“YOU” 

BEFORE ANYTHING ELSE

2019

ANNUAL REPORT

A. CORPORATE POLICY

I. Vision, Mission and Core Values

Vision:

    As a partner in nation-building, to be recognized as among the leading rural banks of value to customers, shareholders and employees, continuously striving to create more valued products, achieve greater results and make a positive contribution to the life of every individual.

Mission:

• To encourage the people to practice the habit of savings and thrift and the judicious use of credit in the communities that it serve;

• To help eradicate usurious practices in the communities it serve;
• To provide quality service to the people of the communities it serve whether they are depositors or borrowers so that they can improve their economic standing;
• To enhance the knowledge, skills and community relations of the employees, so they can become good citizens and uplift their economic well-being;
• To encourage the people to be proactive in banking activities so as to spur economic activity in the community, as partners in nation-building.

Core Values:

• Respect
• Excellence
• Responsibility
• Teamwork
• Concern for People

II. Brief History

BRIEF HISTORY

OF PANGASINAN BANK (A RURAL BANK), INC.

Formerly Pangasinan Savings and Loan Bank

          In the early part of 1976, a closely-knit circle of friends from San Fabian, Pangasinan informally gathered together and decided to organize the second thrift bank in Pangasinan.  The group was composed of Dr. Gregorio Tercero de Guzman, Jr., a private medical practitioner, Atty. Conrado P. Gubatan, at that time Mayor or San Fabian, Mr. Daniel P. Calimlim, an insurance underwriter also engaged in the poultry business, and Mr. Mauro S. Abalos, an accountant and businessman.  They invited Msgr. Oscar A. Aquino, who was then parish priest of San Fabian and a native of Mangaldan to join them.  With the support of some relative, namely, Dr. Letecia L. Quinto and Mr. Alfredo B. Quinto, related by affinity to Dr. Gregorio T. de Guzman, Jr. and Dr. Loreto J. Gubatan, a dentist and brother of Atty.  Conrado P. Gubatan, the group managed to deposit Five Hundred Thousand Pesos (P 500,000.00) with the Central Bank and this amount was the minimum paid-up capital required of a thrift bank at that time.

            In August of 1976, the first staff of the bank led by Dr.  and Mrs. Gregorio Tercero de Guzman, Jr. underwent a 15-day training at the Central Bank Training Institute.  The basic training course was especially designed for employees of savings and loan associations, one of three categories of thrift banks.

            With a fully trained staff, the Bank opened on October 3, 1976 on a rented building in Mangaldan, right at the center of business of the town. The Banks name back then was PANGASINAN SAVINGS AND LOAN ASSOCIATION, INC. The blessing was officiated by the late Msgr. Federico Limon, Archbishop of Lingayen-Dagupan with prospective depositors, hundreds of them, in attendance.  The guest of honor was the late Mr. Manuel Santos, the Central Bank Director in charge of savings and loan associations.

            At the end of 1976, after three months of operation, the Association has exceeded break even and realized a profit of P 137.00.  Since then, the Corporation has been profiting except for the troublesome years that followed the assassination of Ninoy Aquino.

            One year after the bank’s establishment, due to profitable operation, the Central Bank granted rediscounting privileges and availment of cheap special time deposits (STD) for supervised and non-supervised credit.  These privileges expanded the resources of the Bank although most of the time, the Bank did not need loans from the Central Bank due to the rapid increase of deposits from the general public.  The Bank has been a pioneer in the financing of cotton industry which flourished in San Fabian and neighboring towns in the eighties. It was in fact one of the biggest financiers of cotton planting in the entire country.

          After exactly two years of operation, on October 3, 1978, the Bank opened a Savings Agency, its first branch unit, in San Fabian (which was converted into a full branch in 1990).  Then came a rapid succession of branches which were also approved by the CB because of profitable operation and efficient management and strict adherence to all rules and regulations prescribed by the CB.  The Malasiqui branch was opened on April 22, 1979, followed by Binmaley branch on June 17, 1979 and the Alaminos Branch on March 3, 1980.

            From December 31, 1977 to June 30, 1980, the Bank’s stockholders gradually increased the paid-up capital of the Bank using their hard-earned savings, from P 500,000.00 to P 2 Million to comply with the minimum capital requirement prescribed by the Central Bank.  When the Bank had attained the P 2 Million mark, it earned the right to change its corporate name to PANGASINAN SAVINGS AND LOAN BANK, INC. and its new name was registered with the Securities and Exchange Commission.

            In 1981, the Central Bank required another round of capital build-up with P 5 Million as the target for savings and loan associations outside of Metro Manila.  But due to the economic crisis that started in 1983, the stockholders were not able to comply immediately with the increase in capital.  To remedy the situation, the stockholders channeled all available dividends from the undivided profits to stock dividends and the members of the Board of Directors infused back all their per diem and honoraria.

            Despite the economic debacle during the martial law years, PSLB maintained a consistent growth in resources and total deposits.  In 1980, it was adjudged the First runner-up as Best Savings and Loan Association in the country by the Philippine League of Savings and Loan Associations, with the Central Bank acting as the judge of the contests.

            In 1983, PSLB was accredited as a participating or originating bank by the National Home Mortgage Finance Corporation to grant PAG-IBIG housing loans, the only accredited bank in Pangasinan.  It was given a continuous automatic revolving line of P 1.5 Million.  Since then, PSLB has released about 150 housing loans amounting to about P 15 Million.  On December 22, 1984, the NHMFC granted PSLB a P 7.4 Million new credit line, one of the only 38 banks given accreditation.

            From P 500,000, the Bank’s resources had reached P 143 Million at the end of 1996.  The original stockholders had managed to increase the Bank’s capital to P 10 Million in 1992.  But because the CB in 1992 had required all thrift banks operating outside Metro Manila to have a P 20 Million capital, the original stockholders invited S & F Realty Corporation owned by Mr. & Mrs. Romualdo C. Siapno to infuse additional capital.

            Finally, the P 20 Million capital requirement was complied with in 1996 only to be increased by the CB (now the Bangko Sentral ng Pilipinas) to P 40 Million.  The latest minimum capital requirement for thrift banks is P 52 Million at the end of 2000 and P 64 Million at the end of year 2001.

