,111,707

600,000,000P1,790,111,707

SPURAInterbank loans receivable

2010p23,244,445

694,976p23,939,421

2009P15,864,583

159,520P16,024,103

2008P35,732,466

12,502,997P48,235,463

Quoted: Government securities (Note 24) Equity securities

Unquoted: Equity securities at cost Less allowance for impairment losses (Note 16)

2010

p6,348,497,43622,815,823

6,371,313,259

18,364,312

6,103,98012,260,332

p6,383,573,591

2009

P7,191,550,73019,750,000

7,211,300,730

18,260,922

6,000,59012,260,332

P7,223,561,062

Balance at beginning of yearChanges in fair value of AFS investmentsTrading gain from sale of AFS

investments taken to profit or loss (Note 25)

Balance at end of year

2010(p176,986,021)

577,557,122

(500,900,079)76,657,043

(p100,328,978)

2009(P604,044,742)

542,472,300

(115,413,579)427,058,721

(P176,986,021)

2008P46,304,577

(539,351,897)

(110,997,422)(650,349,319)

(P604,044,742)

9. held-to-maturity investments

This account includes government securities amounting to P7.64 billion, which are pledged as collateral to PDIC to secure loans under the FAA (Notes 1 and 18). As approved by the BSP, such collateral is excluded in the computation of the prescribed regulatory ceiling on HTM holdings under BSP Circular No. 161. Bond exchangeOn October 6, 2010, the Bank participated in the bond exchange program of the Philippine Government and exchanged ROP 19 bonds, classified as HTM investments, with carrying value of P102.87 million for ROP 34 with carrying value of P125.85 million. The gain from the bond exchange amounting to P22.98 million was deferred by the Bank and amortized over the term of the new bond.

The Bank accounted for the bond exchange transaction in accordance with Philippine GAAP for banks, as prescribed by the SEC, to exempt the disposal of the old HTM bond investment from the tainting rule. Had the Bank accounted for the the bond exchange under PFRS, the entire HTM investment portfolio amounting to P7.81 billion as of December 31, 2010 would have been measured at fair value of P9.60 billion and reclassified to AFS investments as at the bond exchange date. Gain resulting from the reclassification will be credited to OCI and amortized over the term of the investment.

As of December 31, 2010, had the Bank accounted for the bond exchange under PFRS, total assets and equity would have increased by P1.87 billion.

ReclassificationThe 2008 global credit crunch had prompted the International Accounting Standards Board to issue the Amendments to International Accounting Standards 39 and International Financial Reporting Standards, which was adopted by Philippine Financial Reporting Standards Council as amendments to PAS 39 and PFRS 7, respectively. These amendments permitted the Bank to revisit the existing classification of itsinancial assets. The Bank identified financial assets amounting to P164.63 million eligible under the amendments, for which it had a clear change of intent to hold for the foreseeable future rather than to exit or trade in the short-term and reclassified such assets from held-for-trading investments to HTM investments under rare circumstance on July 1, 2008. The carrying amounts of reclassified securities amounted to P45.38 million and P157.99 million as of December 31, 2010 and 2009, (with fair value of P54.17 million and P173.84 million as of December 31, 2010 and 2009), respectively.

As at the date of reclassification, the EIR on the reclassified securities range from 7.75% to 9.88%. The Bank expects to recover approximately the reclassified instrument’s carrying amounts as of December 31, 2010 and 2009.

Had these securities not been reclassified to HTM investments, market gains of P8.79 million and P15.85 million would have been credited to the statements of income in 2010 and 2009, respectively.

10. loans and Receivables


As of December 31, 2010 and 2009, unquoted debt securities consist of the following:

Regulatory ReportingCurrent banking regulations allow banks that have no unbooked valuation reserves and capital adjustments to exclude from nonperforming classification those receivables classified as loss in the latest examination of the BSP which are fully covered by allowance for credit losses, provided that interest on said receivables shall not be accrued for regulatory accounting purposes. As of December 31, 2010 and 2009, NPLs not fully covered by allowance for credit losses follow:

The following table shows the breakdown of receivables from customers (at gross amount) as to secured and unsecured and the breakdown of secured loans as to type of security (amounts in thousands):

Receivables from customers: Corporate loans Consumer loans

Unearned discounts and capitalized interest

Unquoted debt securities (Notes 17 and 18)Accrued interest receivableAccounts receivableSales contracts receivable

Less allowance for credit losses (Note 16)

2010

p8,542,070,334335,427,356

8,877,497,690

(4,259,123)8,873,238,567

p5,618,540,651813,659,249443,676,055112,087,736

15,861,202,258

2,675,854,432p13,185,347,826

2009

P8,399,151,886258,363,616

8,657,515,502

(9,670,156)8,647,845,346

P5,078,378,816897,675,877403,060,650

81,556,97615,108,517,665

2,499,532,212P12,608,985,453

Investments in: Peace bonds MRT bonds HGC bonds RFM Corporation bonds

2010

p2,822,315,0001,724,095,678

909,129,973163,000,000

p5,618,540,651

2009

P2,595,232,1841,617,997,363

865,149,269–

P5,078,378,816

NPLsLess NPLs fully provided with allowance for credit losses

2009P1,382,520,528

909,786,490P472,734,038

2010p1,531,100,040

790,959,271 p740,140,769

Loans secured by: Real estate Deposit hold-out Securities and others ChattelSecuredUnsecured loans

2009Amount

P1,344,341555,824823,048156,496

2,879,7095,777,807

P8,657,516

2010amount

p1,125,572475,484403,108100,411

2,104,5756,772,923

p8,877,498

%

15.536.429.511.81

33.2766.73

100.00

%

12.685.364.541.13

23.7176.29

100.00

RevenueThird partyIntersegmentTotal operating income (loss)Compensation and fringe benefitsTaxes and licensesOccupancy and equipment-

related costsDepreciation and amortizationProvision for credit and

impairment losses -netOther operating expensesNet operating income (loss)segment ResultsNet interest income (expense)Rent incomeService charges, fees, and

commissionsTrading and securities gain - netOther operating income (loss)total operating incomeCompensation and fringe benefitsTaxes and licensesOccupancy and other

equipment-related costsDepreciation and amortizationProvision for credit and

impairment lossesOther operating expensesSegment profit (loss)Provision for income taxNet income (loss)



Total

P2,167,298–

2,167,298615,797327,599

149,922103,822

50,195313,306

P606,657

P1,452,487308,299

180,094104,638121,780

2,167,298615,797327,599

149,922103,822

50,195313,306606,657289,271

P317,386

P11,688917,086

3,614,48241,290,472

P45,833,728

P43,314,825

Eliminations and

adjustments

P143,785–

143,78523,159

–

45,159(63,685)

(161,941)(1,152,379)P1,453,472

P127,20628,566

–8,936

(20,923)143,785

23,159–

45,159(63,685)

(161,941)(1,152,379)

1,453,472442

P1,453,030

P1,219(208,264)2,637,919

(7,538,312)(P5,107,438)

(P1,713,269)

Unallocated

P1,028,814–

1,028,814291,405150,687

10,609130,697

212,1361,307,159

(P1,073,879)

P617,290279,733

36,767(2,767)97,791

1,028,814291,405150,687

10,609130,697

212,1361,307,159

(1,073,879)244,951

(P1,318,830)

P10,469823,187976,563

24,902,714P26,712,933

P10,237,364

Treasury

(P110,064)–

(110,064)30,52636,733

1,1012,122

–22,027

(202,573)

(P202,360)–

4198,363(6,108)

(110,064)30,52636,733

1,1012,122

–22,027

(202,573)14,398

(P216,971)

P–––

11,906,656P11,906,656

P5,573,834

CorporateBanking

P330,023–

330,02334,93051,705

1,5552,967

–3,699

P235,167

P231,530–

68,679–

29,814330,023

34,93051,705

1,5552,967

–3,699

235,1671,740

P233,427

P–––

7,291,679P7,291,679

P444,907

ConsumerBanking

P774,740–

774,740235,777

88,474

91,49831,721

–132,800

P194,470

P678,821–

74,607106

21,206774,740235,777

88,474

91,49831,721

–132,800194,470

27,740P166,730

P–302,163

–4,727,735

P5,029,898

P28,771,989




www.pbcom.com.ph

The Bank also monitors its exposure to fluctuations in interest rates by measuring the impact of interest rate movements on its interest income. This is done by modeling the impact of various changes in interest rates to the Bank’s interest-related income and expenses.

The following table demonstrates the sensitivity of the cumulative net position of risk-sensitive assets and risk-sensitive liabilities to a reasonable change in interest rates, with all other variables held constant, on the Bank’s statement of income.

As of December 31, 2010 and 2009, there is no other impact on the Bank’s OCI other than those already affecting the profit and loss.

Foreign Currency Risk ManagementCurrency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates.

Foreign currency liabilities generally consist of foreign currency-deposits in the Bank’s FCDU account made in the Philippines or which are generated from remittances to the Philippines by Filipino expatriates and overseas Filipino workers who retain for their own benefit or for the benefit of a third party, foreign currency deposit accounts with the Bank and foreign currency-denominated borrowings appearing in the regular books of the Bank.

Foreign currency deposits are generally used to fund the Bank’s foreign currency-denominated loan and investment portfolio in the FCDU. Banks are required by the BSP to match the foreign currency assets with the foreign currency liabilities held through FCDUs. In addition, the BSP requires a 30.00% liquidity reserve on all foreign currency liabilities held through FCDUs.

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

The table summarizes the Bank’s exposure to foreign exchange risk as of December 31, 2010 and 2009. Included in the table are the Bank’s assets and liabilities at carrying amounts, categorized by currency (amounts in thousands and in Philippine peso equivalent).

The table below indicates the exposure of the Bank in USD on its non-trading monetary assets and liabilities. The analysis calculates the effect of a reasonable possible movement of the base currency rate against the USD, with all other variables held constant on the statement of income and statement of comprehensive income. A negative amount in the table reflects a potential net reduction in income or comprehensive income, while a positive amount reflects a potential net increase. The Bank’s exposure in currencies other than USD is minimal.

As of December 31, 2010 and 2009, there is no impact on the Bank’s OCI other than those already affecting profit and loss.

Equity Price Risk ManagementEquity price risk is the risk that the fair values of equities decrease as a result of changes in the levels of equity indices and the value of individual stocks. The Bank holds a minimal amount of equity securities, hence any changes to equity prices is deemed to not significantly affect its financial performance.

6. segment information

The Bank’s operating businesses are organized and managed separately according to the nature of services provided and the different markets served with segment representing a strategic business unit. The Bank’s business segments are as follows:

Consumer Banking - principally handling individual customers’ deposits, and providing consumer type loans, overdrafts and fund transfer facilities;

Corporate Banking - principally handling loans and other credit facilities and deposit and current accounts for corporate and institutional customers;

Treasury - principally providing money market, trading and treasury services, as well as the management of the Bank’s funding operations by use of treasury bills, government securities and placements and acceptances with other banks, through treasury and wholesale banking.

Interest income is reported net as management primarily relies on net interest revenue as a performance measure, not the gross interest income and expense.

No revenue from transactions with a single external customer or counterparty amounted to 10.00% or more of the Bank’s total revenue in 2010, 2009, and 2008.

For management purposes, business segment information provided to the CODM is based on the Regulatory Accounting Principles (RAP) submitted to BSP in compliance with the reportorial requirements under the Financial Reporting Package (FRP) for banks, which differ from PFRS.

The following table presents income and profit and certain asset and liability information regarding the Bank’s operating segments as of and for the years ended December 31, 2010, 2009 and 2008 (amounts in thousands):

Net operating loss reported to the CODM which is based on RAP amounted to P179.21 million, P660.65 million and P846.82 million in 2010, 2009 and 2008, respectively. The difference in the net operating income (loss) based on RAP and PFRS primarily represents the annual amortization of SPV losses and difference in the accounting treatment for investments properties and related transactions under RAP and PFRS.

7. interbank loans Receivable and securities purchased under Resale agreements


As of December 31, 2010 and 2009, interbank loans receivable comprise of USD-denominated loans amounting to $25.22 million and $25.76 million, respectively. As of December 31, 2010, interbank loans receivable also includes placement granted to a local bank amounting to $1.00 million carrying a term of one year.

Interest income on interbank loans receivable and SPURA follows:

Interbank loans receivable bears nominal annual interest rate ranging from 0.15% to 0.50% in 2010, from 0.06% to 0.26% in 2009 and from 1.90% to 5.00% in 2008, while SPURA bears nominal annual interest rates ranging from 3.50% to 4.75% in 2010, from 4.00% to 5.25% in 2009 and from 5.00% to 6.00% in 2008.

The Bank is not permitted to sell or repledge the related collateral on interbank lending in the absence of default by the counterparty.

8. available-for-sale investments

This account consists of investments in:

As of December 31, 2010 and 2009, net unrealized losses on AFS investments amounted to P100.33 million and P176.99 million, respectively.

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


+50(p6,596)

-50p6,596

+100(p13,192)

-100p13,192


+50(P12,348)

–50P12,348

+100(P24,697)

–100P24,697

assetsLoans and receivables:

Due from other banksCorporate loans

Accrued interest receivableAccounts receivableOther assets

Total assetsliabilitiesDeposit liabilities:

SavingsTime

Outstanding acceptancesOther liabilities:

Accounts payableOthersTotal liabilities

Net exposure

usD

p90,992437,286

831190313

529,612

––

53,182

13,477

56,660p472,952

2010others

p36,660–––

24136,901

6,2505,046

–

–4

11,300p25,601

total

p127,652437,286

831190554

566,513

6,2505,046

53,182

13,481

67,960p498,553

USD

P92,56166,671

184201

71159,688

––

34,418

–34

34,452P125,236

2009Others

P22,2736,216

––

27728,766

1,1445,7156,216

–1

13,076P15,690

Total

P114,83472,887

184201348

188,454

1,1445,715

40,634

–35

47,528P140,926


+3.00%p18,667

-3.00%(p18,667)

+4.00%p24,902

-4.00%(p24,902)


+3.00%P4,185

-3.00%(P4,185)

+4.00%P5,581

-4.00%(P5,581)


segment ResultsNet interest incomeRent incomeService charges, fees, and commissionsTrading and securities gain - netOther operating income (loss)total operating incomeCompensation and fringe benefitsProvision for credit and impairment losses - netTaxes and licensesDepreciation and amortizationOccupancy and other equipment-related costsOther operating expensesSegment profit (loss)Provision for income taxNet income (loss)



Consumerbanking

p563,786–

563,786125,311

–76,40331,625

103,767138,721p87,959

p558,770–

62,8385

(57,827)563,786125,311

–76,40331,625

103,767138,721

87,95929,976

p57,983

p–259,762

–4,269,123

p4,528,885

p26,209,176

Corporatebanking

p247,787–

247,78718,110

–60

2,913

1,91630,594

p194,194

p110,300–

63,886–

73,601247,787

18,110

–60

2,913

1,91630,594

194,194992

p193,202

p–––

6,843,797p6,843,797

p86,137

2010

treasury

p684,447–

684,44713,613

–9,5661,474

1,42379,825

p578,546

p178,205–

81506,130

31684,447

13,613

–9,5661,474

1,42379,825

578,54657,438

p521,108

p–––

12,980,401p12,980,401

p3,450,203

unallocated

p1,106,793–

1,106,793448,640

212,136237,882

95,067

(36,283)1,189,258

(p1,039,907)

p670,558302,864

8,773906

123,6921,106,793

448,640

212,136237,882105,035

(36,283)1,179,290

(1,039,907)185,812

(p1,225,719)

p11,300756,953537,394

18,294,505p19,600,152

p9,431,130

Eliminations and

adjustments

(p111,358)–

(111,358)1,537

165,658(9,528)

–

(3,653)(1,096,162)

p830,790

(p12,418)–

––

(98,940)(111,358)

1,537

165,658(9,528)(9,968)

(3,653)(1,086,194)

830,79060

p830,730

p–(24,372)

2,130,381(4,400,126)

(p2,294,117)

(p1,092,449)

total

p2,491,455–

2,491,455607,211

377,794314,383131,079

67,170342,236

p651,582

p1,505,415302,864

135,578507,041

40,5572,491,455

607,211

377,794314,383131,079

67,170342,236651,582274,278

p377,304

p11,300992,343

2,667,77537,987,700

p41,659,118

p38,084,197


segment ResultsNet interest incomeRent incomeService charges, fees, and commissionsTrading and securities gain - netOther operating income (loss)Total operating income (loss)Compensation and fringe benefitsProvision for credit and impairment losses Depreciation and amortizationTaxes and licensesOccupancy and other equipment-related costsOther operating expensesSegment profit (loss)Provision for income taxNet income (loss)



ConsumerBanking

P743,467–

743,467223,494

–96,79831,956

93,822125,439

P171,958

P637,918–

67,147389

38,013743,467223,494

–31,95696,798

93,822125,439171,958

28,568P143,390

P–276,223

–4,698,324

P4,974,547

P26,939,373

CorporateBanking

P189,302–

189,30238,811

–41,173

3,420

1,7213,335

P100,842

P126,061–

73,758–

(10,517)189,302

38,811

–3,420

41,173

1,7213,335

100,8421,077

P99,765

P–––

6,821,012P6,821,012

P440,268

Treasury

P331,581–

331,58126,559

–104,746

1,846

1,13821,998

P175,294

P213,361–

54118,797

(631)331,581

26,559

–1,846

104,746

1,13821,998

175,29416,466

P158,828

P–––

11,120,625P11,120,625

P3,931,008

Unallocated

P860,428–

860,428282,376

212,13680,125

120,689

(39,734)1,313,581

(P1,108,745)

P312,009308,390

7,0393

232,987860,428282,376

212,136120,689

80,125

(39,734)1,313,581

(1,108,745)241,881

(P1,350,626)

P11,612781,762613,783

22,145,544P23,552,701

P9,843,676

Eliminations and

adjustments

(P193,444)–

(193,444)44,805

134,359(9,528)(6,008)

883(1,331,312)

P973,357

P16,792(1,916)

1(4)

(208,317)(193,444)

44,805

134,359(6,008)(9,528)

883(1,331,312)

973,357(77,479)

P1,050,836

P30(135,291)2,472,739

(6,180,737)(P3,843,259)

(P1,547,399)

Total

P1,931,334–

1,931,334616,045

346,495313,314151,903

57,830133,041

P312,706

P1,306,141306,474

147,999119,18551,535

1,931,334616,045

346,495151,903313,314

57,830133,041312,706210,513

P102,193

P11,642922,694

3,086,52238,604,768

P42,625,626

P39,606,926


Interbank loans receivableSPURA

2010p1,149,282,177

–p1,149,282,177

2009P1,190,111,707

600,000,000P1,790,111,707

SPURAInterbank loans receivable

2010p23,244,445

694,976p23,939,421

2009P15,864,583

159,520P16,024,103

2008P35,732,466

12,502,997P48,235,463

Quoted: Government securities (Note 24) Equity securities

Unquoted: Equity securities at cost Less allowance for impairment losses (Note 16)

2010

p6,348,497,43622,815,823

6,371,313,259

18,364,312

6,103,98012,260,332

p6,383,573,591

2009

P7,191,550,73019,750,000

7,211,300,730

18,260,922

6,000,59012,260,332

P7,223,561,062

Balance at beginning of yearChanges in fair value of AFS investmentsTrading gain from sale of AFS

investments taken to profit or loss (Note 25)

Balance at end of year

2010(p176,986,021)

577,557,122

(500,900,079)76,657,043

(p100,328,978)

2009(P604,044,742)

542,472,300

(115,413,579)427,058,721

(P176,986,021)

2008P46,304,577

(539,351,897)

(110,997,422)(650,349,319)

(P604,044,742)

9. held-to-maturity investments

This account includes government securities amounting to P7.64 billion, which are pledged as collateral to PDIC to secure loans under the FAA (Notes 1 and 18). As approved by the BSP, such collateral is excluded in the computation of the prescribed regulatory ceiling on HTM holdings under BSP Circular No. 161. Bond exchangeOn October 6, 2010, the Bank participated in the bond exchange program of the Philippine Government and exchanged ROP 19 bonds, classified as HTM investments, with carrying value of P102.87 million for ROP 34 with carrying value of P125.85 million. The gain from the bond exchange amounting to P22.98 million was deferred by the Bank and amortized over the term of the new bond.