          The present total capital accounts of PSLB is P 44 Million, or P 20 Million short of the required capital.  Knowing their limited capability, the present stockholders decided to downgrade the Bank’s category to rural bank.  The group had also in mind the greater privileges now being enjoyed by rural banks like lower reserve requirements and easier branching requirements.  The Bank will then be able to open branches in Rosario, La Union where it owns a prime lot and in other towns of Pangasinan, and will be eligible also to offer current accounts to its clients.  The new name of the Bank as approved by the BSP last January 2001 and by the SEC in August 27, 2001 is now PANGASINAN BANK (A RURAL BANK), INC.

            In August 2011,  the capitalization of the Bank reached P50 million. Since the bank is over capitalized when it downgraded to rural bank,  the bank decided to expand its operation to the north, and in March 26, 2007 the bank opened it’s first branch outside of Pangasinan located at Rosario, La Union.

KEY OF EVENTS

EARLY YEARS:

1976- The bank was organized as the second thrift bank in Pangasinan with a minimum paid up capital of P500,000.00 as a requirement for a thrift bank that time.

August of 1976- when the first staff of the bank led by Dr.  and Mrs. Gregorio T. de Guzman, Jr. underwent a 15-day training at the Central Bank Training Institute.

October 3, 1976- when the bank first opened and was then was named PANGASINAN SAVINGS AND LOAN ASSOCIATION, INC.

GROWTH YEARS:

October 3, 1978- the Bank opened a Savings Agency, its first branch unit, in San Fabian.

April 22, 1979- opening of Malasiqui branch.

June 17, 1979- when Binmaley branch was opened.

March 3, 1980- when Alaminos branch was opened.

December 31, 1977- the Bank’s stockholders gradually increased the paid-up capital of the Bank using their hard-earned savings, from P 500,000.00 to P 2 Million to comply with the minimum capital requirement prescribed by the Central Bank.

1980- it was adjudged the First runner-up as Best Savings and Loan Association in the country by the Philippine League of Savings and Loan Associations, with the Central Bank acting as the judge of the contests.

1981- the Central Bank required another round of capital build-up with P 5 Million as the target for savings and loan associations outside of Metro Manila.

1983- as economic crisis was going on, the stockholders were not able to comply immediately with the increase in capital.  To remedy the situation, the stockholders channeled all available dividends from the undivided profits to stock dividends and the members of the Board of Directors infused back all their per diem and honoraria.

PSLB was accredited as a participating or originating bank by the National Home Mortgage Finance Corporation to grant PAG-IBIG housing loans, the only accredited bank in Pangasinan.  It was given a continuous automatic revolving line of P 1.5 Million.

December 22, 1984- the NHMFC granted PSLB a P 7.4 Million new credit line, one of the only 38 banks given accreditation.

1996- the Bank’s resources had reached P 143 Million from its original resources of P500,000.00.

January 2001- the BSP approved the new name of the bank.

August 19, 2011-the total capitalization reached P50 million

August 27, 2001- the new name of bank is now PANGASINAN BANK,( A RURAL BANK) INC. approved by BSP and SEC.

March 26, 2007- opening of the first branch outside Pangasinan which is located at Rosario, La Union

2008- Pangasinan Bank released its first radio advertisement.

III. Bank’s Business Model and Brand

            Pangasinan Bank (A Rural Bank), Inc. is a six-unit bank with Head office located in the agricultural town of Mangaldan, a 1^st class municipality in the province of Pangasinan.  It has four branches in Pangasinan located in Alaminos, Binmaley, Malasiqui, and San Fabian, and one branch in Rosario, La Union.  The Bank funds, comes mostly from deposits comprising of 79% of total resources. These are channeled to loans and due from BSP and other banks comprising 38% and 47% respectively of total resources.  Lending activities are mostly for motor vehicle (33.42%), and real estate (28.95%) loans.  Other loans are granted to agricultural (17.52%), agrarian (0.19%), trading and commercial (12.70%) sectors and the rest for salary and consumption (7.22%) loans. 

            The bank faces stiff competition as a number of non-bank financial institutions operate within the same areas of operations, and offer similar loan products without requiring the same documentary requirements ( i.e. KYC and financial documents) and/or collaterals from borrowers.  To date, the bank has gradually shift to risk-based lending wherein credit decisions was based primarily on the capacity to pay of the borrowers.  The bank has undergone all phases of the Capacity building program conducted by the Small Business Corporation (SBC) to develop risk-based lending. 

B. FINANCIAL SUMMARY/FINANCIAL HIGHLIGHTS

C. FINANCIAL CONDITION AND RESULTS OF OPERATION

President’s Annual Report for 2019

    Dear fellow stockholders:

         This year had been a tough and challenging year for the Bank as we ended up with a net loss after having a great start, with the bank starting its first four r (4) months of operation with a steady increase in net income which as at the end of April totaled 4 Million. However on the fifth month, following the directives of the BSP Examiners during the last audit examination, the Board approved the additional booking of P 9,224k in addition to the already existing allowance for credit losses (ACL) of P6,712k, or a total ACL of P 15,936k. This led to the bank incurring a net loss of P9, 220k for the month of May 2019.

          In the months that followed, the bank managed to reverse some of the ACL’s due to full payments of delinquent accounts despite the regular additional monthly bookings of ACL. With these reversals, together with the monthly income generated by the bank, the net loss which started in May, was significantly reduced to net loss at year end of P 2,051k.

          During this year’s BSP Examination covering the cut-off period December 31, 2018, the Bank garnered a CAMELS rating of 3.

           Below is the Financial Performance for 2019:

Net Loss for the period ending December 31, 2019 totaled P 2,051k or a decrease of 155.43% compared to the Net Income from the previous year of P3,700k. The decrease was primarily due to the booking of Allowance for Credit Losses (ACL) of P 9,224k as per BSP Circular 941 and 855.

At year-end, Alaminos, San Fabian, Mangaldan, Binmaley Branch and Admin Department contributed a total net income of P 2,675k while Malasiqui and Rosario combined for a net loss of P 4,726k.

Total Income increased by 15.75% or P 39,753k compared to the previous year’s total income of P 34,345k. The administration department particularly Asset Management contributed the highest income of P 10,921k total gross income at year end.

Total Expenses increased by 36.41% or P 41,804k compared to last year’s P 30,645k. Except for Alaminos branch, all the other branches including Admin department increased their expenses.

The overall increase was primarily due to the 1) the setting up of allowances for past due and non-performing loans being strictly implemented by BSP in the net amount of P 7,770k., 2) Fees & Commissions paid to dealers and sales agents of car loans amounting to P1, 897k and 3) increase in Contribution to Retirement Fund of P 441k, 4) Taxes & Licenses of P 394k.

Total Assets slightly decreased by 1.10% or P 397,000k compared to last year’s P 401,000k. The decrease was brought about by a net increase in Allowance for Probable Losses of P 8,706k.

Total loans slightly increased by 3.54% or P 168,517k this year compared to the previous years’ P 162,763k.

            New Loan releases for 2019 totaled P 67,764k lower by P 15,555k or a decrease of 18.67% compared to P83, 319k in 2018. Goal for loan releases where only 83.66% achieved with only Alaminos and San Fabian exceeding their goals by P160k and P2, 016k respectively. Majority of the new loans released were auto loans which totaled P48, 079k this year.

              During the latter part of 2019, the Board of Directors approved for the bank to concentrate more on marketing for auto loans and to temporarily refrain from accepting new real estate mortgage loans until its past due ratio is reduced to 12% or less.

Liquid Assets (Cash and Other Cash Items, Due from BSP, Due from Other Banks) slightly decreased by 1.92% or P 179,815k compared to P 183,351k last year. Our Liquidity ratio for this year is at 79.372% indicating that our Bank isstill very liquid.

Total Deposits slightly increased by 0.17% or P 315,974k this year compared to P 315,433k in 2018. I am happy to announce that for the quarter
ending September 2019, our bank made it to the List of Top 100 Rural Banks as to Total Deposit Liabilities with ranking of No. 99 and Total Deposit Liabilities of P322, 500k for that quarter.

Capital Funds decreased by 6.09% or P 68,693k this year compared to last years’ P 73,146k. The decrease was a result of the net loss incurred by the bank for this year brought about by the provision of allowances for credit losses.

Earnings per Share or EPS for the year went down by 155.40% or –P 4.1 this year compared to last years’ P 7.40.

Past Due Ratio (PDR) increased by 24.92% or PDR of 24.26% this year compared to 19.42% last year. Although there was an increase in the total loan portfolio the Bank is also religiously providing allowance for losses to all past due and non-performing loans.

Restructuring of past due loans are also being implemented for delinquent accounts that have irregular movements. These accounts are given a chance to pay their loan on a regular basis based on their revised cash flow statement and amortization schedule.

Capital Adequacy Ratio remains substantial at 17.66% despite a decrease of 1.26% compared to last years’ 18.92%. This is an indication of the bank’s strength in its capital structure and is still way above the industry level of 10.

Based on the financial performance above, almost all indicators went down except for Total Income, Loans and Deposits. The root cause of the decline is the
provisioning of allowance for credit losses. As a mode of prevention, the Board temporarily halted the acceptance of new real estate mortgage loans as most of our past due loans are coming from these accounts and to concentrate more on auto loans which has a lower past due rate.

This year the BSP closed down 10 rural banks as it continues to weed out weak players in the industry. We have to date over 400 rural bank members across the country with over 3,000 offices nationwide.

Moving forward, the bank thru RBAP has partnered with TransUnion, a private comprehensive credit bureau in the Philippines. It helps consolidate the
credit information ecosystem and manage the collection and sharing of both positive and negative credit data. This information solution provider will be very helpful to the bank as it will provide consumer reports, risk scores, analytical services and deciding capabilities. Further, it will enable the bank to manage risk and assess a consumer’s creditworthiness.

At present rural banks can only offer few financial products and services especially in rural areas. Investments in digital technology, such as cloud-based systems, can instantly bear fruit for the rural banking sector as revenues increase with wider reach and higher volume of transactions.

Like some rural banks, our bank is currently preparing for the digital shift, including a move to cloud-based core banking technology as revenues increase with wider reach and higher volume of transactions.

At present, the Board is looking for a service provider for its core banking solutions and mobile banking. One is the I Computing Solutions, Inc. (ICSI) and the other one is Pearl Pay, and i2i for its National Retail Payment System, Cloud Corebanking and Bills Payment. Hopefully, this shift to digital technology will enable the bank to expand its services to the unbanked and underserved market and generate more profits for the bank.

Lastly, the Board decided not to declare cash dividends for all common and preferred shares for this year so as not to deplete our capital.

As always, I enjoin all stockholders to help the bank in suggesting new bank products and services to better service our clients and generate more income and to market for new loans and deposits.

In behalf of the senior management and the Board of Directors, I would like to thank you, our Shareholders for the continuing support and guidance you have given us. We hope to accomplish more in the coming year.

                                                                                                                                                                                                                                                        ANNE Q. DE GUZMAN
President

D. RISK MANAGEMENT FRAMEWORK ADOPTED

       RISK MANAGEMENT is a system that needs to be put in place in a business, in order to understand and calculate the risks being taken in exchange for earnings or revenue. It considers and determines the probability of a negative event; of a crisis; of an NPL; of a default and of a loss. It helps the Board and the Management to formulate risk-sensitive decisions. It must not become a barrier towards delivering exceptional services to its clients. Neither shall it be viewed as an additional surface for red tape or a front to appease the regulators.

       RISK MANAGEMENT OBJECTIVES & PROCESSES

1. IDENTIFY: to search for and locate the various risks before they become problems.
2. ASSESS/MEASURE: evaluate its impact or consequence and the probability of the risks happening or taking place
3. MONITOR: observe/study/keep an eye on the risk marker/risk indicator as well as the risk limits set and the mitigation plans set in place
4. CONTROL: check for and make correction for deviations versus the internal control systems and the risk mitigating plans
5. REPORT: Supply or furnish information and feedback on the various risk activities, current/existing risks and emerging risks.

  In addition to the above, there is a need to:

• Define and disseminate risk orientation/familiarization training and policies set in writing
• Develop the risk management system and its control foundations
• Institutionalize the risk management process. To make it as the code of practice/a habit, a fixture in the company.