The Bank accounted for the bond exchange transaction in accordance with Philippine GAAP for banks, as prescribed by the SEC, to exempt the disposal of the old HTM bond investment from the tainting rule. Had the Bank accounted for the the bond exchange under PFRS, the entire HTM investment portfolio amounting to P7.81 billion as of December 31, 2010 would have been measured at fair value of P9.60 billion and reclassified to AFS investments as at the bond exchange date. Gain resulting from the reclassification will be credited to OCI and amortized over the term of the investment.

As of December 31, 2010, had the Bank accounted for the bond exchange under PFRS, total assets and equity would have increased by P1.87 billion.

ReclassificationThe 2008 global credit crunch had prompted the International Accounting Standards Board to issue the Amendments to International Accounting Standards 39 and International Financial Reporting Standards, which was adopted by Philippine Financial Reporting Standards Council as amendments to PAS 39 and PFRS 7, respectively. These amendments permitted the Bank to revisit the existing classification of itsinancial assets. The Bank identified financial assets amounting to P164.63 million eligible under the amendments, for which it had a clear change of intent to hold for the foreseeable future rather than to exit or trade in the short-term and reclassified such assets from held-for-trading investments to HTM investments under rare circumstance on July 1, 2008. The carrying amounts of reclassified securities amounted to P45.38 million and P157.99 million as of December 31, 2010 and 2009, (with fair value of P54.17 million and P173.84 million as of December 31, 2010 and 2009), respectively.

As at the date of reclassification, the EIR on the reclassified securities range from 7.75% to 9.88%. The Bank expects to recover approximately the reclassified instrument’s carrying amounts as of December 31, 2010 and 2009.

Had these securities not been reclassified to HTM investments, market gains of P8.79 million and P15.85 million would have been credited to the statements of income in 2010 and 2009, respectively.

10. loans and Receivables


As of December 31, 2010 and 2009, unquoted debt securities consist of the following:

Regulatory ReportingCurrent banking regulations allow banks that have no unbooked valuation reserves and capital adjustments to exclude from nonperforming classification those receivables classified as loss in the latest examination of the BSP which are fully covered by allowance for credit losses, provided that interest on said receivables shall not be accrued for regulatory accounting purposes. As of December 31, 2010 and 2009, NPLs not fully covered by allowance for credit losses follow:

The following table shows the breakdown of receivables from customers (at gross amount) as to secured and unsecured and the breakdown of secured loans as to type of security (amounts in thousands):

Receivables from customers: Corporate loans Consumer loans

Unearned discounts and capitalized interest

Unquoted debt securities (Notes 17 and 18)Accrued interest receivableAccounts receivableSales contracts receivable

Less allowance for credit losses (Note 16)

2010

p8,542,070,334335,427,356

8,877,497,690

(4,259,123)8,873,238,567

p5,618,540,651813,659,249443,676,055112,087,736

15,861,202,258

2,675,854,432p13,185,347,826

2009

P8,399,151,886258,363,616

8,657,515,502

(9,670,156)8,647,845,346

P5,078,378,816897,675,877403,060,650

81,556,97615,108,517,665

2,499,532,212P12,608,985,453

Investments in: Peace bonds MRT bonds HGC bonds RFM Corporation bonds

2010

p2,822,315,0001,724,095,678

909,129,973163,000,000

p5,618,540,651

2009

P2,595,232,1841,617,997,363

865,149,269–

P5,078,378,816

NPLsLess NPLs fully provided with allowance for credit losses

2009P1,382,520,528

909,786,490P472,734,038

2010p1,531,100,040

790,959,271 p740,140,769

Loans secured by: Real estate Deposit hold-out Securities and others ChattelSecuredUnsecured loans

2009Amount

P1,344,341555,824823,048156,496

2,879,7095,777,807

P8,657,516

2010amount

p1,125,572475,484403,108100,411

2,104,5756,772,923

p8,877,498

%

15.536.429.511.81

33.2766.73

100.00

%

12.685.364.541.13

23.7176.29

100.00

RevenueThird partyIntersegmentTotal operating income (loss)Compensation and fringe benefitsTaxes and licensesOccupancy and equipment-

related costsDepreciation and amortizationProvision for credit and

impairment losses -netOther operating expensesNet operating income (loss)segment ResultsNet interest income (expense)Rent incomeService charges, fees, and

commissionsTrading and securities gain - netOther operating income (loss)total operating incomeCompensation and fringe benefitsTaxes and licensesOccupancy and other

equipment-related costsDepreciation and amortizationProvision for credit and

impairment lossesOther operating expensesSegment profit (loss)Provision for income taxNet income (loss)



Total

P2,167,298–

2,167,298615,797327,599

149,922103,822

50,195313,306

P606,657

P1,452,487308,299

180,094104,638121,780

2,167,298615,797327,599

149,922103,822

50,195313,306606,657289,271

P317,386

P11,688917,086

3,614,48241,290,472

P45,833,728

P43,314,825

Eliminations and

adjustments

P143,785–

143,78523,159

–

45,159(63,685)

(161,941)(1,152,379)P1,453,472

P127,20628,566

–8,936

(20,923)143,785

23,159–

45,159(63,685)

(161,941)(1,152,379)

1,453,472442

P1,453,030

P1,219(208,264)2,637,919

(7,538,312)(P5,107,438)

(P1,713,269)

Unallocated

P1,028,814–

1,028,814291,405150,687

10,609130,697

212,1361,307,159

(P1,073,879)

P617,290279,733

36,767(2,767)97,791

1,028,814291,405150,687

10,609130,697

212,1361,307,159

(1,073,879)244,951

(P1,318,830)

P10,469823,187976,563

24,902,714P26,712,933

P10,237,364

Treasury

(P110,064)–

(110,064)30,52636,733

1,1012,122

–22,027

(202,573)

(P202,360)–

4198,363(6,108)

(110,064)30,52636,733

1,1012,122

–22,027

(202,573)14,398

(P216,971)

P–––

11,906,656P11,906,656

P5,573,834

CorporateBanking

P330,023–

330,02334,93051,705

1,5552,967

–3,699

P235,167

P231,530–

68,679–

29,814330,023

34,93051,705

1,5552,967

–3,699

235,1671,740

P233,427

P–––

7,291,679P7,291,679

P444,907

ConsumerBanking

P774,740–

774,740235,777

88,474

91,49831,721

–132,800

P194,470

P678,821–

74,607106

21,206774,740235,777

88,474

91,49831,721

–132,800194,470

27,740P166,730

P–302,163

–4,727,735

P5,029,898

P28,771,989




www.pbcom.com.ph

taxable gross income for a period of five consecutive taxable years immediately following the year of sale.

Miscellaneous - net includes foreclosed chattel amounting to nil and P0.57 million as of December 31, 2010 and 2009, respectively. In 2010, 2009 and 2008, the Bank recognized depreciation expense on foreclosed chattel amounting to P0.57 million, P10.23 million and nil, respectively. In 2009, the Bank recognized in the statement of income under profit (loss) on asset sold and exchange gain on sale of foreclosed chattel amounting to P17.87 million. There was no sale of foreclosed chattel in 2010 and 2008.

Refundable security deposits recorded under ‘Miscellaneous - net’ amounted to P15.71 million and P14.39 million as of December 31, 2010 and 2009, respectively.

16. allowance for Credit and impairment losses

Changes in the allowance for credit and impairment losses follow (amounts in thousands):

Below is the breakdown of provisions for credit and impairment losses, net of reversals (amounts in thousands):

With the foregoing level of allowance for credit and impairment losses, management believes that the Bank has sufficient allowance to take care of any losses that the Bank may incur from the noncollection or nonrealization of its receivables and other risk assets.

A reconciliation of the allowance for credit losses by class of loans and receivables follows (in thousands):

17. Deposit liabilities

Under existing BSP regulations, non-FCDU deposit liabilities are subject to liquidity reserve equivalent to 11.00% and statutory reserves equivalent to 8.00%. As of December 31, 2010 and 2009, the Bank is in compliance with such regulation. As of December 31, 2010 and 2009, the following assets were set aside as reserves for deposit liabilities (amounts in thousands):

As of December 31, 2010 and 2009, information on the concentration of credit of loans and receivables (at gross amount but net of unearned discounts and capitalized interest) as to industry follows (amounts in thousands):

The BSP considers that credit concentration risks exist when total loan exposure to a particular industry exceeds 30.00% of the total loan portfolio.

Interest income on loans and receivables consists of interest income on:

Interest income accreted from impaired loans and receivables amounted to nil, P11.68 million and P99.72 million in 2010, 2009 and 2008, respectively.

Of the total receivables from customers of the Bank as of December 31, 2010 and 2009, 87.72% and 82.11%, respectively, are subject to periodic interest repricing. Remaining peso-denominated receivables from customers earn annual fixed interest rates ranging from 6.50% to 18.50% in 2010, 8.47% to 21.73% in 2009 and 4.00% to 32.00% in 2008, respectively, while foreign currency-denominated receivables from customers earn annual fixed interest rates of 5.75% to 8.75% in 2010, 6.50% to 9.88% in 2009, and 7.5% to 9.00% in 2008.

Unquoted debt securities have effective interest rates ranging from 4.25% to 11.90% in 2010, 2009 and 2008.

Sales contracts receivable bears interest rate ranging from 10.00% to 18.00% in 2010 and 2009 and 10.29% to 18.00% in 2008.

11. investment in an associate

This account consists of investment in PBCom Finance as follows:

Movements in accumulated equity in net earnings are as follows:

Share in net income on PBCom Finance is included under ‘Miscellaneous income’ on the statement of income.

The comparative financial information of PBCom Finance follows:

12. property and Equipment

The details of property and equipment carried at cost are as follows:

Details of land at appraised value are as follows:

13. investment properties

The composition of and movements in this account follow:

The aggregate fair value of land, buildings and improvements and condominium units for lease and used for operations amounted to P575.64 million, P208.32 million and P4.27 billion, respectively, as of December 31, 2010 and P809.77 million, P355.51 million and P3.00 billion, respectively, as of December 31, 2009. Fair value has been determined based on valuation made by independent appraisers which were derived on the basis of recent sales of similar properties in the same areas as the investment properties and taking into account the economic conditions prevailing at the time the valuation were made.

Condominium units for lease represents the contributed cost of developing the Bank’s Ayala Avenue property, originally consisting of land and fully depreciated building, into a 52-storey building named PBCom Tower under a joint development agreement with Filinvest Asia Corporation (Filinvest Asia).

The agreement provided for equal sharing of the cost of the project and, correspondingly, of the net usable area of the building, which was converted into a condominium property. Under the agreement, the Bank’s share in such cost included its land along Ayala Avenue, which was given an appraised value of P900.00 million in 1995. The related appraisal increment was closed to surplus, net of applicable deferred tax liability, upon completion of the project in 2000. In November 2007, by virtue of condominiumization, various CCTs under the name of the Bank were derived from TCT No. 134599 wherein the declaration

of restrictions and scope of coverage were annotated on October 23, 2007. About 84.55% of the usable area that the Bank acquired under such project is held for lease or sale, with the balance used for the Bank’s operations. Accordingly, the cost allocable to the area held for lease is carried as Investment Properties, while the remaining balance is carried as condominium property and included in Property and Equipment at cost (Note 12).

In 2010 and 2008, the Bank recognized fair value gain on foreclosure amounting to P5.04 million, and P61.37 million, respectively. The Bank recognized gain (loss) on sale of investment properties amounting to (P2.07) million, (P24.25) million and P36.61 million, in 2010, 2009 and 2008, respectively.

The Bank recognized rental income (shown under ‘Rent income’ in the statements of income) amounting to P296.68 million, P300.55 million, and P302.72 million in 2010, 2009 and 2008, respectively, on investment properties leased out under operating leases.

14. intangibles


Branch licenses have indefinite lives and are subject to annual impairment testing. Branch licenses are written down for impairment when the net present value of the forecasted future cash flows of each branches are insufficient to support its carrying value.

The movements of software cost follow:

15. other assets


As discussed in Note 1, based on the ASPA entered into by the Bank on October 11, 2004, certain NPAs with an aggregate book value of P12.23 billion were sold by the Bank to an SPV under the provisions of Republic Act (RA) No. 9182, “The Special Purpose Vehicle Act of 2002.” As of December 31, 2004, the Bank had collected 30.00% of the total selling price. On April 8, 2005, the Bank collected the remaining 70.00% less the portion retained which is covered by an Escrow Agreement entered by the Bank and the SPV with a local bank. Based on such agreement, the local bank shall act as the escrow agent on the portion of the selling price amounting to P50.00 million that has to be retained to secure the fulfillment by the Bank of its representations and warranties and to apply any adjustment in the purchase price in accordance with the ASPA. As of December 31, 2010 and 2009, the balance of the escrow account included under Miscellaneous - net amounted to P6.08 million and P37.01 million, respectively.

Deferred charges account represents the excess of the book value over the selling price of NPAs sold to an SPV company amounting to P11.12 billion, which was deferred by the Bank as allowed under the regulations issued by the BSP for banks and financial institutions availing of the provisions of RA No. 9182. Under PFRS, such excess should have been charged to deficit in 2004.

Under RA No. 9182, such losses are allowed to be amortized over ten (10) years based on the following schedule:

The Bank’s accounting policy under PFRS is to recognize the yearly amortization of deferred charges retrospectively against deficit, which differs from the BSP regulations which require that yearly amortization be charged against current operations. Had the Bank accounted for the amortization of deferred charges in accordance with RAP, the Bank would have reported a net loss in 2010 of P699.25 million. As of December 31, 2010, 2009 and 2008, unamortized deferred charges amounted to P5.92 billion.