FOUR GUIDING QUESTIONS IN RISK MANAGEMENT:

• R – Return. Are we gaining an appropriate return for the risk we are taking?
• I – Immunization. Do we have the necessary controls in place, to lessen the risk losses?    
• S – Systems.Do we have the actual system to measure and manage the various risks we face?
• K – Knowledge. Do we have the right people, sufficient skills, suitable culture, and proper values for an effective risk management?

RISK as DEFINED:

                  It is the uncertainty of whether events expected or otherwise, will have an adverse impact on the bank’s capital or earnings. It is an inevitable part of the business of Banking.

The Bank Risk Spectrum:

      The wide range of risks faced by a Bank is generally grouped into:

• Credit risk – estimated to be 54% of the risk range:
• Operations risk – approximately 27% of the risk band;
• Market risk – composing the remainder of the 19% portion.

            Market and Credit risks are faced and experienced primarily in the hope of ample rewards or good returns. A portion of the bank’s capital addresses the potential losses resulting from these risks.

            Operational risk is taken unintentionally and it is a cost of doing business.

VARIOUS RISKS THAT BANKS FACE

1. Market Risk – the risk of loss, immediate or over time, due to adverse fluctuations in the price or market value of instruments, products, and transactions in the bank’s overall portfolio-whether On or Off Balance sheet.

      It is influenced by:

• Interest Rate Risk – the bank’s financial condition is exposed to adverse movements in interest rate. It means that changes in interest rate will reduce the current or future earnings and/or the economic value of capital of a
  Financial Institution.
• Foreign Exchange Risk – possibility that movements in exchange rates may adversely affect the value of the company’s holdings, thus, its financial condition.

Areas of market risk may include the following:

• Risk of decline in value of trading accounts and investments due to fluctuations in market prices
• Risk that issuer may not be able to meet its obligations promptly
• Risk of decline in value of investments due to investment decisions which fail to take into account:
  • marketability of investment instrument. If bank cannot wait to hold on to the investment until maturity, there must be many buyers in the market willing to pay at a price that is close to bank’s acquisition cost so that bank will not incur a loss
  • diversification of investment outlets
  • maturity and rate of return
  • type of issuer (to ensure payment on maturity)
  • BSP regulations on limits and ceilings

2. Credit Risk – the risk to earnings or capital from the likelihood that a borrower or counterparty will fail to perform/make good on an obligation. It is the most recognizable risk in relation to the banking business.

      Credit risk events which will burden on a bank’s bottom-line:

• the need for loan loss provisioning
• a dramatic increase in NPLs
• a rapid rise in ROPA

Areas of credit risk may include the following

1. Risk of poor or non-collection of loans

• borrower does not have the capacity to pay as shown by financial statements, income tax returns, statements of assets and liabilities, credit investigation, or such other credit basis.
• borrower belongs to a distressed industry
• borrower’s loan grant is beyond his approved credit limit
• corporate borrower has doubtful paying capacity because its capitalization is minimal in relation to loan or project to be financed
• borrower’s co-makers, endorsers, sureties and/or guarantors in case of unsecured loans, do not possess good credit standing and are not financially capable of fulfilling their commitments to the bank in case borrower fails to do so.
• borrower’s loan is in excess of loan value of his submitted collaterals.
• borrower’s loan repayment plan does not jibe with his cash flows
• borrower’s loan was approved and released without proper approval or beyond the lending authority of officers or with incomplete signatories on loan documents or with incomplete documentation or with collateral deficiency such as unregistered REM and chattel mortgage.
• borrower was able to renew his loan without 20% reduction in his principal obligation or without submitting updated financial statements/income tax returns.

• Deficiencies associated with operations risks such as

• lack of or inadequate review of loan portfolio to assess quality and adequacy of loan loss provisioning
• absence of early warning system to detect/recognize symptoms/indicators of problem accounts
• absence of or inadequate loan supervision – monitoring of maturing or matured loans, periodic, visitation of the borrower or borrower’s place of business; updating of credit information
• absence of reminders to borrowers to pay maturing and past due obligations
• ineffective monitoring of insufficient post-dated checks to cover monthly amortizations of borrowers
• poor monitoring of status and value of collateral
• lack of equipment support to keep track of collectibles and actual collections
• absence of collateral valuation and review, collection, credit review, and loan loss provisioning
• lack of periodic review to determine if existing policies are still compatible with the changing market conditions

2. Risk of excessive credit to a single borrower/group of borrower vis-à-vis the single borrower’s limit (SBL).

3. Risk of concentration of credit to a single industry

• grant of loans by type/industry i.e., consumer loans, real estate loans, is not diversified and exceeds the 30% benchmark

4. Risk of overexposure to DOSRI and self-dealing practices

• disregard of aggregate and individual ceilings prescribed by Bangko Sentral ng Pilipinas
• Indiscriminate granting of loans to corporations and individuals identified with DOSRI, although not falling within the technical description of DOSRI

3. Operations Risk – the risk to earnings or capital arising from problems with service or product delivery.

      Its occurrence is influenced by the following factors:

• internal control
• information system
• employee integrity
• operating processes

Sub-categories of Operations Risk are:

1. Transaction risk – risk of loss due to some failures in processing of transactions or problems in the delivery of bank services. This may consist of:

• Documentation risk – risk of loss arising from incomplete or incorrect documentation of the transaction.
• Exceeding limits – risk of loss arising as a result of limits being exceeded and the need to reduce the excess.
• Fraud – risk of loss arising from either internal or external fraud within the organization.
• Security risk – risk of loss from all manner of security breaches including allowing competitors access to confidential information
• Key personnel risk – risk of loss due to having only one person with vital risk management skills or knowledge
• Processing risk – risk of loss due to failings or errors in manual processes usually associated with the quality of back – office staff.
• Systems error – risk of loss due to a failure in any of the systems used within the bank.
• Management information risk – risk of loss arising from management making decisions based on inaccurate or incomplete information.
• Information technology system failure – risk of loss arising from a failure in the computer systems

Areas of operations risk may include the following:

1. organization that is not appropriate to the size and activities of the bank or not flexible to meet changes in business conditions

2. duties and responsibilities of the board of directors, senior management, the officers and staff that are not clear and properly delineated