Under RA No. 9182, for the purpose of computing the Bank’s income tax, the loss is treated as an ordinary loss and will be carried over as a deduction from the Bank’s

Acquisition cost (40% owned)Accumulated equity in net earnings

2010p2,000,000

9,299,640p11,299,640

2009P2,000,000

9,642,380P11,642,380

Balance at beginning of yearShare in net incomeDividend incomeBalance at end of year

2010p9,642,380

257,260(600,000)

p9,299,640

2009P9,687,580

(45,200)–

P9,642,380

Statements of financial position Total assets Total liabilities Net assetsstatements of income Revenue Net income

2010

p28,809,8443,296,294

25,513,550

3,149,919643,151

2009

P29,407,1124,373,505

25,033,608

3,153,272818,888

Cost Balance at beginning of yearAdditionsDisposalsAmortizationTransfers (Note 13)Balance at end of yearaccumulated DepreciationBalance at beginning of yearDepreciationDisposalsTransfers (Note 13)Balance at end of yearaccumulated impairment (Note 16)Balance at beginning of yearReversalsTransfersBalance at end of yearNet book value at end of year

Condominium property(Note 13)

p521,275,992–––

(7,016,973)514,259,019

79,220,0589,510,447

–(1,194,414)87,536,091

––––

p426,722,928

buildings and improvements

p312,223,146507,730

–––

312,730,876

208,428,73810,701,566

––

219,130,304

9,897,499(1,955,069)

–7,942,430

p85,658,142

2010Furniture,

Fixtures and Equipment

p540,413,79117,129,927

(48,274,993)–

1,779,777511,048,502

475,092,87926,278,132

(43,390,176)–

457,980,835

530,114–

(530,114)–

p53,067,667

leasehold improvments

-Net

p39,312,3612,143,504

–(10,061,148)

(1,779,777)29,614,940

–––––

––––

p29,614,940

total

p1,413,225,29019,781,161

(48,274,993)(10,061,148)

(7,016,973)1,367,653,337

762,741,67546,490,145

(43,390,176)(1,194,414)

764,647,230

10,427,613(1,955,069)

(530,114)7,942,430

p595,063,677

Cost Balance at beginning of yearAdditionsDisposalsAmortizationReclassificationsBalance at end of yearaccumulated DepreciationBalance at beginning of yearDepreciationDisposalsReclassificationsBalance at end of yearaccumulated impairment (Note 16)Balance at beginning of yearProvisionsBalance at end of yearNet book value at end of year

Condominium Property

(Note 13)

P521,275,992––––

521,275,992

69,709,6119,510,447

––

79,220,058

–––

P442,055,934

Buildings and Improvements

P312,003,1851,203,176

––

(983,215)312,223,146

197,714,40910,701,706

–12,623

208,428,738

9,897,499–

9,897,499

P93,896,909

2009Furniture,


P549,484,62320,791,135

(29,955,293)–

93,326540,413,791

468,475,24831,881,712

(25,251,458)(12,623)

475,092,879

–530,114530,114

P64,790,798

Leasehold Improvments

-Net

P46,833,9942,249,145

–(10,660,667)

889,88939,312,361

–––––

––

P39,312,361

Total

P1,429,597,7944,243,456

(29,955,293)(10,660,667)

–1,413,225,290

735,899,26852,093,865

(25,251,458)–

762,741,675

9,897,499530,114

10,427,613

P640,056,002

CostBalance at beginning of yearDisposalsReclassifications (Note 13)Balance at end of yearappraisal incrementBalance at beginning of yearAdditionsReversalsReclassifications (Note 13)Balance at end of yearless allowance for impairment losses (Note 16)

2009

P128,037,813(875,000)2,929,875

130,092,688

116,881,143–

(24,145,362)68,600,125

161,335,9068,790,104

P282,638,490

2010

p130,092,688––

130,092,688

161,335,906113,681,156

––

275,017,0627,830,750

p397,279,000

2010

CostBalance at beginning of yearAdditionsDisposalsTransfers (Note 12)Balance at end of year

buildings andimprovements

p453,016,61312,147,042

(70,962,641)–

394,201,014

Condominiumunits for

lease

p2,501,343,0157,706,251

–7,016,973

2,516,066,239

land

p785,265,95917,165,232

(180,620,429)–

621,810,762

total

p3,739,625,58737,018,525

(251,583,070)7,016,973

3,532,078,015

accumulated depreciationBalance at beginning of yearDepreciation and amortizationDisposalsTransfers (Note 12)Balance at end of yearallowance for impairment losses (Note 16)Balance at beginning of yearProvisions Balance at end of yearNet book value at end of the year

75,038,07310,091,390

(24,537,456)–

60,592,007

p118,323,75175,605,181

193,928,932p139,680,075

303,624,13044,443,006

–1,194,414

349,261,550

p–––

p2,166,804,689

–––––

156,117,908104,402,314260,520,222

p361,290,540

378,662,20354,534,396

(24,537,456)1,194,414

409,853,557

p274,441,659180,007,495454,449,154

p2,667,775,304

2009

CostBalance at beginning of yearAdditionsDisposalsTransfers and reclassifications (Notes 12 and 15)Balance at end of yearaccumulated depreciationBalance at beginning of yearDepreciation and amortizationDisposalsBalance at end of yearallowance for impairment losses (Note 16)Balance at beginning of yearDisposals and othersTransfers and reclassificationsBalance at end of yearNet book value at end of the year

Buildings andImprovements

P573,283,740–

(153,005,055)

32,737,928453,016,613

91,174,24215,730,086

(31,866,255)75,038,073

104,337,598(1,439,695)15,425,848

118,323,751P259,654,789

CondominiumUnits for

Lease

P2,498,351,3782,991,637

–

–2,501,343,015

259,325,24444,298,886

–303,624,130

––––

P2,197,718,885

Land

P1,199,849,2621,072,555

(344,125,858)

(71,530,000)785,265,959

––––

202,164,822(6,382,530)

(39,664,384)156,117,908

P629,148,051

Total

P4,271,484,3804,064,192

(497,130,913)

(38,792,072)3,739,625,587

350,499,48660,028,972

(31,866,255)378,662,203

306,502,420(7,822,225)

(24,238,536)274,441,659

P3,086,521,725

Branch licensesSoftware cost

Less allowance for impairment losses (Note 16)

2009P102,100,153

20,353,165122,453,318

85,979,076P36,474,242

2010p102,100,153

6,642,048108,742,201102,100,153p6,642,048

Balance at beginning of yearAdditions during the year

Amortization during the year

2010p20,353,165

5,714,64626,067,811

(19,425,763)p6,642,048

2009P28,913,004

10,333,78839,246,792

(18,893,627)P20,353,165

Deferred charges (Note 32)Prepaid expensesInteroffice float items - netRCOCIMiscellaneous - net


2010p5,921,040,451

55,961,65641,419,08013,617,013

251,996,3906,284,034,590

209,936,338p6,074,098,252

2008 (As restated

- Note 32)P5,921,040,451

54,010,07325,748,753

5,984,551349,634,152

6,356,417,980

226,561,267P6,129,856,713

2009(As restated

- Note 32)P5,921,040,451

72,026,87019,795,985

7,376,187284,746,259

6,304,985,752

210,400,998P6,094,584,754

End of Period From Date of TransactionYear 1Year 2Year 3Year 4Year 5Year 6Year 7Year 8Year 9Year 10

Cumulative Write-downof Deferred Charges

5%10%15%25%35%45%55%70%85%

100%

Balance at beginning of year: AFS investments (Note 8) Loans and receivables (Note 10) Property and equipment (Note 12) Investment properties (Note 13) Intangibles (Note 14) Other assets (Note 15)

Provisions for credit and impairment losses - net of reversals (Notes 8, 10, 12, 13, 14 and 15)Revaluation of FCDU loansAccretionAccounts written off and others

Balance at end of year: AFS investments (Note 8) Loans and receivables (Note 10) Property and equipment (Note 12) Investment properties (Note 13) Intangibles (Note 14) Other assets (Note 15)

2010

p6,0012,499,532

19,218274,442

85,979210,401

3,095,573

377,793(9,150)

––

368,643

6,1042,675,854

15,773454,449102,100209,936

p3,464,216

2009

P3,2872,135,760

21,532306,502

80,605226,562

2,774,248

346,495(5,670)

(11,678)(7,822)

321,325

6,0012,499,532

19,218274,442

85,979210,401

P3,095,573

AFS investmentsLoans and receivablesProperty and equipmentInvestment propertiesIntangiblesOther assets

2010p103

184,941(2,914)

180,00716,121

(465)p377,793

2008P–

50,195––––

P50,195

2009P2,714

337,877530

–5,374

–P346,495

Balance at beginning of yearProvisions during the yearRevaluationOthers**Balance at end of yearIndividual impairmentCollective impairment

Gross amount of loans individually determined to be impaired* This includes allowance for credit losses on accounts receivables, accrued interest receivables and sales contract receivables.** This includes transfers and write-offs.

Corporatep1,545,743

14,696(9,150)

–p1,551,289p1,010,191

541,098p1,551,289

p1,150,963

totalp2,499,532

184,941(9,150)

531p2,675,854p2,123,121

552,733p2,675,854

p2,263,893

Consumerp137,502

101,973––

p239,475p228,662

10,813p239,475

p228,662

others*p816,287

68,272–

531p885,090p884,268

822p885,090

p884,268

2010

Balance at beginning of yearProvisions during the yearAccretionRevaluationOthers**Balance at end of yearIndividual impairmentCollective impairment


CorporateP1,463,845

59,725(11,678)(5,671)39,522

P1,545,743P1,110,879

434,864P1,545,743

P1,254,675

TotalP2,135,760

337,877(11,678)(5,671)43,244

P2,499,532P2,040,937

458,595P2,499,532

P2,182,402

ConsumerP124,560

9,220––

3,722P137,502P113,771

23,731P137,502

P111,440

Others*P547,355

268,932–––

P816,287P816,287

–P816,287

P816,287

2009

Cash and other cash items*Due from BSPUnquoted debt securities

*Based on December 29, 2010 and December 30, 2009 balances

2010p296,2141,704,4052,313,572

p4,314,191

2009P317,9951,892,6372,538,762

P4,749,394

GovernmentWholesale and Retail TradeManufacturingConstruction and real estateBanks and financial institutionsOthers

2010amount

p4,331,1113,594,2522,983,436

903,338296,449

3,752,616p15,861,202

%27.3122.6618.81

5.701.86

23.66100.00

2009Amount

4,087,9983,257,3203,013,2121,012,310

196,8733,540,805

P15,108,518

%27.0621.5619.94

6.701.30

23.44100.00

Receivables from customers: Corporate ConsumerUnquoted debt securitiesOthers

2010

p630,058,85415,717,655

466,994,5237,806,615

p1,120,577,647

2009

P655,381,52213,414,032

434,212,76210,086,537

P1,113,094,853

2008

P917,392,02416,193,694

383,682,97314,192,279

P1,331,460,970



www.pbcom.com.ph

taxable gross income for a period of five consecutive taxable years immediately following the year of sale.

Miscellaneous - net includes foreclosed chattel amounting to nil and P0.57 million as of December 31, 2010 and 2009, respectively. In 2010, 2009 and 2008, the Bank recognized depreciation expense on foreclosed chattel amounting to P0.57 million, P10.23 million and nil, respectively. In 2009, the Bank recognized in the statement of income under profit (loss) on asset sold and exchange gain on sale of foreclosed chattel amounting to P17.87 million. There was no sale of foreclosed chattel in 2010 and 2008.

Refundable security deposits recorded under ‘Miscellaneous - net’ amounted to P15.71 million and P14.39 million as of December 31, 2010 and 2009, respectively.

16. allowance for Credit and impairment losses

Changes in the allowance for credit and impairment losses follow (amounts in thousands):

Below is the breakdown of provisions for credit and impairment losses, net of reversals (amounts in thousands):

With the foregoing level of allowance for credit and impairment losses, management believes that the Bank has sufficient allowance to take care of any losses that the Bank may incur from the noncollection or nonrealization of its receivables and other risk assets.

A reconciliation of the allowance for credit losses by class of loans and receivables follows (in thousands):

17. Deposit liabilities

Under existing BSP regulations, non-FCDU deposit liabilities are subject to liquidity reserve equivalent to 11.00% and statutory reserves equivalent to 8.00%. As of December 31, 2010 and 2009, the Bank is in compliance with such regulation. As of December 31, 2010 and 2009, the following assets were set aside as reserves for deposit liabilities (amounts in thousands):

As of December 31, 2010 and 2009, information on the concentration of credit of loans and receivables (at gross amount but net of unearned discounts and capitalized interest) as to industry follows (amounts in thousands):

The BSP considers that credit concentration risks exist when total loan exposure to a particular industry exceeds 30.00% of the total loan portfolio.

Interest income on loans and receivables consists of interest income on:

Interest income accreted from impaired loans and receivables amounted to nil, P11.68 million and P99.72 million in 2010, 2009 and 2008, respectively.

Of the total receivables from customers of the Bank as of December 31, 2010 and 2009, 87.72% and 82.11%, respectively, are subject to periodic interest repricing. Remaining peso-denominated receivables from customers earn annual fixed interest rates ranging from 6.50% to 18.50% in 2010, 8.47% to 21.73% in 2009 and 4.00% to 32.00% in 2008, respectively, while foreign currency-denominated receivables from customers earn annual fixed interest rates of 5.75% to 8.75% in 2010, 6.50% to 9.88% in 2009, and 7.5% to 9.00% in 2008.

Unquoted debt securities have effective interest rates ranging from 4.25% to 11.90% in 2010, 2009 and 2008.

Sales contracts receivable bears interest rate ranging from 10.00% to 18.00% in 2010 and 2009 and 10.29% to 18.00% in 2008.

11. investment in an associate

This account consists of investment in PBCom Finance as follows:

Movements in accumulated equity in net earnings are as follows:

Share in net income on PBCom Finance is included under ‘Miscellaneous income’ on the statement of income.

The comparative financial information of PBCom Finance follows:

12. property and Equipment

The details of property and equipment carried at cost are as follows:

Details of land at appraised value are as follows:

13. investment properties

The composition of and movements in this account follow:

The aggregate fair value of land, buildings and improvements and condominium units for lease and used for operations amounted to P575.64 million, P208.32 million and P4.27 billion, respectively, as of December 31, 2010 and P809.77 million, P355.51 million and P3.00 billion, respectively, as of December 31, 2009. Fair value has been determined based on valuation made by independent appraisers which were derived on the basis of recent sales of similar properties in the same areas as the investment properties and taking into account the economic conditions prevailing at the time the valuation were made.

Condominium units for lease represents the contributed cost of developing the Bank’s Ayala Avenue property, originally consisting of land and fully depreciated building, into a 52-storey building named PBCom Tower under a joint development agreement with Filinvest Asia Corporation (Filinvest Asia).

The agreement provided for equal sharing of the cost of the project and, correspondingly, of the net usable area of the building, which was converted into a condominium property. Under the agreement, the Bank’s share in such cost included its land along Ayala Avenue, which was given an appraised value of P900.00 million in 1995. The related appraisal increment was closed to surplus, net of applicable deferred tax liability, upon completion of the project in 2000. In November 2007, by virtue of condominiumization, various CCTs under the name of the Bank were derived from TCT No. 134599 wherein the declaration

of restrictions and scope of coverage were annotated on October 23, 2007. About 84.55% of the usable area that the Bank acquired under such project is held for lease or sale, with the balance used for the Bank’s operations. Accordingly, the cost allocable to the area held for lease is carried as Investment Properties, while the remaining balance is carried as condominium property and included in Property and Equipment at cost (Note 12).

In 2010 and 2008, the Bank recognized fair value gain on foreclosure amounting to P5.04 million, and P61.37 million, respectively. The Bank recognized gain (loss) on sale of investment properties amounting to (P2.07) million, (P24.25) million and P36.61 million, in 2010, 2009 and 2008, respectively.

The Bank recognized rental income (shown under ‘Rent income’ in the statements of income) amounting to P296.68 million, P300.55 million, and P302.72 million in 2010, 2009 and 2008, respectively, on investment properties leased out under operating leases.

14. intangibles


Branch licenses have indefinite lives and are subject to annual impairment testing. Branch licenses are written down for impairment when the net present value of the forecasted future cash flows of each branches are insufficient to support its carrying value.

The movements of software cost follow:

15. other assets


As discussed in Note 1, based on the ASPA entered into by the Bank on October 11, 2004, certain NPAs with an aggregate book value of P12.23 billion were sold by the Bank to an SPV under the provisions of Republic Act (RA) No. 9182, “The Special Purpose Vehicle Act of 2002.” As of December 31, 2004, the Bank had collected 30.00% of the total selling price. On April 8, 2005, the Bank collected the remaining 70.00% less the portion retained which is covered by an Escrow Agreement entered by the Bank and the SPV with a local bank. Based on such agreement, the local bank shall act as the escrow agent on the portion of the selling price amounting to P50.00 million that has to be retained to secure the fulfillment by the Bank of its representations and warranties and to apply any adjustment in the purchase price in accordance with the ASPA. As of December 31, 2010 and 2009, the balance of the escrow account included under Miscellaneous - net amounted to P6.08 million and P37.01 million, respectively.

Deferred charges account represents the excess of the book value over the selling price of NPAs sold to an SPV company amounting to P11.12 billion, which was deferred by the Bank as allowed under the regulations issued by the BSP for banks and financial institutions availing of the provisions of RA No. 9182. Under PFRS, such excess should have been charged to deficit in 2004.

Under RA No. 9182, such losses are allowed to be amortized over ten (10) years based on the following schedule:

The Bank’s accounting policy under PFRS is to recognize the yearly amortization of deferred charges retrospectively against deficit, which differs from the BSP regulations which require that yearly amortization be charged against current operations. Had the Bank accounted for the amortization of deferred charges in accordance with RAP, the Bank would have reported a net loss in 2010 of P699.25 million. As of December 31, 2010, 2009 and 2008, unamortized deferred charges amounted to P5.92 billion.

Under RA No. 9182, for the purpose of computing the Bank’s income tax, the loss is treated as an ordinary loss and will be carried over as a deduction from the Bank’s

Acquisition cost (40% owned)Accumulated equity in net earnings

2010p2,000,000

9,299,640p11,299,640

2009P2,000,000

9,642,380P11,642,380

Balance at beginning of yearShare in net incomeDividend incomeBalance at end of year

2010p9,642,380

257,260(600,000)

p9,299,640

2009P9,687,580

(45,200)–

P9,642,380

Statements of financial position Total assets Total liabilities Net assetsstatements of income Revenue Net income

2010

p28,809,8443,296,294

25,513,550

3,149,919643,151

2009

P29,407,1124,373,505

25,033,608

3,153,272818,888

Cost Balance at beginning of yearAdditionsDisposalsAmortizationTransfers (Note 13)Balance at end of yearaccumulated DepreciationBalance at beginning of yearDepreciationDisposalsTransfers (Note 13)Balance at end of yearaccumulated impairment (Note 16)Balance at beginning of yearReversalsTransfersBalance at end of yearNet book value at end of year

Condominium property(Note 13)

p521,275,992–––

(7,016,973)514,259,019

79,220,0589,510,447

–(1,194,414)87,536,091

––––

p426,722,928

buildings and improvements

p312,223,146507,730

–––

312,730,876

208,428,73810,701,566

––

219,130,304

9,897,499(1,955,069)

–7,942,430

p85,658,142

2010Furniture,


p540,413,79117,129,927

(48,274,993)–

1,779,777511,048,502

475,092,87926,278,132

(43,390,176)–

457,980,835

530,114–

(530,114)–

p53,067,667

leasehold improvments

-Net

p39,312,3612,143,504

–(10,061,148)

(1,779,777)29,614,940

–––––

––––

p29,614,940

total

p1,413,225,29019,781,161

(48,274,993)(10,061,148)

(7,016,973)1,367,653,337

762,741,67546,490,145

(43,390,176)(1,194,414)

764,647,230

10,427,613(1,955,069)

(530,114)7,942,430

p595,063,677

Cost Balance at beginning of yearAdditionsDisposalsAmortizationReclassificationsBalance at end of yearaccumulated DepreciationBalance at beginning of yearDepreciationDisposalsReclassificationsBalance at end of yearaccumulated impairment (Note 16)Balance at beginning of yearProvisionsBalance at end of yearNet book value at end of year

Condominium Property

(Note 13)

P521,275,992––––

521,275,992

69,709,6119,510,447

––

79,220,058

–––

P442,055,934

Buildings and Improvements

P312,003,1851,203,176

––

(983,215)312,223,146

197,714,40910,701,706

–12,623

208,428,738

9,897,499–

9,897,499

P93,896,909

2009Furniture,


P549,484,62320,791,135

(29,955,293)–

93,326540,413,791

468,475,24831,881,712

(25,251,458)(12,623)

475,092,879

–530,114530,114

P64,790,798

Leasehold Improvments

-Net

P46,833,9942,249,145

–(10,660,667)

889,88939,312,361

–––––

––

P39,312,361

Total

P1,429,597,7944,243,456

(29,955,293)(10,660,667)

–1,413,225,290

735,899,26852,093,865

(25,251,458)–

762,741,675

9,897,499530,114

10,427,613

P640,056,002

CostBalance at beginning of yearDisposalsReclassifications (Note 13)Balance at end of yearappraisal incrementBalance at beginning of yearAdditionsReversalsReclassifications (Note 13)Balance at end of yearless allowance for impairment losses (Note 16)

2009

P128,037,813(875,000)2,929,875

130,092,688

116,881,143–

(24,145,362)68,600,125

161,335,9068,790,104

P282,638,490

2010

p130,092,688––

130,092,688

161,335,906113,681,156

––

275,017,0627,830,750

p397,279,000

2010

CostBalance at beginning of yearAdditionsDisposalsTransfers (Note 12)Balance at end of year

buildings andimprovements

p453,016,61312,147,042

(70,962,641)–

394,201,014

Condominiumunits for

lease

p2,501,343,0157,706,251

–7,016,973

2,516,066,239

land

p785,265,95917,165,232

(180,620,429)–

621,810,762

total

p3,739,625,58737,018,525

(251,583,070)7,016,973

3,532,078,015

accumulated depreciationBalance at beginning of yearDepreciation and amortizationDisposalsTransfers (Note 12)Balance at end of yearallowance for impairment losses (Note 16)Balance at beginning of yearProvisions Balance at end of yearNet book value at end of the year

75,038,07310,091,390

(24,537,456)–

60,592,007

p118,323,75175,605,181

193,928,932p139,680,075

303,624,13044,443,006

–1,194,414

349,261,550

p–––

p2,166,804,689

–––––

156,117,908104,402,314260,520,222

p361,290,540

378,662,20354,534,396

(24,537,456)1,194,414

409,853,557

p274,441,659180,007,495454,449,154

p2,667,775,304

2009

CostBalance at beginning of yearAdditionsDisposalsTransfers and reclassifications (Notes 12 and 15)Balance at end of yearaccumulated depreciationBalance at beginning of yearDepreciation and amortizationDisposalsBalance at end of yearallowance for impairment losses (Note 16)Balance at beginning of yearDisposals and othersTransfers and reclassificationsBalance at end of yearNet book value at end of the year

Buildings andImprovements

P573,283,740–

(153,005,055)

32,737,928453,016,613

91,174,24215,730,086

(31,866,255)75,038,073

104,337,598(1,439,695)15,425,848

118,323,751P259,654,789

CondominiumUnits for

Lease

P2,498,351,3782,991,637

–

–2,501,343,015

259,325,24444,298,886

–303,624,130

––––

P2,197,718,885

Land

P1,199,849,2621,072,555

(344,125,858)

(71,530,000)785,265,959

––––

202,164,822(6,382,530)

(39,664,384)156,117,908

P629,148,051

Total

P4,271,484,3804,064,192

(497,130,913)

(38,792,072)3,739,625,587

350,499,48660,028,972

(31,866,255)378,662,203

306,502,420(7,822,225)

(24,238,536)274,441,659

P3,086,521,725

Branch licensesSoftware cost


2009P102,100,153

20,353,165122,453,318

85,979,076P36,474,242

2010p102,100,153

6,642,048108,742,201102,100,153p6,642,048

Balance at beginning of yearAdditions during the year

Amortization during the year

2010p20,353,165

5,714,64626,067,811

(19,425,763)p6,642,048

2009P28,913,004

10,333,78839,246,792

(18,893,627)P20,353,165

Deferred charges (Note 32)Prepaid expensesInteroffice float items - netRCOCIMiscellaneous - net


2010p5,921,040,451

55,961,65641,419,08013,617,013

251,996,3906,284,034,590

209,936,338p6,074,098,252

2008 (As restated

- Note 32)P5,921,040,451

54,010,07325,748,753

5,984,551349,634,152

6,356,417,980

226,561,267P6,129,856,713

2009(As restated

- Note 32)P5,921,040,451

72,026,87019,795,985

7,376,187284,746,259

6,304,985,752

210,400,998P6,094,584,754

End of Period From Date of TransactionYear 1Year 2Year 3Year 4Year 5Year 6Year 7Year 8Year 9Year 10

Cumulative Write-downof Deferred Charges

5%10%15%25%35%45%55%70%85%

100%

Balance at beginning of year: AFS investments (Note 8) Loans and receivables (Note 10) Property and equipment (Note 12) Investment properties (Note 13) Intangibles (Note 14) Other assets (Note 15)

Provisions for credit and impairment losses - net of reversals (Notes 8, 10, 12, 13, 14 and 15)Revaluation of FCDU loansAccretionAccounts written off and others

Balance at end of year: AFS investments (Note 8) Loans and receivables (Note 10) Property and equipment (Note 12) Investment properties (Note 13) Intangibles (Note 14) Other assets (Note 15)

2010

p6,0012,499,532

19,218274,442

85,979210,401

3,095,573

377,793(9,150)

––

368,643

6,1042,675,854

15,773454,449102,100209,936

p3,464,216

2009

P3,2872,135,760

21,532306,502

80,605226,562

2,774,248

346,495(5,670)

(11,678)(7,822)

321,325

6,0012,499,532

19,218274,442

85,979210,401

P3,095,573

AFS investmentsLoans and receivablesProperty and equipmentInvestment propertiesIntangiblesOther assets

2010p103

184,941(2,914)

180,00716,121

(465)p377,793

2008P–

50,195––––

P50,195

2009P2,714

337,877530

–5,374

–P346,495

Balance at beginning of yearProvisions during the yearRevaluationOthers**Balance at end of yearIndividual impairmentCollective impairment


Corporatep1,545,743

14,696(9,150)

–p1,551,289p1,010,191

541,098p1,551,289

p1,150,963

totalp2,499,532

184,941(9,150)

531p2,675,854p2,123,121

552,733p2,675,854

p2,263,893

Consumerp137,502

101,973––

p239,475p228,662

10,813p239,475

p228,662

others*p816,287

68,272–

531p885,090p884,268

822p885,090

p884,268

2010

Balance at beginning of yearProvisions during the yearAccretionRevaluationOthers**Balance at end of yearIndividual impairmentCollective impairment


CorporateP1,463,845

59,725(11,678)(5,671)39,522

P1,545,743P1,110,879

434,864P1,545,743

P1,254,675

TotalP2,135,760

337,877(11,678)(5,671)43,244

P2,499,532P2,040,937

458,595P2,499,532

P2,182,402

ConsumerP124,560

9,220––

3,722P137,502P113,771

23,731P137,502

P111,440

Others*P547,355

268,932–––

P816,287P816,287

–P816,287

P816,287

2009



2010p296,2141,704,4052,313,572

p4,314,191

2009P317,9951,892,6372,538,762

P4,749,394

GovernmentWholesale and Retail TradeManufacturingConstruction and real estateBanks and financial institutionsOthers

2010amount

p4,331,1113,594,2522,983,436

903,338296,449

3,752,616p15,861,202

%27.3122.6618.81

5.701.86

23.66100.00

2009Amount

4,087,9983,257,3203,013,2121,012,310

196,8733,540,805

P15,108,518

%27.0621.5619.94

6.701.30

23.44100.00

Receivables from customers: Corporate ConsumerUnquoted debt securitiesOthers

2010

p630,058,85415,717,655

466,994,5237,806,615

p1,120,577,647

2009

P655,381,52213,414,032

434,212,76210,086,537

P1,113,094,853

2008

P917,392,02416,193,694

383,682,97314,192,279

P1,331,460,970



www.pbcom.com.ph

21. maturity analysis of assets and liabilities

The table below shows an analysis of assets and liabilities analyzed according to when they are expected to be recovered or settled (amounts in thousands):

22. Equity

Capital stock consists of:

Preferred shares are non-redeemable, nonconvertible and have the same voting rights, dividend rights, and other rights as the holder of common shares.

As of December 31, 2010 and 2009, surplus reserves consist of:

In compliance with BSP regulations, 10.00% of the Bank’s profit from trust business is appropriated to surplus reserves. This annual appropriation is required until the surplus reserves for trust business equals 20.00% of the Bank’s authorized capital stock.

Surplus reserve for self-insurance represents the amount set aside to cover for losses due to fire, defalcation by and other unlawful acts of the Bank’s personnel or third parties.

Capital ManagementThe 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 shareholders’ value.

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. The Bank manages its capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of its activities. In order to maintain or adjust the capital structure, the Bank may adjust the amount of dividend payment to shareholders, return capital to shareholders or issue capital securities. No changes were made in the objectives, policies and processes from the previous years.

Interest expense on deposit liabilities consists of:

Peso-denominated deposit liabilities earn annual fixed interest rates ranging from 0.50% to 4.75%, from 0.75% to 6.00 % and from 0.75% to 6.50% in 2010, 2009 and 2008, respectively, while foreign currency-denominated deposit liabilities earn annual fixed interest rates ranging from 0.50% to 3.50%, from 0.50% to 4.50% and from 0.50% to 4.75% in 2010, 2009 and 2008, respectively.

18. bills payable

This account consists of borrowings from:

Borrowings from banks and other financial institutions include borrowing from PDIC with loan principal amounting to P7.64 billion, which are fully secured by government securities under the FAA, as discussed in Note 1. Borrowing from PDIC was measured initially at fair value and carried at amortized cost of P5.41 billion and P4.86 billion, as of December 31, 2010 and 2009, respectively. As of December 31, 2010 and 2009, related unamortized day 1 gain on bills payable to PDIC which is presented as unearned income under other liabilities amounted to P2.26 billion and P2.78 billion, respectively.

Interest expense on bills payable and other borrowings consists of:

There were no peso interbank borrowings in 2010 and 2009. Dollar interbank borrowings are subject to annual floating interest rates ranging from 0.86% to 2.27% in 2010, from 0.74% to 2.27% in 2009 and from 2.29% to 6.58% in2008. There were no peso and dollar rediscounting availments in 2010 and 2009.

As of December 31, 2010 and 2009, the following assets were set aside as reserve for deposit substitutes (amounts in thousands):

19. accrued interest, taxes and other Expenses


20. other liabilities


Unearned income primarily pertains to the difference between the principal amount and the present value of the FAA granted by PDIC (Notes 1 and 15). Unearned income is amortized over the term of the financial assistance using the effective interest method and is shown under ‘Interest income - others’ in the statement of income. In 2010, 2009 and 2008, amortization of unearned income amounted to P515.35 million, P480.16 million and P429.65 million, respectively.

Miscellaneous includes marginal deposit, cash letters of credit, due to treasurer of the Philippines, withholding tax payable, refundable security deposits and deposit liabilities classified as dormant.

DemandSavingsTime

2010p36,945,059

15,608,360824,627,579

p877,180,998

2008P32,756,723

18,782,3691,288,589,197

P1,340,128,289

2009P30,324,575

14,954,5881,151,374,225

P1,196,653,388

Banks and other financial institutionsPrivate firms and individuals

2010p5,591,411,520

1,694,738,529p7,286,150,049

2009P5,444,993,615

1,928,678,671P7,373,672,286

Borrowed fundsOthers

2010p168,620,157

551,013,332p719,633,489

2008P74,125,357534,631,234

P608,756,591

2009P194,157,479

486,562,847P680,720,326



2010p102,356

34,119187,653

p324,128

2009P114,975

38,325210,788

P364,088

Financial Accrued interest payable Accrued other expenses

Nonfinancial Retirement liability (Note 26) Accrued taxes and licenses

2010

p71,540,35467,118,668

138,659,022

2,515,40710,196,88512,712,292

p151,371,314

2009

P87,351,76053,791,668

141,143,428

56,883,59619,629,43476,513,030

P217,656,458

Unearned income (Note 18)Accounts payableDeferred creditsMiscellaneous

2010p2,286,979,263

102,583,33876,640,761

451,458,088p2,917,661,450

2009P2,779,796,062

78,286,58375,883,517

436,419,772P3,370,385,934

Financial assets - at grossCash and other cash itemsDue from BSPDue from other banksInterbank loans receivable and SPURADerivative assetAFS investments (Note 8)HTM investments (Note 9)Loans and receivables (Note 10) Receivables from customers Unquoted debt securities Accrued interest receivable Accounts receivable Sales contract receivableOther assets (Note 15) Refundable deposits RCOCI

Nonfinancial Assets - at grossProperty and equipment (Note 12)Investment properties (Note 13)Investment in an associate (Note 11)Intangibles (Note 14)Other assets (Note 15)

Less:Unearned interest and discounts (Note 10)Accumulated depreciation and amortization (Notes 12 and 13)Allowance for credit and impairment losses (Note 16)Total

total

p379,6042,439,554

556,587

1,149,2821,882

6,389,6777,811,130

8,877,4975,618,541

813,659443,676112,088

15,71413,617

34,622,508

1,772,7633,532,078

11,300108,742

6,254,70211,679,58546,302,093

4,259

1,174,500

3,464,216p41,659,118

Due WithinOne Year

P395,6012,082,639

578,318

1,790,112–––

6,118,150–

383,587102,994

2,448

–7,376

11,461,225

––––

1,248,4111,248,411

P12,709,636

Due withinone year

p379,6042,439,554

556,587

1,149,2821,882

––

6,617,5692,822,315

309,91846,907

2,234

–13,617

14,339,469

––––

1,199,7991,199,799

p15,539,268

2010Due beyond

one year

p–––

––

6,389,6777,811,130

2,259,9282,796,226

503,741396,769109,854

15,714–

20,283,039

1,772,7633,532,078

11,300108,742

5,054,90310,479,786

p30,762,825

Due BeyondOne Year

P–––

––

7,229,5627,794,493

2,539,3685,078,379

514,088300,066

79,109

14,394–

23,549,459

1,704,6543,739,626

11,642122,453

5,034,80510,613,180

P34,162,639


Total

P395,6012,082,639

578,318

1,790,112–

7,229,5627,794,493

8,657,5185,078,379

897,675403,060

81,557

14,3947,376

35,010,684

1,704,6543,739,626

11,642122,453

6,283,21611,861,59146,872,275

9,670

1,141,406

3,095,573P42,625,626

Financial liabilitiesDeposit liabilities

DemandSavingsTime

Bills payableOutstanding acceptancesManager’s checks Accrued interest payable (Note 19)Accrued other expenses (Note 19)Other liabilities (Note 20) Accounts payable Miscellaneous

Nonfinancial LiabilityIncome tax payableDeferred tax liabilities (Note 29)Retirement liability (Notes 19 and 26)Accrued taxes and licenses (Note 19)Other liabilities: Unearned income Deferred credits Miscellaneous

p4,487,8722,375,465

20,744,3117,286,150

53,18234,02071,54067,119

102,583103,833

35,326,075

p6034,104

2,51510,197

2,286,97976,641

347,6262,758,122

p38,084,197

P3,858,1002,270,264

21,215,8851,928,679

40,63441,84987,35253,792

78,28712,489

29,587,331

P153–––

539,06675,884

–615,103

P30,202,434

p4,487,8722,375,465

20,701,8901,694,739

53,18234,02069,55367,119

102,58316,434

29,602,857

p60––

10,197

607,31876,641

–694,216

p30,297,073

p––

42,4215,591,411

––

1,987–

–87,399

5,723,218

p–34,104

2,515–

1,679,661–

347,6262,063,906

p7,787,124

P––

1,218,3265,444,993

––––

–86,791

6,750,110

P––

56,88419,629

2,240,730–

337,1392,654,382

P9,404,492

P3,858,1002,270,264

22,434,2117,373,672

40,63441,84987,35253,792

78,28799,280

36,337,441

P153–

56,88419,629

2,779,79675,884

337,1393,269,485

P39,606,926

Preferred stock - P25 par value Authorized - 120,000,000 shares Issued - 120,000,000 sharesCommon stock - P100 par value Authorized - 145,000,000 shares Issued - 52,598,965 shares

P3,000,000,000

5,259,896,500P8,259,896,500

Reserve for trust businessContingenciesSelf-insurance

p88,654,541

10,414,5486,703,225

p105,772,314

Regulatory Qualifying CapitalUnder existing BSP regulations, the determination of the Bank’s compliance with regulatory requirements and ratios is based on the amount of the Bank’s “qualifying capital” (regulatory net worth) as reported to the BSP, which is determined on the basis of regulatory accounting policies which differ from PFRS in some respects.

In addition to the required RBCAR of at least 12.50% under the FAA, the RBCAR of the Bank expressed as a percentage of qualifying capital to risk weighted assets, should not be less than 10.00%. Qualifying capital and risk weighted assets are computed based on BSP regulations.

The BSP, under BSP Circular No. 538 dated August 4, 2006, has issued the prescribed guidelines implementing the revised risk-based capital adequacy framework for the Philippine banking system to conform to Basel II recommendations. The new BSP guidelines took effect on July 1, 2007. The Bank’s RBCAR as of December 31, 2010 and 2009 are shown in the table below (amounts in millions):

The regulatory qualifying capital of the Bank consists of Tier 1 (core) capital, which comprises paid-up common and preferred stock, surplus including current year profit and surplus reserves less required deductions such as unsecured credit accommodations to directors, officers, stockholders and related interests (DOSRI) and deferred income tax and significant minority investments in banks and other financial allied undertakings. The other component of regulatory capital is Tier 2 (supplementary) capital, which includes appraisal increment reserves, as authorized by the monetary board and general loan loss provision.