3. reporting lines that are not clear

4. responsibilities that are not segregated nor distinguished as to those committing the organization to a transaction, recording it, settling it, and controlling it

5. appointed officers who are not qualified to manage the bank

6. ineffective supervision of the bank’s affairs

7. BOD and senior management who are not generally informed of the bank’s business environment and the legal and regulatory framework controlling the bank’s activities or who do not devote enough time and attention in overseeing the bank

8. Lack of or inadequate risk management system

9. Non-compliance with minimum internal control standards particularly on

• maintenance of proper accounting records and adoption of written accounting policies and procedures
• independent balancing
• division of duties and responsibilities
• joint custody
• signing authorities
• dual control
• number control
• rotation of duties
• independence of the internal auditor
• direct verification

10. Absence of internal audit personnel/department to make certain that controls to protect assets are maintained, or in the absence of controls, to propose adequate and effective control system and procedures

11. Management reports that are not timely, inaccurate and incomplete as to information

12. Lack of management reports to the board and senior management on the financial condition and performance of the bank which will be helpful in the formulation of policies and plans

13. Absence of feedback mechanism on adherence to set policies, standards and procedures on major activities of the bank

14. Lack of downward and upward flow of communication within the bank

15. Non-utilization of external and internal audit reports as well as BSP recommendations on examination findings to improve performance

4. Liquidity Risk – the risk to earnings or capital arising from the Bank’s inability to make a timely payment/meet any of its currently maturing financial obligations to customers or counter parties in any currency.

      Such risk may arise as a result of:

1. Mismatches in cash flows
2. Borrowing short and lending long
3. No provision for reserves (primary reserves to meet anticipated cash needs while secondary reserves to meet contingent or extraordinary cash needs/withdrawals)
4. Absence of contingency plan to cover unexpected fund withdrawals during financial stress
5. Absence of or non-compliance with maturity gap limits
6. High incidence of past due loans which put pressure on bank’s liquidity position (on time loan collections, assure a steady source of funds/cash flows)

5. Compliance Risk – is the risk to earnings or capital arising from violations of or non-conformance to laws, rules, and regulations, prescribed practices or ethical standards. It exposes the Bank to fines, penalties, damages, and the voiding of contracts.

6. Legal Risk – is the risk to earnings or capital that may arise as a result of unenforceable contracts, lawsuits, or adverse judgment.

      Areas of legal risk may include:

1. Contracts that are not legally enforceable due to failure to carefully review all provisions therein.
2. Protracted legal/court case

7. Reputational Risk – is the risk to earnings or capital arising from the possibility that negative publicity regarding an entity’s business practices (whether true or not) will cause a decline in the customer base, cost of litigation or revenue reductions.

8. Personnel Risk – is the risk to earnings or capital arising from inadequate training, inexperience, or illegal activities of a risk-taking personnel. It highlights the human side of risk-taking and the important role and adequacy of institutional guidelines/manuals, codes of conduct, personnel policies and training and development programs.

9. Strategic risk – risk to earnings or capital arising from adverse business decisions or the improper implementation of these business decisions.

FACTORS/EVENTS THAT CHALLENGE RISK MANAGEMENT

1. Those that are bought about by Market Place or Economic change

2. Change that are due to Technology Improvements or due to Process Change

3. Change that come about because of New Strategies introduced

4. Change because of Competition bringing in

• new products
• new channels

5. Change within the company itself due to:

• product change
• new leadership or shift in organizational structure

6.Change to comply with new Regulation or Legislative enactments.

AUTHORITIES and RESPONSIBILITIES

1. The Board of Directors must define the policy structure and lay down the risk management framework. Towards this end, it must:

• approve the policies for the various key risks;
• set-up the risk management foundation
• identify who shall be responsible for carrying out the policies,
• originate controls to comply with the policies

            Additionally, the BOD must establish and guide the Bank’s strategic direction and the tolerance towards risks. It must periodically review, discusses, and approve needed changes to address the overall objectives in relation to the acceptable level of liquidity and market risks.

            It must set the limits, which indicates its maximum tolerance for each major risk. The limits structure is vital for interest rate risk; credit risk; liquidity and operational risks. Relatedly, there must be exposure measurement mechanism in place to properly quantify the limit structure so established.

            The BOD must also ensure that technical and human resources are allocated towards risk management. There must be a personnel available who possess technical skills to evaluate and control risks. There must be continuous training of personnel and that the internal audit function is properly manned by a staff with competent background.

            It must monitor risks, ascertaining that the levels of risk is maintained with the tolerance limits which is properly supported by adequate capital base.

            The BOD shall exercise its oversight function in risk management by seeing to it that:

• set policies are being followed;
• set limits are being properly considered
• controls are in place

            There must be timely reporting and clear presentation when there are noted breaches to the established limits so that thoughtful, well-informed, and properly coordinated risk management decisions are formulated and timely actions are undertaken in a timely manner.

II – Senior Management for its part must develop and implement the risk management policies, procedures, and practices. There must be periodic review of the Bank’s risk management policies and procedures to make sure that they remain appropriate and reliable. It must make certain that the lines of authority and responsibilities are being strictly followed.

            It is the “implementor”; it shall be responsible for carrying out the risk management decisions, under a system of delegated authorities. In carrying out this mandated authority, it shall be subject to close monitoring and control that the BOD has set up.

            Other related functions of senior management in risk handling are the following:

• maintenance of appropriate limits structure as well as the presence of adequate measurement systems;
• to oversee the implementation and proper upkeep of management information system (MIS);
• the establishment of an effective internal controls;
• Make sure that adequate resources are available.

E.CORPORATE GOVERNANCE

I. Overall Corporate Governance and Structure and Practices

CORPORATE GOVERNANCE COMMITTEE – The Corporate Governance Committee shall assist the Board of Directors in fulfilling its corporate governance responsibilities. It shall review and evaluate the qualifications of all persons nominated to the board as well as those nominated to other positions requiring appointment by the board of directors. The committee shall be composed of at least three (3) members of the board of directors, two (2) of whom shall be independent directors.