Internal Capital Adequacy Assessment Process (ICAAP)The ICAAP methodology of the Bank was based on the minimum regulatory capital requirement under the BSP Circular No. 639 which involved, first, an assessment of whether the risk covered by the Framework are fully captured; and second, an assessment of other risks the Bank is exposed which are not fully captured and covered under the Framework, and an assessment of whether and how much capital to allocate against these other risks. The ICAAP Document was presented by the Bank to the BSP on January 26, 2011, prior to the deadline set by BSP of January 31, 2011. The ICAAP was approved by the BOD on January 27, 2011.

23. Commitments and Contingent liabilities

In the normal course of operations, the Bank has various outstanding commitments and contingent liabilities such as guarantees, forward exchange contracts, and commitments to extend credit, which are not presented in the accompanying financial statements. The Bank does not anticipate any material losses as a result of these transactions.

The following is a summary of the Bank’s commitments and contingent liabilities at their equivalent peso contractual amounts:

As of December 31, 2010 and 2009, the Bank has pending tax assessments from the BIR on certain industry tax issues covering FCDU taxation and documentary stamp tax, among others.

In 2007, the Bank availed of the tax amnesty program under RA No. 9480 to settle outstanding tax assessments. Under RA No. 9480, taxpayers who availed of the tax amnesty program shall be immune from payment of taxes, including interests and surcharges and any civil, criminal or administrative penalties arising from failure to pay any and all internal revenue taxes for taxable year 2005 and prior years. In 2009, the Bank received favorable resolution from the Court of Tax Appeals (CTA) on majority of the tax assessments which were rendered as “Final and Executory”. On the same year, the related “Entry of Judgment “ issued by the CTA were received by the Bank. Accordingly, provisions charged against prior years amounting to P169.66 million were recorded as a reversal of provision for tax assessments (Note 28).

The Bank has several loan-related suits and claims that remain unsettled. It is not practicable to estimate the potential financial statement impact of these contingencies. However, in the opinion of management, the suits and claims, if decided adversely, will not involve sums having a material effect on the financial statements.

The Bank is a defendant in legal actions arising from its normal business activities. Management believes that these actions are without merit or that the ultimate liability, if any, resulting from them will not materially affect the Bank’s financial statements. Derivative Financial Instrument As of December 31, 2010, the aggregate notional amount of the outstanding sell US dollar currency forwards with terms ranging from 5 to 21 days amounted to US$7.00 million. As of December 31, 2010, the weighted average sell US dollar forward rate is P44.12. In 2010, realized loss and unrealized gain on currency forwards recorded under ‘Trading and securities gain - net’ in the statements of income amounted to P0.05

million and P1.88 million, respectively.

24. trust operations

Securities and other properties (other than deposits) held by the Bank in its fiduciary or agency capacity for its customers are not included in the statements of financial position since these are not assets of the Bank. Total assets held by the Bank’s trust department amounted to P4.33 billion and P3.32 billion as of December 31, 2010 and 2009, respectively (Note 23).

As of December 31, 2010 and 2009, government securities (included in AFS investments in the statement of financial position) owned by the Bank with total face value of P40.00 million and P52.00 million, respectively, are deposited with the BSP in compliance with the requirements of the General Banking Law relative to the Bank’s trust functions.

Income from the Bank’s trust operations amounted to P13.45 million, P15.21 million and P22.10 million in 2010, 2009 and 2008, respectively.

25. income on trading and investment securities

Interest income on trading and investment securities follows:

In 2010, 2009 and 2008, peso-denominated financial assets at FVPL and AFS investments earned annual interest rates ranging from 4.10% to 9.13%, 5.50% to 9.13% and 5.00% to 10.00%, respectively, while dollar-denominated financial assets at FVPL and AFS investments earned annual interest ranging from 4.00% to 9.50%, 6.38% to 9.88% and 6.38% to 9.88%, respectively. HTM investments earned annual interest rates ranging from 7.75% to 12.38% in 2010, 2009 and 2008.

Trading and securities gain - net includes:

26. Retirement plan

The Bank has a noncontributory and funded retirement plan covering all its officers and regular employees. The retirement fund is administered by the Bank’s Trust Department which acts as the trustee under the plan. Under the retirement plan, all covered officers and employees are entitled to cash benefits after satisfying certain age and service requirements. The latest actuarial valuation study of the retirement plan was made on December 31, 2010.

The Bank’s annual contribution to the retirement plan consists of a payment covering the current service cost, amortization of the unfunded actuarial accrued liability and interest on such unfunded actuarial liability.

The principal actuarial assumptions used in determining retirement liability of the Bank under the Plan are shown below:

The overall expected rate of return on plan assets is determined based on the market prices prevailing on that date applicable to the period over which the obligation is to be settled.

The net retirement liability of the Bank (included under ‘Accrued interest, taxes and other expenses’ in the statement of financial position) follows:

The movements in the present value of retirement obligation of the Bank follow:

The movements in the fair value of plan assets of the Bank follow:

Tier 1 capitalTier 2 capitalGross qualifying capitalLess: Required deductions

Reduction from tier 1 (50.00%) and tier 2 (50.00%)Total qualifying capital

Risk-weighted assets

Tier 1 capital ratioTotal capital ratio

2010p3,482.74

320.763,803.50

(23.91)11.30

p3,816.11

p27,500.40

12.73%13.88%

2009P4,157.19

191.554,348.74

28.3511.64

P4,308.75

P34,189.43

12.06%12.60%

Trust department accountsStandby LCForward exchange soldSight import LC outstandingSpot exchange:

BoughtSold

Domestic LC outstandingOutstanding shipping guaranteesDeficiency claims receivableOutward bills for collectionInward bills for collectionUsance import LC outstandingLate deposits/payment receivedUnused loan commitmentsItems held for safekeepingItems held as collateral

2010p4,329,376,887

398,342,400306,880,000146,745,281

131,520,000131,520,000

98,360,85545,944,73433,772,86624,690,09216,665,05013,986,892

3,903,4271,000,000

7,7873,063

2009P3,322,425,505

335,374,320–

331,141,756

116,140,000116,095,000188,515,844

44,135,11933,772,866

3,340,90215,745,18319,217,477

9,999,3714,000,000

8,8923,268

Financial assets at FVPLAFS investmentsHTM investments

2010p1,925,167

447,040,207958,167,547

p1,407,132,921

2008P5,816,877

535,174,357965,474,777

P1,506,466,011

2009P11,136

567,820,122957,804,526

P1,525,635,784

AFS investmentsFinancial assets at FVPL

2010p500,900,079

6,140,661p507,040,740

2008P110,997,422

(6,359,903)P104,637,519

2009P115,413,579

3,771,674P119,185,253

Discount rate At January 1 At December 31Expected return on plan assetsFuture salary increases

2010

8.25%8.90%6.00%

10.00%

2009

9.00%8.25%7.00%7.00%

Present value of retirement obligationFair value of plan assetsDeficitUnrecognized actuarial loss Net retirement liability (Note 19)

2010p481,675,716

344,742,994136,932,722

(134,417,315)p2,515,407

2009P399,445,875

262,170,813137,275,062(80,391,467)P56,883,595

Balance at beginning of yearInterest costCurrent service costBenefits paidActuarial loss (gain) on retirement obligationBalance at end of year

2010p399,445,875

32,954,28528,006,771

(35,276,711)56,545,496

p481,675,716

2009P408,266,712

36,744,00428,983,045

(52,971,130)(21,576,756)

P399,445,875

Balance at beginning of yearContributions paidExpected returnBenefits paidActuarial loss on plan assetsBalance at end of year

2010p262,170,813

102,710,29215,730,250

(35,276,711)(591,650)

p344,742,994

2009P298,657,836

–20,906,049

(52,971,130)(4,421,942)

P262,170,813



www.pbcom.com.ph

21. maturity analysis of assets and liabilities

The table below shows an analysis of assets and liabilities analyzed according to when they are expected to be recovered or settled (amounts in thousands):

22. Equity

Capital stock consists of:

Preferred shares are non-redeemable, nonconvertible and have the same voting rights, dividend rights, and other rights as the holder of common shares.

As of December 31, 2010 and 2009, surplus reserves consist of:

In compliance with BSP regulations, 10.00% of the Bank’s profit from trust business is appropriated to surplus reserves. This annual appropriation is required until the surplus reserves for trust business equals 20.00% of the Bank’s authorized capital stock.

Surplus reserve for self-insurance represents the amount set aside to cover for losses due to fire, defalcation by and other unlawful acts of the Bank’s personnel or third parties.

Capital ManagementThe 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 shareholders’ value.

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. The Bank manages its capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of its activities. In order to maintain or adjust the capital structure, the Bank may adjust the amount of dividend payment to shareholders, return capital to shareholders or issue capital securities. No changes were made in the objectives, policies and processes from the previous years.

Interest expense on deposit liabilities consists of:

Peso-denominated deposit liabilities earn annual fixed interest rates ranging from 0.50% to 4.75%, from 0.75% to 6.00 % and from 0.75% to 6.50% in 2010, 2009 and 2008, respectively, while foreign currency-denominated deposit liabilities earn annual fixed interest rates ranging from 0.50% to 3.50%, from 0.50% to 4.50% and from 0.50% to 4.75% in 2010, 2009 and 2008, respectively.

18. bills payable

This account consists of borrowings from:

Borrowings from banks and other financial institutions include borrowing from PDIC with loan principal amounting to P7.64 billion, which are fully secured by government securities under the FAA, as discussed in Note 1. Borrowing from PDIC was measured initially at fair value and carried at amortized cost of P5.41 billion and P4.86 billion, as of December 31, 2010 and 2009, respectively. As of December 31, 2010 and 2009, related unamortized day 1 gain on bills payable to PDIC which is presented as unearned income under other liabilities amounted to P2.26 billion and P2.78 billion, respectively.

Interest expense on bills payable and other borrowings consists of:

There were no peso interbank borrowings in 2010 and 2009. Dollar interbank borrowings are subject to annual floating interest rates ranging from 0.86% to 2.27% in 2010, from 0.74% to 2.27% in 2009 and from 2.29% to 6.58% in2008. There were no peso and dollar rediscounting availments in 2010 and 2009.

As of December 31, 2010 and 2009, the following assets were set aside as reserve for deposit substitutes (amounts in thousands):

19. accrued interest, taxes and other Expenses


20. other liabilities


Unearned income primarily pertains to the difference between the principal amount and the present value of the FAA granted by PDIC (Notes 1 and 15). Unearned income is amortized over the term of the financial assistance using the effective interest method and is shown under ‘Interest income - others’ in the statement of income. In 2010, 2009 and 2008, amortization of unearned income amounted to P515.35 million, P480.16 million and P429.65 million, respectively.

Miscellaneous includes marginal deposit, cash letters of credit, due to treasurer of the Philippines, withholding tax payable, refundable security deposits and deposit liabilities classified as dormant.

DemandSavingsTime

2010p36,945,059

15,608,360824,627,579

p877,180,998

2008P32,756,723

18,782,3691,288,589,197

P1,340,128,289

2009P30,324,575

14,954,5881,151,374,225

P1,196,653,388

Banks and other financial institutionsPrivate firms and individuals

2010p5,591,411,520

1,694,738,529p7,286,150,049

2009P5,444,993,615

1,928,678,671P7,373,672,286

Borrowed fundsOthers

2010p168,620,157

551,013,332p719,633,489

2008P74,125,357534,631,234

P608,756,591

2009P194,157,479

486,562,847P680,720,326



2010p102,356

34,119187,653

p324,128

2009P114,975

38,325210,788

P364,088

Financial Accrued interest payable Accrued other expenses

Nonfinancial Retirement liability (Note 26) Accrued taxes and licenses

2010

p71,540,35467,118,668

138,659,022

2,515,40710,196,88512,712,292

p151,371,314

2009

P87,351,76053,791,668

141,143,428

56,883,59619,629,43476,513,030

P217,656,458

Unearned income (Note 18)Accounts payableDeferred creditsMiscellaneous

2010p2,286,979,263

102,583,33876,640,761

451,458,088p2,917,661,450

2009P2,779,796,062

78,286,58375,883,517

436,419,772P3,370,385,934

Financial assets - at grossCash and other cash itemsDue from BSPDue from other banksInterbank loans receivable and SPURADerivative assetAFS investments (Note 8)HTM investments (Note 9)Loans and receivables (Note 10) Receivables from customers Unquoted debt securities Accrued interest receivable Accounts receivable Sales contract receivableOther assets (Note 15) Refundable deposits RCOCI

Nonfinancial Assets - at grossProperty and equipment (Note 12)Investment properties (Note 13)Investment in an associate (Note 11)Intangibles (Note 14)Other assets (Note 15)

Less:Unearned interest and discounts (Note 10)Accumulated depreciation and amortization (Notes 12 and 13)Allowance for credit and impairment losses (Note 16)Total

total

p379,6042,439,554

556,587

1,149,2821,882

6,389,6777,811,130

8,877,4975,618,541

813,659443,676112,088

15,71413,617

34,622,508

1,772,7633,532,078

11,300108,742

6,254,70211,679,58546,302,093

4,259

1,174,500

3,464,216p41,659,118

Due WithinOne Year

P395,6012,082,639

578,318

1,790,112–––

6,118,150–

383,587102,994

2,448

–7,376

11,461,225

––––

1,248,4111,248,411

P12,709,636

Due withinone year

p379,6042,439,554

556,587

1,149,2821,882

––

6,617,5692,822,315

309,91846,907

2,234

–13,617

14,339,469

––––

1,199,7991,199,799

p15,539,268

2010Due beyond

one year

p–––

––

6,389,6777,811,130

2,259,9282,796,226

503,741396,769109,854

15,714–

20,283,039

1,772,7633,532,078

11,300108,742

5,054,90310,479,786

p30,762,825

Due BeyondOne Year

P–––

––

7,229,5627,794,493

2,539,3685,078,379

514,088300,066

79,109

14,394–

23,549,459

1,704,6543,739,626

11,642122,453

5,034,80510,613,180

P34,162,639


Total

P395,6012,082,639

578,318

1,790,112–

7,229,5627,794,493

8,657,5185,078,379

897,675403,060

81,557

14,3947,376

35,010,684

1,704,6543,739,626

11,642122,453

6,283,21611,861,59146,872,275

9,670

1,141,406

3,095,573P42,625,626

Financial liabilitiesDeposit liabilities

DemandSavingsTime

Bills payableOutstanding acceptancesManager’s checks Accrued interest payable (Note 19)Accrued other expenses (Note 19)Other liabilities (Note 20) Accounts payable Miscellaneous

Nonfinancial LiabilityIncome tax payableDeferred tax liabilities (Note 29)Retirement liability (Notes 19 and 26)Accrued taxes and licenses (Note 19)Other liabilities: Unearned income Deferred credits Miscellaneous

p4,487,8722,375,465

20,744,3117,286,150

53,18234,02071,54067,119

102,583103,833

35,326,075

p6034,104

2,51510,197

2,286,97976,641

347,6262,758,122

p38,084,197

P3,858,1002,270,264

21,215,8851,928,679

40,63441,84987,35253,792

78,28712,489

29,587,331

P153–––

539,06675,884

–615,103

P30,202,434

p4,487,8722,375,465

20,701,8901,694,739

53,18234,02069,55367,119

102,58316,434

29,602,857

p60––

10,197

607,31876,641

–694,216

p30,297,073

p––

42,4215,591,411

––

1,987–

–87,399

5,723,218

p–34,104

2,515–

1,679,661–

347,6262,063,906

p7,787,124

P––

1,218,3265,444,993

––––

–86,791

6,750,110

P––

56,88419,629

2,240,730–

337,1392,654,382

P9,404,492

P3,858,1002,270,264

22,434,2117,373,672

40,63441,84987,35253,792

78,28799,280

36,337,441

P153–

56,88419,629

2,779,79675,884

337,1393,269,485

P39,606,926

Preferred stock - P25 par value Authorized - 120,000,000 shares Issued - 120,000,000 sharesCommon stock - P100 par value Authorized - 145,000,000 shares Issued - 52,598,965 shares

P3,000,000,000

5,259,896,500P8,259,896,500

Reserve for trust businessContingenciesSelf-insurance

p88,654,541

10,414,5486,703,225

p105,772,314

Regulatory Qualifying CapitalUnder existing BSP regulations, the determination of the Bank’s compliance with regulatory requirements and ratios is based on the amount of the Bank’s “qualifying capital” (regulatory net worth) as reported to the BSP, which is determined on the basis of regulatory accounting policies which differ from PFRS in some respects.

In addition to the required RBCAR of at least 12.50% under the FAA, the RBCAR of the Bank expressed as a percentage of qualifying capital to risk weighted assets, should not be less than 10.00%. Qualifying capital and risk weighted assets are computed based on BSP regulations.

The BSP, under BSP Circular No. 538 dated August 4, 2006, has issued the prescribed guidelines implementing the revised risk-based capital adequacy framework for the Philippine banking system to conform to Basel II recommendations. The new BSP guidelines took effect on July 1, 2007. The Bank’s RBCAR as of December 31, 2010 and 2009 are shown in the table below (amounts in millions):

The regulatory qualifying capital of the Bank consists of Tier 1 (core) capital, which comprises paid-up common and preferred stock, surplus including current year profit and surplus reserves less required deductions such as unsecured credit accommodations to directors, officers, stockholders and related interests (DOSRI) and deferred income tax and significant minority investments in banks and other financial allied undertakings. The other component of regulatory capital is Tier 2 (supplementary) capital, which includes appraisal increment reserves, as authorized by the monetary board and general loan loss provision.

Internal Capital Adequacy Assessment Process (ICAAP)The ICAAP methodology of the Bank was based on the minimum regulatory capital requirement under the BSP Circular No. 639 which involved, first, an assessment of whether the risk covered by the Framework are fully captured; and second, an assessment of other risks the Bank is exposed which are not fully captured and covered under the Framework, and an assessment of whether and how much capital to allocate against these other risks. The ICAAP Document was presented by the Bank to the BSP on January 26, 2011, prior to the deadline set by BSP of January 31, 2011. The ICAAP was approved by the BOD on January 27, 2011.