CORE RESPONSIBILITIES:

• The committee shall be responsible for ensuring the board’s effectiveness and due observance of corporate governance principles and guidelines. It will oversee the periodic performance evaluation of the board, its committees and executive management. And shall also conduct an annual self-evaluation of its performance.
• The committee shall also decide whether or not a director is adequately carrying out his/her duties, bearing in mind the concerned person’s contribution and performance (e.g., competence, candor, attendance, preparedness and participation).
• The committee shall make recommendations to the board regarding the continuing education of directors, assignment to board committees, succession plan for the board members and senior officers, and their remuneration commensurate with corporate and individual performance.
• The corporate governance committee shall decide the manner by which the board’s performance may be evaluated and propose an objective performance criteria approved by the board. Such performance indicators shall address how the board has enhanced long term shareholders value.

II. Selection Process for the Board and Senior Management

The director who shall be elected at the annual meeting of the stockholders shall hold office for a term of one (1) year and until their successors shall have been duly elected and qualified.

III. Board’s Overall Responsibility

        In general, the Board shall have full charge of all the properties, interest, business and transactions of the Corporation, with full power and authority, to manage, direct and supervise the same, which powers shall include, but shall not limited to the following:

1. To elect or appoint all officers and employees of the Corporation; to fix their salaries, wages, and other conditions of employment, and to discipline or remove them; but every executive officer of the Corporation and such other officers as the Board may authorize shall have the power to suspend any subordinate officer or employee under his supervision, the suspension to continue until the Board shall have acted upon the case.
2. To appoint agents, correspondents and depositories, and to designate the points where they are to be situated, subject to the pertinent provisions of existing laws and rules and regulations.
3. Subject t the authority of the Monetary Board of the Bangko Sentral ng Pilipinas, to authorize the establishment of branches at such places as will serve the interest of the public and that of the Corporation.
4. To pass upon all applications for credit accommodations as well as important contracts and agreement, subject to the pertinent provisions of existing laws, rules and regulations governing rural banks.
5. To fix rates of interest on loans as well as deposits in conformity with existing rules and regulations.
6. To delegate to the Chairman of the Board, Vice-Chairman, President, or any officer or to any committee any of its delegable powers whenever deemed necessary for the best interest of the Corporation.
7. To prescribed from time to time, the powers and duties and fix the compensation of the officer, agents, and employees of the Corporation in the management of its properties and affairs, where such powers and duties are not prescribed by law or by the By-Laws.

IV. Description of the Role and Contribution of Executive, Non-Executive and Independent Directors, and of the Chairman of the Board.

1. THE CHAIRMAN. The Chairman of the Board shall preside at all meetings of the Board of Directors, in his absence or inability to do so, the meeting shall be presided over by the Vice Chairman, or other Officers to whom this power may have been delegated by the Chairman.  The Chairman of the Board shall have such other powers as may be prescribed by the Board.

2. THE VICE CHAIRMAN. The Vice Chairman shall have such powers and perform such duties as the Board of Directors may from time to time prescribe and as may be delegated to him by the Chairman.  In the absence of the Chairman, the Vice Chairman shall act in his stead and shall perform any and all such powers and duties pertaining to the office.

3. THE PRESIDENT. The President who shall be elected from among the Directors, shall be the Chief Executive officer of the Corporation.  Aside from those which may have been assigned to him by the Board, his powers and duties shall include the following:

• To direct the implementation of the policies of the Board, and report to it and the stockholders on all matters concerning the affairs of the Corporation that may require action by them at their respective meetings.
• To take active supervision and control over the property, interest, business and affairs of the Corporation, and subject to the approval of the Board, he may appoint, suspend or remove any appointive officer or employee whenever in his judgment it may become necessary to do so.
• To supervise, control and direct subordinate officers, agents and employees in the discharge of their duties.
• To see to it that all officers, agents, employees, and other personnel comply with the pertinent laws, as well as the applicable rules and regulations of the Bangko Sentral ng Pilipinas and all other regulatory/supervisory bodies.
• To present to the Board of Directors at any regular or special meeting or at such other times as it may require, a report on the state of the business of the Corporation.
• To attend meetings of the Board, and render such assistance or advice as it may concerning the estate of the business of the Corporation.
• To be responsible for the efficient management of the affairs of the Corporation, to maintain harmonious relations between management and the employees, see to it that the public in general, and the clients of the corporation in particular, are rendered prompt, courteous and efficient service, and to develop and maintain sound public relations.
• The President may delegate to any officer any of his powers and duties whenever in his judgment such delegation is expedient and practicable.

4. THE VICE PRESIDENT. The Board of Directors may elect one or more Vice Presidents who may not be members of the Board, whose powers and duties, in general, shall be determined by the Board.  In the absence or inability of the President, the Board shall designate the Vice President, who should be a member of the board of directors, to perform and discharge the powers and duties of the office of the President.  If the Vice Presidents are not members of the Board, the Board shall designate who among the Board members shall act in place of the President.

5. THE TREASURER. The Treasurer shall have the care and custody of the funds, securities and properties of the Corporation.  He shall deposit all money and valuable effects in the name and to the credit of the Corporation in such banks, or trust companies, or with such bankers or other depositories as the Board may from time to time designate, and any funds so deposited shall be withdrawable only by checks or other instruments signed by duly authorized officers of the Corporation as hereinafter provided.  He shall render to the Board of Directors and the President whenever required, an account of the financial condition of the Corporation and of all his transactions as Treasurer.  He shall perform such other duties as the Board of Directors may from time to time assign t him or are incident to his office.  In the absence of the Treasurer, or his inability to act, his duties shall be performed by such person as may be designated by the Board of Directors.

6. THE SECRETARY. The Secretary who must be a citizen and resident of the Philippines, shall have the following powers and duties:

• He shall keep accurate minutes of all meetings of the stockholder and of the Board, and shall attend to the giving of all notices required by these By-Laws to be given;
• He shall be custodian of the corporate seal, stock certificate books, stock and transfer book, records, documents and papers of the Corporation, prepare ballots for the annual elections and keep a complete and up-to-date list of the stockholders and their addresses;
• He shall perform such other duties as may be assigned to him from time to time by the Board of Directors of the President, and such other duties incidental to his office;
• He shall also sign prepare such reports and statements as are required by the Board and or the President.
• During the absence or inability of the Secretary, the Board shall select the persons to act in his stead.