23. Commitments and Contingent liabilities

In the normal course of operations, the Bank has various outstanding commitments and contingent liabilities such as guarantees, forward exchange contracts, and commitments to extend credit, which are not presented in the accompanying financial statements. The Bank does not anticipate any material losses as a result of these transactions.

The following is a summary of the Bank’s commitments and contingent liabilities at their equivalent peso contractual amounts:

As of December 31, 2010 and 2009, the Bank has pending tax assessments from the BIR on certain industry tax issues covering FCDU taxation and documentary stamp tax, among others.

In 2007, the Bank availed of the tax amnesty program under RA No. 9480 to settle outstanding tax assessments. Under RA No. 9480, taxpayers who availed of the tax amnesty program shall be immune from payment of taxes, including interests and surcharges and any civil, criminal or administrative penalties arising from failure to pay any and all internal revenue taxes for taxable year 2005 and prior years. In 2009, the Bank received favorable resolution from the Court of Tax Appeals (CTA) on majority of the tax assessments which were rendered as “Final and Executory”. On the same year, the related “Entry of Judgment “ issued by the CTA were received by the Bank. Accordingly, provisions charged against prior years amounting to P169.66 million were recorded as a reversal of provision for tax assessments (Note 28).

The Bank has several loan-related suits and claims that remain unsettled. It is not practicable to estimate the potential financial statement impact of these contingencies. However, in the opinion of management, the suits and claims, if decided adversely, will not involve sums having a material effect on the financial statements.

The Bank is a defendant in legal actions arising from its normal business activities. Management believes that these actions are without merit or that the ultimate liability, if any, resulting from them will not materially affect the Bank’s financial statements. Derivative Financial Instrument As of December 31, 2010, the aggregate notional amount of the outstanding sell US dollar currency forwards with terms ranging from 5 to 21 days amounted to US$7.00 million. As of December 31, 2010, the weighted average sell US dollar forward rate is P44.12. In 2010, realized loss and unrealized gain on currency forwards recorded under ‘Trading and securities gain - net’ in the statements of income amounted to P0.05

million and P1.88 million, respectively.

24. trust operations

Securities and other properties (other than deposits) held by the Bank in its fiduciary or agency capacity for its customers are not included in the statements of financial position since these are not assets of the Bank. Total assets held by the Bank’s trust department amounted to P4.33 billion and P3.32 billion as of December 31, 2010 and 2009, respectively (Note 23).

As of December 31, 2010 and 2009, government securities (included in AFS investments in the statement of financial position) owned by the Bank with total face value of P40.00 million and P52.00 million, respectively, are deposited with the BSP in compliance with the requirements of the General Banking Law relative to the Bank’s trust functions.

Income from the Bank’s trust operations amounted to P13.45 million, P15.21 million and P22.10 million in 2010, 2009 and 2008, respectively.

25. income on trading and investment securities

Interest income on trading and investment securities follows:

In 2010, 2009 and 2008, peso-denominated financial assets at FVPL and AFS investments earned annual interest rates ranging from 4.10% to 9.13%, 5.50% to 9.13% and 5.00% to 10.00%, respectively, while dollar-denominated financial assets at FVPL and AFS investments earned annual interest ranging from 4.00% to 9.50%, 6.38% to 9.88% and 6.38% to 9.88%, respectively. HTM investments earned annual interest rates ranging from 7.75% to 12.38% in 2010, 2009 and 2008.

Trading and securities gain - net includes:

26. Retirement plan

The Bank has a noncontributory and funded retirement plan covering all its officers and regular employees. The retirement fund is administered by the Bank’s Trust Department which acts as the trustee under the plan. Under the retirement plan, all covered officers and employees are entitled to cash benefits after satisfying certain age and service requirements. The latest actuarial valuation study of the retirement plan was made on December 31, 2010.

The Bank’s annual contribution to the retirement plan consists of a payment covering the current service cost, amortization of the unfunded actuarial accrued liability and interest on such unfunded actuarial liability.

The principal actuarial assumptions used in determining retirement liability of the Bank under the Plan are shown below:

The overall expected rate of return on plan assets is determined based on the market prices prevailing on that date applicable to the period over which the obligation is to be settled.

The net retirement liability of the Bank (included under ‘Accrued interest, taxes and other expenses’ in the statement of financial position) follows:

The movements in the present value of retirement obligation of the Bank follow:

The movements in the fair value of plan assets of the Bank follow:

Tier 1 capitalTier 2 capitalGross qualifying capitalLess: Required deductions

Reduction from tier 1 (50.00%) and tier 2 (50.00%)Total qualifying capital

Risk-weighted assets

Tier 1 capital ratioTotal capital ratio

2010p3,482.74

320.763,803.50

(23.91)11.30

p3,816.11

p27,500.40

12.73%13.88%

2009P4,157.19

191.554,348.74

28.3511.64

P4,308.75

P34,189.43

12.06%12.60%

Trust department accountsStandby LCForward exchange soldSight import LC outstandingSpot exchange:

BoughtSold

Domestic LC outstandingOutstanding shipping guaranteesDeficiency claims receivableOutward bills for collectionInward bills for collectionUsance import LC outstandingLate deposits/payment receivedUnused loan commitmentsItems held for safekeepingItems held as collateral

2010p4,329,376,887

398,342,400306,880,000146,745,281

131,520,000131,520,000

98,360,85545,944,73433,772,86624,690,09216,665,05013,986,892

3,903,4271,000,000

7,7873,063

2009P3,322,425,505

335,374,320–

331,141,756

116,140,000116,095,000188,515,844

44,135,11933,772,866

3,340,90215,745,18319,217,477

9,999,3714,000,000

8,8923,268

Financial assets at FVPLAFS investmentsHTM investments

2010p1,925,167

447,040,207958,167,547

p1,407,132,921

2008P5,816,877

535,174,357965,474,777

P1,506,466,011

2009P11,136

567,820,122957,804,526

P1,525,635,784

AFS investmentsFinancial assets at FVPL

2010p500,900,079

6,140,661p507,040,740

2008P110,997,422

(6,359,903)P104,637,519

2009P115,413,579

3,771,674P119,185,253

Discount rate At January 1 At December 31Expected return on plan assetsFuture salary increases

2010

8.25%8.90%6.00%

10.00%

2009

9.00%8.25%7.00%7.00%

Present value of retirement obligationFair value of plan assetsDeficitUnrecognized actuarial loss Net retirement liability (Note 19)

2010p481,675,716

344,742,994136,932,722

(134,417,315)p2,515,407

2009P399,445,875

262,170,813137,275,062(80,391,467)P56,883,595

Balance at beginning of yearInterest costCurrent service costBenefits paidActuarial loss (gain) on retirement obligationBalance at end of year

2010p399,445,875

32,954,28528,006,771

(35,276,711)56,545,496

p481,675,716

2009P408,266,712

36,744,00428,983,045

(52,971,130)(21,576,756)

P399,445,875

Balance at beginning of yearContributions paidExpected returnBenefits paidActuarial loss on plan assetsBalance at end of year

2010p262,170,813

102,710,29215,730,250

(35,276,711)(591,650)

p344,742,994

2009P298,657,836

–20,906,049

(52,971,130)(4,421,942)

P262,170,813



www.pbcom.com.ph

starting January 1, 2009, the RCIT rate shall be 30.00% while interest expense allowed as a deductible expense is reduced to 33.00% of interest income subject to final tax.

An MCIT of 2.00% on modified gross income is computed and compared with the RCIT. Any excess MCIT over RCIT is deferred and can be used as a tax credit against future income tax liability for the next three years. In addition, the NOLCO is allowed as a deduction from taxable income in the next three years from the year of inception.

Current tax regulations also set a limit on the amount of EAR expenses that can be deducted for income tax purposes. EAR expenses are limited to 1.00% of net revenue for sellers of services. EAR expenses of the Bank (included under ‘Miscellaneous expenses’ in the statement of income) amounted to P16.52 million in 2010, P21.02 million in 2009 and P25.98 million in 2008 (Note 28).

FCDU offshore income (income from non-residents) is tax-exempt while gross onshore income (income from residents) is subject to 10.00% income tax. In addition, interest income on deposit placements with other FCDUs and offshore banking units (OBUs) is taxed at 7.50%. RA No. 9294, which became effective in May 2004, provides that the income derived by the FCDU from foreign currency transactions with non-residents, OBUs, local commercial banks including branches of foreign banks is tax-exempt while interest income on foreign currency loans from residents other than OBUs or other depository banks under the expanded system is subject to 10.00% income tax.

Provision for income tax consists of:

Components of ‘Deferred tax liabilities - net’ are as follows:

The ultimate realization of deferred tax assets is dependent on the generation of future taxable income. Management considers projected future taxable income, reversal of temporary differences, and tax planning strategies in making the assessment based on the historical income and projections of future taxable income.

Management believes that portion of the deferred tax assets may not be realized in the future. Accordingly, the Bank did not set up deferred tax assets on the following NOLCO and temporary differences:

Details of the Bank’s NOLCO are as follows:

A reconciliation between the statutory income tax and the effective income tax follows:

30. Related party transactions

In the ordinary course of business, the Bank has loan transactions with its associates and affiliates, and with certain DOSRI. Under the Bank’s existing policy, these loans are made substantially on the same terms as loans to other individuals and businesses of comparable risks. The amount of individual loans to DOSRI, of which 70.00% must be secured, should not exceed the amount of their respective unencumbered deposits and book value of their respective investments in the Bank. In the aggregate, loans to DOSRI generally should not exceed the lower of the Bank’s total regulatory capital or 15.00% of the total loan portfolio. These limits do not apply to loans secured by assets considered as non-risk as defined in the regulations. As of December 31, 2010 and 2009, the Bank is in compliance with such regulations.

On January 31, 2007, BSP Circular No. 560 was issued providing the rules and regulations that govern loans, other credit accommodations and guarantees granted to subsidiaries and affiliates of banks and quasi-banks. Under the said circular, the

The amounts included in ‘Compensation and fringe benefits’ of the Bank in the statements of income follow:

The movements in the retirement liability follow:

The major categories of plan assets as a percentage of the fair value of total plan assets are as follows:

Amount for the current and previous years follow:

27. long-term leases

The Bank leases certain premises occupied by most of its branches (about 68.00% of the branch sites). The lease contracts are for periods ranging from 1 to 20 years and renewable at the Bank’s option under certain terms and conditions. Various lease contracts include escalation clauses, most of which bear an annual rent increase of 5.00 - 15.00%.

Rent expense charged to current operations (included in ‘Occupancy and other equipment-related costs’ in the statements of income) amounted to P58.73 million, P56.92 million and P107.49 million in 2010, 2009 and 2008, respectively.

Future minimum rentals payable under noncancellable operating leases are as follows:

The Bank also has entered into commercial property leases on its investment properties. These noncancellable leases have remaining noncancellable lease terms of between one to five years.

Future minimum rentals receivable under noncancellable operating leases follow:

28. miscellaneous Expenses


Others include brokerage fees, transporation expenses and provision for year-end expenses. In 2010, ‘Others’ include cost incurred by the Bank from the compromise settlement entered into with a property developer to remove legal impediment on a foreclosed property amounting to P26.00 million and provision for losses from fictitious withdrawals amounting to P40.00 million.

29. income and other taxes

Income taxes include corporate income tax and FCDU final taxes, as discussed below, and final tax paid at the rate of 20.00%, which represents final withholding tax on gross interest income from government securities and other deposit substitutes. These income taxes, as well as the deferred tax benefits, are presented as ‘Provision for income tax’ in the statement of income.

RA No. 9337, An Act Amending National Internal Revenue Code, provides that

Current service costInterest costExpected return on plan assetsActuarial lossTotal retirement expense

2010p28,006,771

32,954,285(15,730,250)

3,111,298p48,342,104

2009P28,983,045

36,744,004(20,906,049)

4,726,634P49,547,634

Balance at beginning of yearRetirement expenseContributions paidBalance at end of year

2010p56,883,595

48,342,104(102,710,292)

p2,515,407

2009P7,335,96149,547,634

–P56,883,595

Cash Fixed-income placementsInvestments in government securities, bonds and other debt instrumentsOther assets

201087.10%11.65%

11.65%1.25%

100.00%

200941.76%

2.00%

54.57%1.67%

100.00%

Present value of retirement obligationFair value of plan assetsDeficitExperience adjustments on present value of retirement obligationExperience adjustments on plan assets

2009

P399,445,875262,170,813137,275,062

(45,346,375)

(4,421,942)

2010

p481,675,716344,742,994136,932,722

(20,411,391)

(591,650)

2006

P388,076,263353,375,606

34,700,657

33,335,395

(7,074,894)

2007

P444,937,661378,111,89866,825,763

17,255,117

(5,681,744)

2008

P408,266,712298,657,836109,608,876

(33,233,155)

(55,030,990)

Within one yearBeyond one year

2010p53,936,142

77,800,998p131,737,140

2009P30,887,624

56,770,239P87,657,863


2010p303,000,531

418,832,505p721,833,036

2009P364,944,938

763,895,028P1,128,839,966

InsuranceCommunicationsManagement and professional feesTransaction duesEntertainment, amusement and recreation (EAR) (Note 29)Information technologyStationery and suppliesLitigation and assets acquiredAdvertisingReversal of provision for tax assessments (Note 23)Others

2010p59,622,721

36,081,65625,755,50318,355,267

16,520,64811,579,04711,135,3652,343,9101,628,239

–159,214,297

p342,236,653

2009P61,458,189

34,292,39026,133,28821,962,376

21,023,8369,324,999

11,554,8425,337,6551,783,182

(169,663,646)109,834,149

P133,041,260

2008P72,273,171

35,943,88215,369,82223,291,149

25,979,74610,091,12012,902,78863,661,349

2,898,011

–50,894,728

P313,305,766

Current: Final RCIT

Deferred

2010

p274,218,56959,936

274,278,505–

p274,278,505

2009

P288,144,244–

288,144,244(77,631,287)

P210,512,957

2008

P294,600,289–

294,600,289(5,329,465)

P289,270,824

Deferred tax assets on allowance for credit and impairment lossesDeferred tax liability on: Revaluation increment credited to surplus free (Note 13) Revaluation increment on land (Note 12) Investment properties - net of accumulated depreciation (Note 13)

2010

p569,316,558

(443,339,472)(82,505,119)(77,576,314)

(603,420,905)(p34,104,347)

2009

608,004,958

(449,244,137)(48,400,772)

(110,360,049)(608,004,958)

P–

NOLCOAllowance for credit and impairment lossesFair value loss on financial assets acquired at off-market ratesAccumulated depreciation on investment propertyUnamortized past service costAdvance rental incomeUnrealized loss on AFS investmentsRetirement liability

2010p1,728,673,951

1,560,391,396

534,078,185124,177,914

70,404,32023,009,127

–2,515,407

p4,043,250,300

2009P2,020,701,147

1,062,888,467

581,714,972145,579,091

7,362,73023,278,67110,999,17656,883,595

P3,909,407,849

Inception Year2007200820092010

AmountP772,868,760

655,794,182592,038,205480,841,564

P2,501,542,711

ExpiredP772,868,760

–––

P772,868,760

BalanceP–

655,794,182592,038,205480,841,564

P1,728,673,951

Expiry Year2010201120122013

Statutory income taxTax effect of: Changes on unrecognized deferred tax assets Nontaxable income Nondeductible expenses and others FCDU income before income tax Interest income subjected to final tax - net of nondeductible interest expenseEffect of change in tax rateEffective income tax

2010p195,474,670

260,408,119(292,140,644)

324,169,389(87,484,039)

(126,148,990)–

p274,278,505

2009P93,811,785

218,199,030(225,108,566)

237,450,185(54,112,885)

(59,726,592)–

P210,512,957

2008P212,329,855

530,206,429(388,911,580)(104,022,967)

(68,665,110)

19,966,45988,367,738

P289,270,824

total outstanding exposures to each of the bank's subsidiaries and affiliates shall not exceed 10.00% of a bank's net worth, the unsecured portion of which shall not exceed 5.00% of such net worth. Further, the total outstanding exposures to subsidiaries and affiliates shall not exceed 20.00% of the net worth of the lending bank. BSP Circular No. 560 is effective February 15, 2007.

BSP Circular No. 423, dated March 15, 2004, amended the definition of DOSRI accounts. Further, BSP issued Circular No. 464, dated January 4, 2005, clarified the definition of stockholders. The following table shows information relating to DOSRI loans:

Any violation of the provisions under BSP Circular No. 423 is subject to regulatory sanctions. However, loans, other credit accommodations and guarantees, as well as availments of previously approved loans and committed credit lines that are not considered DOSRI (non-DOSRI) accounts prior to the issuance of BSP Circular No. 423 are not covered by such sanctions for a transition period of two years from the effectivity of the Circular or until said loan, other credit accommodations and guarantees become past due, or are extended, renewed or restructured, whichever comes later.

The year-end balances of loans and interest income earned in respect of related parties which are included in the Bank’s financial statements follow:

The year-end balances of deposits and interest expense incurred in respect of related parties which are included in the Bank’s financial statements follow:

The remuneration of directors and other members of key management are as follows:

31. Financial performance

Basic and diluted EPS amounts were computed as follows:

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

As discussed in Notes 1 and 15 to the financial statements, had the departure from Philippine GAAP for banks and PFRS been adjusted in the books of the Bank, the ROE and ROA would have been reduced proportionately by the effects of such adjustments required to conform to Philippine GAAP for banks in 2010 and PFRS in 2009 and 2008.

32. Retroactive Effect of Correction of a prior-period Error

The reconciliation of the effect on equity and deficit of the correction of a prior-period error follows:

Amortization of deferred charges represents the annual amortization of SPV losses which is allowed under the SPV law (Note 15).

Total outstanding DOSRI loansTotal outstanding DOSRI loans granted under regulations existing prior to Circular No. 423New DOSRI loans granted under Circular No. 423Total outstanding non-DOSRI loans prior to Circular No. 423Percent of DOSRI loans to total loansPercent of unsecured DOSRI loans to total DOSRI loansPercent of past due DOSRI loans to total DOSRI loansPercent of nonperforming DOSRI loans to total DOSRI loans

2010p33,812,318

33,812,318–

9,852,005,3720.34%

30.14%2.56%2.56%

2009P38,722,041

38,722,041–

9,865,593,4610.39%

31.87%2.37%2.37%

Loans Interest Income

Multi Purpose LoanTriton Securities Corporation

2010p26,062,318

7,750,000p33,812,318

2010p3,227,915

653,583p3,881,498

2009P3,806,694

763,375P4,570,069

2009P30,972,041

7,750,000P38,722,041

2008P2,243,140

691,477P2,934,617

Deposit liabilitiesInterest expense

2010p10,412,725

52,633

2009P10,921,958

13,939

2008P98,663

–

Short-term benefitsPost-employment benefits

2010p36,645,520

12,569,936p49,215,456

2009P45,223,552

19,098,103P64,321,655

2008P49,134,032

18,082,786P67,216,818

a. Net incomeb. Weighted average number of: Preferred shares Common shares

c. Earnings per share (a/b)

2010p377,303,728

120,000,00052,598,965

172,598,965p2.19

2009P102,192,994

120,000,00052,598,965

172,598,965P0.59

2008P317,385,905

120,000,00052,598,965

172,598,965P1.84

Return on average equity (ROE)Return on average assets (ROA)Net interest margin on average earning assets

201011.44%0.89%4.68%

20093.69%0.23%3.87%

20089.80%0.68%4.11%

EquityAs previously reported Adjustments on: Amortization of deferred charges (Note 15)as restated

2009P4,095,253,245

(1,076,552,809)P3,018,700,436

2008P3,595,456,549

(1,076,552,809)P2,518,903,740

2007P3,955,376,163

(1,076,552,809)P2,878,823,354

DeficitAs previously reported Adjustments on: Amortization of deferred charges (Note 15)as restated

2009(P4,684,491,104)

(1,076,552,809)(P5,761,043,913)

2008(P4,789,444,000)

(1,076,552,809)(P5,865,996,809)

2007(P5,105,265,099)

(1,076,552,809)(P6,181,817,908)

33. Notes to statements of Cash Flows

The amounts of interbank loans receivable and SPURA considered as cash and cash equivalents as of December 31, 2010, 2009 and 2008 follow:

The following is a summary of noncash activities:

34. supplementary information under Revenue Regulations 15-2010

In compliance with the requirements set forth by RR 15-2010 hereunder are the details of percentage and other taxes paid or accrued by the Bank in 2010.

Withholding TaxesDetails of total remittances in 2010 and outstanding balance of withholding taxes as of December 31, 2010 follow:

Interbank loans receivables and SPURA shown under statements of cashflowsInterbank loans receivables and SPURA not considered as cash and cash equivalents

2010

p1,105,442,717

43,840,000p1,149,282,717

2009

P1,790,111,707

–P1,790,111,707

2008

P–

–P–

Gross receipts taxDocumentary stamp taxLocal taxesFringe benefit taxOthers

P201,328,11082,780,70628,646,232

1,272,181356,154

P314,383,383

Final withholding taxes on deposit substitute borrowingsWithholding taxes on compensation and benefits Expanded withholding taxes

Balance as ofDecember 31P10,937,294

10,028,1251,691,006

P22,656,425

TotalRemittances

P155,708,87592,466,70518,490,942

P266,666,522

Noncash operating activities: Additions to loans and receivable from disposal of investment properties Additions to unearned income due to deferral of gain on HTM investments disposed through bond exchange Reclassification from financial assets at FVPL to HTM investments (Note 9)Noncash investing activities: Increase (decrease) in land due to revaluation Net increase (decrease) in fair value of AFS investments Additions to investment properties in settlement of loans (Note 13) Transfer from (to) property and equipment to (from) investment properties (Notes 12 and 13) Transfer from chattel mortgage to investment properties (Notes 13 and 15)

2010

p30,530,760

22,977,176

–

113,681,156

p76,757,043

31,978,191

5,822,559

–

2009

P–

–

–

(24,145,362)

P427,058,721

4,064,192

(71,530,000)

32,737,928

2008

P –

–

164,628,287

(56,475,544)

(P650,349,319)

46,680,924

–

–



www.pbcom.com.ph

starting January 1, 2009, the RCIT rate shall be 30.00% while interest expense allowed as a deductible expense is reduced to 33.00% of interest income subject to final tax.

An MCIT of 2.00% on modified gross income is computed and compared with the RCIT. Any excess MCIT over RCIT is deferred and can be used as a tax credit against future income tax liability for the next three years. In addition, the NOLCO is allowed as a deduction from taxable income in the next three years from the year of inception.

Current tax regulations also set a limit on the amount of EAR expenses that can be deducted for income tax purposes. EAR expenses are limited to 1.00% of net revenue for sellers of services. EAR expenses of the Bank (included under ‘Miscellaneous expenses’ in the statement of income) amounted to P16.52 million in 2010, P21.02 million in 2009 and P25.98 million in 2008 (Note 28).

FCDU offshore income (income from non-residents) is tax-exempt while gross onshore income (income from residents) is subject to 10.00% income tax. In addition, interest income on deposit placements with other FCDUs and offshore banking units (OBUs) is taxed at 7.50%. RA No. 9294, which became effective in May 2004, provides that the income derived by the FCDU from foreign currency transactions with non-residents, OBUs, local commercial banks including branches of foreign banks is tax-exempt while interest income on foreign currency loans from residents other than OBUs or other depository banks under the expanded system is subject to 10.00% income tax.

Provision for income tax consists of:

Components of ‘Deferred tax liabilities - net’ are as follows:

The ultimate realization of deferred tax assets is dependent on the generation of future taxable income. Management considers projected future taxable income, reversal of temporary differences, and tax planning strategies in making the assessment based on the historical income and projections of future taxable income.

Management believes that portion of the deferred tax assets may not be realized in the future. Accordingly, the Bank did not set up deferred tax assets on the following NOLCO and temporary differences:

Details of the Bank’s NOLCO are as follows:

A reconciliation between the statutory income tax and the effective income tax follows:

30. Related party transactions

In the ordinary course of business, the Bank has loan transactions with its associates and affiliates, and with certain DOSRI. Under the Bank’s existing policy, these loans are made substantially on the same terms as loans to other individuals and businesses of comparable risks. The amount of individual loans to DOSRI, of which 70.00% must be secured, should not exceed the amount of their respective unencumbered deposits and book value of their respective investments in the Bank. In the aggregate, loans to DOSRI generally should not exceed the lower of the Bank’s total regulatory capital or 15.00% of the total loan portfolio. These limits do not apply to loans secured by assets considered as non-risk as defined in the regulations. As of December 31, 2010 and 2009, the Bank is in compliance with such regulations.

On January 31, 2007, BSP Circular No. 560 was issued providing the rules and regulations that govern loans, other credit accommodations and guarantees granted to subsidiaries and affiliates of banks and quasi-banks. Under the said circular, the

The amounts included in ‘Compensation and fringe benefits’ of the Bank in the statements of income follow:

The movements in the retirement liability follow:

The major categories of plan assets as a percentage of the fair value of total plan assets are as follows:

Amount for the current and previous years follow:

27. long-term leases

The Bank leases certain premises occupied by most of its branches (about 68.00% of the branch sites). The lease contracts are for periods ranging from 1 to 20 years and renewable at the Bank’s option under certain terms and conditions. Various lease contracts include escalation clauses, most of which bear an annual rent increase of 5.00 - 15.00%.

Rent expense charged to current operations (included in ‘Occupancy and other equipment-related costs’ in the statements of income) amounted to P58.73 million, P56.92 million and P107.49 million in 2010, 2009 and 2008, respectively.

Future minimum rentals payable under noncancellable operating leases are as follows:

The Bank also has entered into commercial property leases on its investment properties. These noncancellable leases have remaining noncancellable lease terms of between one to five years.

Future minimum rentals receivable under noncancellable operating leases follow:

28. miscellaneous Expenses


Others include brokerage fees, transporation expenses and provision for year-end expenses. In 2010, ‘Others’ include cost incurred by the Bank from the compromise settlement entered into with a property developer to remove legal impediment on a foreclosed property amounting to P26.00 million and provision for losses from fictitious withdrawals amounting to P40.00 million.

29. income and other taxes

Income taxes include corporate income tax and FCDU final taxes, as discussed below, and final tax paid at the rate of 20.00%, which represents final withholding tax on gross interest income from government securities and other deposit substitutes. These income taxes, as well as the deferred tax benefits, are presented as ‘Provision for income tax’ in the statement of income.

RA No. 9337, An Act Amending National Internal Revenue Code, provides that

Current service costInterest costExpected return on plan assetsActuarial lossTotal retirement expense

2010p28,006,771

32,954,285(15,730,250)

3,111,298p48,342,104

2009P28,983,045

36,744,004(20,906,049)

4,726,634P49,547,634

Balance at beginning of yearRetirement expenseContributions paidBalance at end of year

2010p56,883,595

48,342,104(102,710,292)

p2,515,407

2009P7,335,96149,547,634

–P56,883,595

Cash Fixed-income placementsInvestments in government securities, bonds and other debt instrumentsOther assets

201087.10%11.65%

11.65%1.25%

100.00%

200941.76%

2.00%

54.57%1.67%

100.00%

Present value of retirement obligationFair value of plan assetsDeficitExperience adjustments on present value of retirement obligationExperience adjustments on plan assets

2009

P399,445,875262,170,813137,275,062

(45,346,375)

(4,421,942)

2010

p481,675,716344,742,994136,932,722

(20,411,391)

(591,650)

2006

P388,076,263353,375,606

34,700,657

33,335,395

(7,074,894)

2007

P444,937,661378,111,89866,825,763

17,255,117

(5,681,744)

2008

P408,266,712298,657,836109,608,876

(33,233,155)

(55,030,990)


2010p53,936,142

77,800,998p131,737,140

2009P30,887,624

56,770,239P87,657,863


2010p303,000,531

418,832,505p721,833,036

2009P364,944,938

763,895,028P1,128,839,966

InsuranceCommunicationsManagement and professional feesTransaction duesEntertainment, amusement and recreation (EAR) (Note 29)Information technologyStationery and suppliesLitigation and assets acquiredAdvertisingReversal of provision for tax assessments (Note 23)Others

2010p59,622,721

36,081,65625,755,50318,355,267

16,520,64811,579,04711,135,3652,343,9101,628,239

–159,214,297

p342,236,653

2009P61,458,189

34,292,39026,133,28821,962,376

21,023,8369,324,999

11,554,8425,337,6551,783,182

(169,663,646)109,834,149

P133,041,260

2008P72,273,171

35,943,88215,369,82223,291,149

25,979,74610,091,12012,902,78863,661,349

2,898,011

–50,894,728

P313,305,766

Current: Final RCIT

Deferred

2010

p274,218,56959,936

274,278,505–

p274,278,505

2009

P288,144,244–

288,144,244(77,631,287)

P210,512,957

2008

P294,600,289–

294,600,289(5,329,465)

P289,270,824

Deferred tax assets on allowance for credit and impairment lossesDeferred tax liability on: Revaluation increment credited to surplus free (Note 13) Revaluation increment on land (Note 12) Investment properties - net of accumulated depreciation (Note 13)

2010

p569,316,558

(443,339,472)(82,505,119)(77,576,314)

(603,420,905)(p34,104,347)

2009

608,004,958

(449,244,137)(48,400,772)

(110,360,049)(608,004,958)

P–

NOLCOAllowance for credit and impairment lossesFair value loss on financial assets acquired at off-market ratesAccumulated depreciation on investment propertyUnamortized past service costAdvance rental incomeUnrealized loss on AFS investmentsRetirement liability

2010p1,728,673,951

1,560,391,396

534,078,185124,177,914

70,404,32023,009,127

–2,515,407

p4,043,250,300

2009P2,020,701,147

1,062,888,467

581,714,972145,579,091

7,362,73023,278,67110,999,17656,883,595

P3,909,407,849

Inception Year2007200820092010

AmountP772,868,760

655,794,182592,038,205480,841,564

P2,501,542,711

ExpiredP772,868,760

–––

P772,868,760

BalanceP–

655,794,182592,038,205480,841,564

P1,728,673,951

Expiry Year2010201120122013

Statutory income taxTax effect of: Changes on unrecognized deferred tax assets Nontaxable income Nondeductible expenses and others FCDU income before income tax Interest income subjected to final tax - net of nondeductible interest expenseEffect of change in tax rateEffective income tax

2010p195,474,670

260,408,119(292,140,644)

324,169,389(87,484,039)

(126,148,990)–

p274,278,505

2009P93,811,785

218,199,030(225,108,566)

237,450,185(54,112,885)

(59,726,592)–

P210,512,957

2008P212,329,855

530,206,429(388,911,580)(104,022,967)

(68,665,110)

19,966,45988,367,738

P289,270,824

total outstanding exposures to each of the bank's subsidiaries and affiliates shall not exceed 10.00% of a bank's net worth, the unsecured portion of which shall not exceed 5.00% of such net worth. Further, the total outstanding exposures to subsidiaries and affiliates shall not exceed 20.00% of the net worth of the lending bank. BSP Circular No. 560 is effective February 15, 2007.

BSP Circular No. 423, dated March 15, 2004, amended the definition of DOSRI accounts. Further, BSP issued Circular No. 464, dated January 4, 2005, clarified the definition of stockholders. The following table shows information relating to DOSRI loans:

Any violation of the provisions under BSP Circular No. 423 is subject to regulatory sanctions. However, loans, other credit accommodations and guarantees, as well as availments of previously approved loans and committed credit lines that are not considered DOSRI (non-DOSRI) accounts prior to the issuance of BSP Circular No. 423 are not covered by such sanctions for a transition period of two years from the effectivity of the Circular or until said loan, other credit accommodations and guarantees become past due, or are extended, renewed or restructured, whichever comes later.

The year-end balances of loans and interest income earned in respect of related parties which are included in the Bank’s financial statements follow:

The year-end balances of deposits and interest expense incurred in respect of related parties which are included in the Bank’s financial statements follow:

The remuneration of directors and other members of key management are as follows:

31. Financial performance

Basic and diluted EPS amounts were computed as follows:

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

As discussed in Notes 1 and 15 to the financial statements, had the departure from Philippine GAAP for banks and PFRS been adjusted in the books of the Bank, the ROE and ROA would have been reduced proportionately by the effects of such adjustments required to conform to Philippine GAAP for banks in 2010 and PFRS in 2009 and 2008.

32. Retroactive Effect of Correction of a prior-period Error

The reconciliation of the effect on equity and deficit of the correction of a prior-period error follows:

Amortization of deferred charges represents the annual amortization of SPV losses which is allowed under the SPV law (Note 15).

Total outstanding DOSRI loansTotal outstanding DOSRI loans granted under regulations existing prior to Circular No. 423New DOSRI loans granted under Circular No. 423Total outstanding non-DOSRI loans prior to Circular No. 423Percent of DOSRI loans to total loansPercent of unsecured DOSRI loans to total DOSRI loansPercent of past due DOSRI loans to total DOSRI loansPercent of nonperforming DOSRI loans to total DOSRI loans

2010p33,812,318

33,812,318–

9,852,005,3720.34%

30.14%2.56%2.56%

2009P38,722,041

38,722,041–

9,865,593,4610.39%

31.87%2.37%2.37%

Loans Interest Income

Multi Purpose LoanTriton Securities Corporation

2010p26,062,318

7,750,000p33,812,318

2010p3,227,915

653,583p3,881,498

2009P3,806,694

763,375P4,570,069

2009P30,972,041

7,750,000P38,722,041

2008P2,243,140

691,477P2,934,617

Deposit liabilitiesInterest expense

2010p10,412,725

52,633

2009P10,921,958

13,939

2008P98,663

–

Short-term benefitsPost-employment benefits

2010p36,645,520

12,569,936p49,215,456

2009P45,223,552

19,098,103P64,321,655

2008P49,134,032

18,082,786P67,216,818

a. Net incomeb. Weighted average number of: Preferred shares Common shares

c. Earnings per share (a/b)

2010p377,303,728

120,000,00052,598,965

172,598,965p2.19

2009P102,192,994

120,000,00052,598,965

172,598,965P0.59

2008P317,385,905

120,000,00052,598,965

172,598,965P1.84

Return on average equity (ROE)Return on average assets (ROA)Net interest margin on average earning assets

201011.44%0.89%4.68%

20093.69%0.23%3.87%

20089.80%0.68%4.11%

EquityAs previously reported Adjustments on: Amortization of deferred charges (Note 15)as restated

2009P4,095,253,245

(1,076,552,809)P3,018,700,436

2008P3,595,456,549

(1,076,552,809)P2,518,903,740

2007P3,955,376,163

(1,076,552,809)P2,878,823,354

DeficitAs previously reported Adjustments on: Amortization of deferred charges (Note 15)as restated

2009(P4,684,491,104)

(1,076,552,809)(P5,761,043,913)

2008(P4,789,444,000)

(1,076,552,809)(P5,865,996,809)

2007(P5,105,265,099)

(1,076,552,809)(P6,181,817,908)

33. Notes to statements of Cash Flows

The amounts of interbank loans receivable and SPURA considered as cash and cash equivalents as of December 31, 2010, 2009 and 2008 follow:

The following is a summary of noncash activities:

34. supplementary information under Revenue Regulations 15-2010

In compliance with the requirements set forth by RR 15-2010 hereunder are the details of percentage and other taxes paid or accrued by the Bank in 2010.