7. GENERAL MANAGER/CHIEF OPERATING OFFICER. (The position in place instead of Comptroller, as amended on 01-25-11 and confirmed on 02-13-11).  The General Manager/Chief Operating officer shall be the operating head of the bank with the power to transact the general business of the bank.  He is responsible for the efficient and accurate execution of what the board of directors decide upon.  He supervises all the transaction between the bank and customers through junior officers and employees.  He provides leadership and has to control the work of others.  He has to ensure that the best results are obtained from his own efforts and from those bank officers and bank employees, he has tasked for being responsible.

8. COMPLIANCE OFFICER.   (Installation of Compliance Officer, as amended on 01-25-11 and confirmed on 02-13-11).  It is the bank’s discipline to stay compliant with regulations on a going-concern basis that is essential to what makes it a bank. His/her duties and responsibilities shall include the following:

• In consultation with the Board of Directors and Board Officers, prepares a Compliance Program for approval of the Board, and thereafter, submit the same to the DRB, BSP.
• Oversee and coordinate with the Board and Bank President the implementation of Compliance Program.
• Acquaint the Board members and the bank personnel with the provisions of the Compliance Program.
• Conduct regular updates orientation of the latest issuances, policies rules and regulations issued by the regulatory institutions (BSP, PDIC, SEC, BIR, DOLE, SSS, DOF).
• Build-up library of all relevant laws, rules, and regulations issued by regulatory bodies.
• Keep the library current and up-to-date be seeing to it that copies of new laws and issuances of regulatory bodies, interpretations thereof, amendments thereto and repeat revocation thereof are on file and properly disseminated to the officers and employees of the bank.
• Study each new law, rule or regulation with the following objectives: (a) determination of the unit/group/department and personnel affected; (b) providing proper implementation guideline; (c) identification of the risk of non-compliance thereof.
• Provide a vehicle for efficient dissemination of issuances, laws, rules and regulations: (a) install system with which permanent laws, rules and regulations together with their implementing guidelines and the risks/consequences for non-compliance thereof are effectively disseminated to acknowledged, and clearly understood by each and every staff member of the bank; (b) conduct regular meetings and seminar/workshops among the officers and staff on the proper implementation of the guidelines and risk implications; (c) maintain a bulletin board and regularly post new issuances/implementing guidelines for the information and guidance of all concerned; (d) adopt an open communication system; (e) free flow of information should be maintained and compliance related issues should be conveyed in a complete and timely manner; (f) compliance issues should be brought to the attention of the staff concerned as soon as possible for immediate resolution in order to minimize risks/violations thereof.
• Regularly consult with appropriate regulatory agencies for additional guidance on specific provisions of laws, rules and regulations and/or discuss compliance findings with each agencies, initiate dialogues regarding borderline issues.
• Conduct annual competence assessment, future training needs and introduce remedial action to correct/improve inadequate performance.
• Install compliance monitoring system in coordination with the Audit Committee or Bank President to insure that the directors, officers and staff are familiar with the compliance program.
• Undertake periodic compliance review/monitoring and assessment of each department/branch on a regular basis.
• Compliance officers should consult internal and external auditor of any violation of laws, rules and regulation noted in their findings.
• Compliance Officer shall submit reports on the monitoring and assessment to the President/Chairman of the Board of Directors to document findings, issues, concerns and remedial/corrective measures taken which report must be cleared and approved by the department/unit head/branch managers before submitting the same to the officers concerned.
• The Compliance Officer shall closely and religiously monitor the following: (a) past due loans; (b) non-performing loans; (c) aging of loans.
• The Compliance Officer should be familiar with the types/kinds of risks the Bank is exposed to which are as follows: (a) credit risk; (b) market risk; (c) interest risk; (d) foreign exchange risk; (e) liquidity risk; (f) operational risk; (g) legal risk; (h) compliance risk.
• The Compliance Officer should be acquainted with the manner CAMELS is computed/evaluated: (a) capital adequacy; (b) asset quality; (c) management; (d) earnings; (e) liquidity; (f) sensitivity to market risk.

9. INTERNAL AUDITOR.  (Installation of Internal Auditor, as amended on 01-25-11 and confirmed on 01-13-11).  The Internal Audit Section is being tasked to assist in the financial and operational management of the company, shall be responsible in conducting its activities in such manner, as to:

• provide the correct accountability;
• protect the company from losses and fraud, wastage and extravagance;
• develop the necessary management information.

Its primary objective is to assist the management in achieving an effective and efficient administration of its fiscal and operational functions.  This objective cover two phases:

• Protective – to protect the company’s interest, including the disclosure of weaknesses and deficiencies in control standards needing correction. To attain this objective, he/she must, (a) ascertain the degree of reliability of the amounts and statistics; (b) ascertain the extent to which the monies and properties are safeguarded from losses of all kinds and are properly accounted for; (c) ascertain the extent of compliance with the established policies, regulations, plans and procedures.
• Constructive–the furtherance of the company’s interest, including the recommendation of actions to improve its performance. To achieve this objective, he/she needs to: (a) review and appraise the policies, regulations, procedures and plans in the light of related date, changing circumstances and other evidences having a bearing on their effectiveness; (b) review and appraise the internal records of the various units within the company in terms of their adequacy, efficiency and effectiveness; (c) review and appraise the performance within the framework of the policies, regulations, plans and procedures.

He/she has the authority to examine all the company’s records, books, vouchers, files and properties necessary to carry out his/her work.  His/her examination and review shall in no way relieve the other persons from their primary responsibilities assigned to them.

To carry out its work, its personnel shall institute and conduct an independent review and appraisal of the accounting, financial and other operational aspects of the company’s various organizational units.

As such, he/she shall conduct periodic audit and whenever necessary, do special investigation of the records and operations of the company and keep management informed of the irregularities and unsatisfactory conditions discovered and other findings which may be of interest.

And in order to attain its objectives, internal audit personnel have to report its findings and recommendations to the responsible officials of the company.  These reports will be presented in writing or verbally, according to the circumstances.

He/she shall be directly responsible for the complete reporting in each case, of all unsatisfactory conditions and deviations from the established procedures to the management.

Additionally, he/she is also expected to give constructive recommendations/suggestions regarding improvements of the procedures, during the course of his/her work.