Withholding TaxesDetails of total remittances in 2010 and outstanding balance of withholding taxes as of December 31, 2010 follow:

Interbank loans receivables and SPURA shown under statements of cashflowsInterbank loans receivables and SPURA not considered as cash and cash equivalents

2010

p1,105,442,717

43,840,000p1,149,282,717

2009

P1,790,111,707

–P1,790,111,707

2008

P–

–P–

Gross receipts taxDocumentary stamp taxLocal taxesFringe benefit taxOthers

P201,328,11082,780,70628,646,232

1,272,181356,154

P314,383,383

Final withholding taxes on deposit substitute borrowingsWithholding taxes on compensation and benefits Expanded withholding taxes

Balance as ofDecember 31P10,937,294

10,028,1251,691,006

P22,656,425

TotalRemittances

P155,708,87592,466,70518,490,942

P266,666,522

Noncash operating activities: Additions to loans and receivable from disposal of investment properties Additions to unearned income due to deferral of gain on HTM investments disposed through bond exchange Reclassification from financial assets at FVPL to HTM investments (Note 9)Noncash investing activities: Increase (decrease) in land due to revaluation Net increase (decrease) in fair value of AFS investments Additions to investment properties in settlement of loans (Note 13) Transfer from (to) property and equipment to (from) investment properties (Notes 12 and 13) Transfer from chattel mortgage to investment properties (Notes 13 and 15)

2010

p30,530,760

22,977,176

–

113,681,156

p76,757,043

31,978,191

5,822,559

–

2009

P–

–

–

(24,145,362)

P427,058,721

4,064,192

(71,530,000)

32,737,928

2008

P –

–

164,628,287

(56,475,544)

(P650,349,319)

46,680,924

–

–



www.pbcom.com.ph

Branches' Directory

hEaD oFFiCEPBCom Tower, 6795 Ayala Avenue cor. V.A. Rufi no St., Makati City830-7000 (trunkline)

mEtRo maNila

aNNapolis Unit 101, Victoria Plaza Condominium, 41 Annapolis St, Greenhills, San Juan577-9406;722-6613; 0917-5541409; Telefax 723-4856

ayala-alabaNG Unit 101 ALPAP II, Bldg., Trade cor. Investment Drive, Madrigal Business Park, Alabang, Muntinlupa City577-9475;809-4538; 0917-5541415; Fax 809-4204

biNoNDo baNkiNG CENtER214-216 Juan Luna St. Binondo, Manila577-9477; 830-7000 loc. 7811/7812/7813/7814; 242-1843; 242-1851; 242-1796; 242-8716; 0917-5541419; Telefax 242-8711

bma Web-jet Building, BMA St. Cor. Quezon Ave., Quezon City577-9476; 712-8414; 0917-5541417; Fax 712-3505

kalookaN #249 Rizal Ave. Ext. Cor. 7th Ave., Kalookan City 577-7790; 361-1302; 361-3653; 0917-5541463; Telefax 361-2094

CoNGREssioNal Ground Floor Cherry Foodarama Complex, Congressional Ave., Quezon City577-9478; 925-9850; 0917-5541421; Fax 925-9848

CoRiNthiaN GaRDENs Sanso St. Corinthian Gardens, Quezon City577-9479; 687-7088; 0917-5541425; Telefax 687-4397

Cubao LGF - 106 Ali Mall II, Times Square Ave. cor. P. Tuazon Blvd., Araneta Center Cubao, Quezon City577-9480; 913-4912; 0917-5541447; Telefax 912-2947

EChaGuE 88-90 Carlos Palanca cor. Isla del Romero St., Quiapo, Manila577-7776; 736-0123; 0917-5541449; Telefax 736-0124

ElCaNo SHC Tower, 613 Elcano St., San Nicolas, Manila577-7779; 242-3575; 0917-5541451; Telefax 242-3591

GREENhills Quadstar Bldg., Ortigas Avenue, Greenhills, San Juan, Metro Manila577-7784; 722-7060; 721-2603; 0917-5541461; Telefax 723-8520

lEGaspi VillaGE G/F, Vernida I Condominium, 120 Amorsolo St., Legaspi Village, Makati City577-7801; 813-2506; 0917-5541469; Telefax 813-2482

makati baNkiNG CENtERG/F PBCOM Tower, 6795 Ayala Ave. cor. V.A. Rufi no St., Makati City577-9009; 830-7000 loc. 7210/7310/7130/7131; 810-2267; 810-2332; 810-2329; 0917-5541471; Fax 810-2334

malaboN 123 Gov. Pascual Ave., Acacia Malabon, Metro Manila577-9026; 446-0381; 0917-5541475; Telefax 288-6599

maRikiNa 34 J.P. Rizal St., Calumpang, Marikina, Metro Manila577-9108; 645-2966; 645-2637; 0917-5541481; Fax 645-8374

masaNGkay 1004-1006 G. Masangkay St., Binondo, Manila577-9110; 244-8787; 244-8751; 0917-5541485; Telefax 244-8679

mERalCo aVENuE C-1 Horizon Condominium, Meralco Avenue, Pasig City577-9112; 637-2857; 632-0422; 0917-5541487; Fax 632-0419

NoValiChEs 860 Quirino Highway, Brgy. Gulod, Novaliches, Quezon City577-9114; 938-1714; 0917-5541491; Telefax 938-1703

oNGpiN Ongpin cor. S. Padilla St., Sta. Cruz, Manila577-9116; 733-1188; 0917-5541348; Telefax 733-1165

paDRE RaDa S & U Bldg., 953 Juan Luna near cor. Padre Rada St., Tondo, Manila577-9118; 245-2356; 0917-5541350; Telefax 245-2354

paRaNaquE Stalls 3 & 4, Kingsland Building, Dr. A Santos Avenue, Parañaque City577-6474; 820-0902; 0917-5541352; Fax 829-2424

pasay 2492 Taft Avenue Extension, Pasay City577-6475; 831-0878; 831-0329; 0917-5541354; Telefax 832-7838

pioNEER GF RFM Corporate Center Bldg., Pioneer St. cor. Sheridan St., Mandaluyong City577-6477; 631-8101 loc. 7160/7162/7180/7109; 706-6120; 637-8927; 0917-5541356; Telefax 631-9213

quEzoN aVENuE APC Building, 1186 Quezon Ave., Quezon City577-6478; 371-2941; 371-2940; 0917-5541360; Telefax 410-8013

saN miGuEl aVENuE G101 One Magnifi cent Mile (OMM), CITRA Condo., San Miguel Ave., Pasig City577-6479; 637-1717; 0917-5541362; Telefax 637-1719

sEN. Gil puyat G/F Country Space One Condominium, 133 Sen. Gil Puyat Avenue, Salcedo Village, Makati City577-6482; 843-9287; 0917-5541364; Telefax 843-9311

shaw boulEVaRD 146 Shaw Blvd. Cor. San Roque, Pasig City577-6483; 634-1433; 0917-5541372; Telefax 634-5758

sta. mEsa 440-A G. Araneta Ave., cor. Bayani St, Sta. Mesa, Quezon City577-6484; 743-1453; 781-5803; 0917-5541374; Telefax 781-4948

sto. CRisto 565-567 Sto. Cristo Street, Binondo, Manila577-6485; 245-6570; 242-3194; 0917-5541378; Telefax 242-5386

taFt aVENuE-Nakpil Goldilocks Commercial Bldg, L-10, B-548 J. Nakpil cor. Taft Ave., Malate, Manila577-6486; 525-7154; 0917-5541382; Telefax 525-2440

t. aloNzo Grd. Flr. Tan Kiang Bldg., 665 T. Alonzo St., Sta. Cruz, Manila577-6487; 733-1598; 0917-5541384; Telefax 733-1520

tutubaNUnit nos. PL-LSO7 & 08, Tutuban Center Prime Block, C. M. Recto, Manila577-6488; 253-5217; 252-4938; 0917-5541386; Telefax 252-4997

uNitED NatioNs aVENuEUnit 101-102 Don Alfonso Sycip Condominium, 1108 M. H. del Pilar, cor. U.N Avenue & Guerrero Street, Ermita, Manila577-6489; 524-8291; 0917-5541390; Telefax 523-0568

ValENzuEla246 McArthur Highway, Karuhatan, Valenzuela, Metro Manila577-6490; 291-5253; 291-2514; 0917-5541396; Fax 291-5197

ylaya790 Ylaya St., San Nicolas, Manila577-6492; 242-9069; 0917-5541402; Telefax 244-9326

luzoN

aNGElEs810 Henson Street, Brgy. Lourdes Northwest, Angeles City(02)830-7000 loc. 2700; (045)625-8712; Telefax (045)888-9650

bataNGasDiego Silang Street, Batangas City(02)830-7000 loc. 2750/2751; (043)723-4208; (043)723-7801; 0917-5564310; Fax (043)723-4207

DaGupaNFIB Bldg., M.H. del Pilar,Mayombo District, Dagupan City(02)830-7000 loc. 2820; (075)523-6862; (075)515-2097; Telefax (075)523-6954

DasmaRiÑasEVY Bldg., Molino-Paliparan Road, Salawag, Dasmariñas, Cavite (02)830-7000 loc. 2780/2781; (046)481-5268; Telefax (046)481-7250

imusP. Nueño Street cor. Gaerlan Street, Imus, Cavite(02)830-7000 loc. 2390; (046)471-4349; Telefax (046)471-3368

saN pEDRo-paCita ComplEx Unit 20 & 21 Bldg. 2, Centro Pacita, Pacita Complex Phase 2, San Pedro, Laguna808-6083; 808-6081; Telefax 808-6082

la uNioN GF CJ ARCH Bldg., Quezon Ave.,San Fernando City, La Union(02)830-7000 loc. 2610; (072)888-2741; (072)888-2044; Telefax (072)888-2740

lipaGF ATDRMAM Laguna Corp. Bldg., Ayala Highway, Mataas na Lupa, Lipa City, Batangas(02)830-7000 loc. 2790(043)757-3258; (043)417-6560; 0917-5564314; Telefax (043)757-3261

luCENa G/F, VCII Bldg., Merchan St.cor. San Fernando St., Lucena City(02)830-7000 loc. 2740/2741; (042)373-6464; (042)373-6462; 0917-5564312; Telefax (042)373-6465

malolos Malolos Shopping Arcade, Paseo del Congreso, San Agustin, Malolos, Bulacan(02)830-7000 loc. 2720; (044)790-6536; (044)662-0896; Fax (044)662-0899

mEyCauayaN Mancon Building, McArthur Highway, Barrio Calvario, Meycauayan, Bulacan480-3476; (044)840-4496; (044)815-2502; Telefax (044)815-2501

saN FERNaNDo McArthur Highway, Dolores, San Fernando, Pampanga(02)830-7000 loc. 2710; (045)860-1890; (045)963-6785Telefax (045)963-6784;

saN pablo # 65 Rizal Ave., Poblacion,San Pablo, Laguna(02)830-7000 loc. 2681; (049)561-1187; (049)561-1186; Telefax (049)561-1188

Visayas

baColoD Ground fl r. OMEI bldg., Locsin St. Bacolod City(02)830-7000 loc. 2961; (034)435-0690; (034)433-0404; Fax (034)433-0402

CEbuMagallanes St., Cebu City(02)830-7000 loc. 2900; (032)253-2761; (032)253-2851; (032)253-2740; (032)318-2487; 0917-5541404; Fax (032)255-3286

iloilo Ledesma cor. Valeria Street, Iloilo City(02)830-7000 loc. 2930; (033)337-3668; (033)336-8989; (033)336-8987; Fax (033)335-1181

maNDauENational Highway, Mandaue City, Metro Cebu(02)830-7000 loc. 2940/2941; (032)318-2489; (032)344-1078; (032)346-5110; 0917-5541420; Telefax (032)346-5109

maNDauE basak Co Tiao King Bldg, Cebu North Road, Basak, Mandaue City(02)830-7000 loc. 2801; (032)318-3506; 0917-5541422; Telefax (032)346-2709

maNGo aVENuEGen. Maxillom (Mango) Ave., Cebu City(02)830-7000 loc. 2950; (032)318-2488; (032)253-1419; 0917-5541416; Fax (032)253-2326

miNDaNao

CaGayaN DE oRo Tiano Bros. Cor. Hayes St., Cagayan de Oro City(02)830-7000 loc. 2920/2921; (08822)72-6519; Fax (088)857-1558

DaVao41 Monteverde Avenue, Davao City(02)830-7000 loc. 2910/2912; (082)330-7985; (082)221-2140; 0917-5564457; Fax (082)221-2141

DaVao - laNaNG Davao Motor Sales Building,National Road, Lanang, Davao City(02)830-7000 loc. 2810; (082)235-3200; (082)330-7987; 0917-5564308; Fax (082)235-3201

quiRiNo-DaVao111 E. Quirino Avenue, Davao City(02)830-7000 loc. 2880; (082)222-4161; (082)330-7986; 0917-5564459; Fax (082)222-4160 GENERal saNtosSantiago Boulevard, General Santos City(02)830-7000 loc. 2980; (083)552-8167; Fax (083)301-8445

iliGaNM.H. del Pilar cor. J. Luna St., Iligan City(02)830-7000 loc. 2840; (063)223-2702; Fax (063)223-2703

koRoNaDal General Santos Drive, Koronadal, South Cotabato(02)830-7000 loc. 2891; (083)228-3917; Fax (083)228-3919

taGum Pioneer Avenue, Tagum, Davao del Norte(02)830-7000 loc. 2970/2971; (084)217-3901; Fax (084)400-2768

zamboaNGa GF Interco Building, NS Valderosa St., Zamboanga City(02)830-7000 loc. 2850; (062)992-6435; (062)992-6437; Fax (062)992-6438

zamboaNGa-VEtERaNs aVENuE HC Building, Veterans Avenue, Zamboanga City(02)830-7000 loc. 2870/2871; (062)991-1865; (062)991-6162; Telefax (062)991-6194

43 Philippine Bank of Communications Annual Report 2010

Designed & Prepared by:PBCom - Corporate Communications Unit

Raymond J. SuarezJoanne E. Constantino

Products & Services

DEposits

Regular Peso Savings AccountQuick Cash ATM AccountU.S. Dollar Savings AccountEuro Savings AccountAutomatic Fund Transfer AccountRegular Peso Checking AccountValue Check AccountIntegrALL AccountRegular Peso Time DepositRegular U.S. Dollar Time DepositRegular Euro Time DepositPassbook Time DepositPremium One Time DepositPremium Two Time DepositPremium Three Time DepositMaxi Dollar Time Deposit

Cash maNaGEmENt sERViCEs

Automated Teller Machines (ATM)PBCom Checkwriting FacilityPDC WarehousingDeposit Pick-UpFull Payroll ServiceAutomatic Debit ArrangementPoint-of-Sale Facility via Bancnet

aNCillaRy sERViCEs

Safe Deposit BoxesManager’s ChecksGift Certifi catesDemand Draft

REmittaNCEs

Foreign & Domestic Remittances via:• Society of Worldwide Interbank Financial

Telecommunications (SWIFT)• Philippine Domestic Dollar Transfer System (PDDTS)

TYPES OF TELEGRAPHIC TRANSFERS:• Foreign Telegraphic Transfer via SWIFT MT103 • Dollar: Local Telegraphic Transfer via PDDTS-GSRT (Gross Settlement Real Time) • Dollar: Local Telegraphic Transfer via PDDTS-EOD (End-of-Day Netting) • Peso: Local Telegraphic Transfer via EPCS (Electronic Peso Clearing System) • Peso: Local Telegraphic Transfer via RTGS

(Real Time Gross Settlement)

CLEARING OF FOREIGN DENOMINATED CHECKS thru:• Cash Letter • Bills Sent For Collection • Outward Bills For Collection

BIR COLLECTIONSSS COLLECTIONSSS PENSIONSMEC (Sickness, Maternity & Employee’s Compensation) BENEFITS and PAYMENT OF SSS CONTRIBUTIONS & LOAN PAYMENTS thru BANCNET-EDI

tRaDE-RElatED sERViCEs

Import and Domestic Letters of CreditForeign and Domestic Stand-by Letters of CreditShipping Guarantee/Shipside BondTrust ReceiptsExport Bills PurchaseClean and Documentary CollectionsImport Bills/Customer's Liabilities under AcceptancesCollection of Advance and Final Duties (BOC E2M/PAS5 System)Trade Financing of Receivables and PayablesDocument Against Acceptance (DA)Document Against Payment (DP)Open Account (OA) Agreement

tREasuRy

Treasury NotesTreasury BillsRetail Treasury BondsUS Dollar Bonds Trading Money Market PlacementsForeign Exchange Trading

tRust aND iNVEstmENt sERViCEs

Employee Benefi t TrustsInstitutional TrustsMortgage Trust Indentures/Collateral Trusts

Estate Planning• PBCom Master Trust• PBCom Forward Trust• PBCom Classic Dollar Trust

Unit Investment Trust Funds (UITFs)• PBCom Signature Trust Fund• PBCom Winner Dollar Fund• PBCom Best Balanced Fund• PBCom Value Equity Fund• PBCom Horizon Peso Bond Fund*• PBCom Harvest Dollar Bond Fund*

Investment Management Accounts (IMA)• Peso IMA• Dollar IMA

Escrow AgencySafekeeping

* to be launched soon

CREDit aND loaN FaCilitiEs

Short Term Peso Commercial LoansCheck Discounting FacilityForeign Currency LoansExport Packing Credit FacilityCommitted Credit LineReal Estate Development LoanReal Estate CTS FinancingTerm Loan FacilityDomestic Bills PurchasedMortgage Loan Program (Value Credit)Salary Loan ProgramQuick Credit Facility

pbCom oNliNE baNkiNG Via baNCNEt

44 Annual Report 2010 Philippine Bank of Communications

www.pbcom.com.ph

Designed & Prepared by:PBCom - Corporate Communications Unit

Raymond J. SuarezJoanne E. Constantino

Special Thanks:Jemuel A. PolicarpioAngelo C. Sta. Maria

PBCom Tower6795 Ayala Avenue corner V.A. Rufino St.,

1226 Makati City, Philippines+632 830-7000

www.pbcom.com.ph

AR2010 Final 062911 - · PDF fileLetter to Shareholders Strong Foundations for Optimism Going forward, our expectation is for the Bank to grow recurring revenue streams and be less

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