10. OTHER OFFICERS.  The Board of Directors may appoint such other officers as may be deemed necessary, provide their powers and duties, and fix their compensation.

V. Board Composition

VI. Board Qualification

• At least twenty five years of age at the time of election or appointment.
• At least College graduate and have five (5) years’ experience in business.
• Have attended a special seminar for Board of Directors conducted or accredited by the BSP.
• Fit and proper for the position of a director of the bank.  The following matters were considered in determining fit and proper for the position of a director:

– Integrity/probity

– Competence

– Education

– Diligence

– Experience/Training

VII. List of Board-Level Committees Including Membership and Function

• AUDIT COMMITTEE. The Audit Committee shall be composed of members of the board of directors, at least two (2) of whom shall be independent directors, including the Chairman, preferably with accounting, auditing or related financial management expertise. Duties and responsibilities are the following:

1. The Audit Committee will oversee the bank’s financial reporting and control as well as the internal and external audit activities.
2. It will be responsible for the setting up of the internal audit department and for the appointment of the internal auditor as well as the independent external auditor who will both report directly to the committee.
3. It will monitor and evaluate/review the adequacy and effectiveness of the internal control system, including financial, operational and compliance control and that risk management, is conducted at least annually.
4. The audit committee shall have explicit authority to investigate any matter within its terms of reference, full access to and cooperation by management and full discretion to invite any director or executive officer to attend its meetings, and have adequate resources to enable it to effectively discharge its functions.

• CORPORATE GOVERNANCE COMMITTEE.  The Corporate Governance committee shall assist the Board of Directors in fulfilling its Corporate Governance responsibilities.  It shall review and evaluate the qualifications of all persons nominated to the board as well as those nominated to other positions requiring appointment by the board of directors.  The committee shall be composed of at least three (3) members of the board of directors, two (2) of whom shall be independent directors.

The committee shall be responsible for ensuring the board’s effectiveness   and due observance of corporate governance principles and guidelines.  It shall oversee the periodic performance evaluation of the board, its committees and executive management; and shall also conduct an annual self-evaluation of its performance.

The committee shall also decide whether or not a director is able to and has been adequately carrying out his/her duties as director bearing in mind the director’s contribution and performance (e.g. competence, candor, attendance, preparedness and participation).

The committee shall make recommendations to the board regarding the continuing education of directors, assignment to board committees, succession plan for the board members and senior officers, and their remuneration commensurate with corporate and individual performance.

The Corporate Governance committee shall decide the manner by which the board’s performance may be evaluated and propose an objective performance criteria approved by the board.  Such performance indicators shall address how the board has enhanced long term shareholders value.

• RISK MANAGEMENT COMMITTEE.  The Risk Management Committee shall be responsible for the development and oversight of the institution’s risk management program.  The committee shall be composed of at least three (3) members of the Board of Directors who shall possess a range of expertise as well as adequate knowledge of the institution’s risk exposures to be able to develop appropriate strategies for preventing losses and minimizing the impact of losses when they occur.  It shall oversee the system of limits to discretionary authority that the board delegates to management, ensure that the system remains effective, that the limits are observed and that immediate corrective actions are taken whenever limits are breached.

Four core responsibilities are the following:

1. Identify and evaluate exposures, prioritize the risks that are likely to occur and are costly when they happen;
2. Develop risk management strategies, define the strategies for managing and controlling major risks and identify practical strategies to reduce the chance of harm and failure;
3. Implement the risk management plan, communicate the plan and loss control procedures to affected parties
4. Review and revise the plan as needed to ensure that the plan remains relevant, comprehensive and effective.

VIII. Directors Attendance at Board/Committee Meetings

* Note: Atty. Gerald Z. Gubatan appointment was on April 30, 2019

IX.List of Executive Officers/Senior Management

PANGASINAN BANK (A Rural Bank), INC.

List of Executive Officers/Senior Management

As of December 31, 2019

Ms. Anne Q. de Guzman                                         President

Mr. Romualdo Patrick F. Siapno                              Vice-President

Mr. Edmund V. Fernandez                                       General Manager

Ma. Socorro Q. Aquino                                            Corporate Secretary

                                                                                    Chief Credit Officer

                                                                                    Property Mgmt. Head

Evelyn C. Vergara                                                    Compliance Officer

                                                                                    Internal Auditor

Sebastina F. Nepacina                                            Chief Accounting Head

Florabella A. Olivar                                                  HR Head

Melanio C. Ferreria                                                  Chief Appraiser

Gemma Q. Caasi                                                     Br. Manager-Alaminos

Dexter S. Quinto                                                      Br. Manager-Binmaley

Cris John R. dela Cruz                                            Br. Manager-Malasiqui

Arlene A. Landingin                                                 Operations Manager-Mangaldan

Nelia V. Terceño                                                      Br. Manager-Rosario

Lily B. Quejado                                                        Br. Manager-San Fabian

X. Performance Assessment Program

The performance appraisal policy supports the performance appraisal scheme. The scheme is a formal process centered on an annual meeting of each employee and their line manager to discuss his/her work. The purpose of the meeting is to review the previous year’s achievements and to set objectives for the following year. These should align individual employees’ goals and objectives with organizational goals and objectives.

ore Principles of the Appraisal Policy

1. The appraisal process aims to improve the effectiveness of the organization by contributing to achieving a well-motivated and competent workforce
2. Appraisal is an ongoing process with an annual formal meeting to review progress.
3. The appraisal discussion is a two-way communication exercise to ensure that both the needs of the individual, and of the organization are being met, and will be met in the next year.
4. The appraisal discussion will review the previous year’s achievement, and will set an agreed Personal Development Plan for the coming year for each member of staff.
5. All directly employed employees who have completed their probationary period are required to participate in the appraisal process.
6. The appraisal process will be used to identify the individual’s development needs and support the objectives of the Training and Development Policy.
7. All staff will receive appraisal training as an appraisee, and where appropriate as an appraiser.
8. The appraisal process will provide management with valuable data to assist succession planning.
9. The appraisal process will be a fair and equitable process in line with our Equality Policy.

Performance Appraisal Implementation

Performance appraisal discussions will be held over a designated 4-week period on an annual basis. They will be arranged by the appraisee’s line manager. Line managers are encouraged to provide the opportunity for a supplemental 6-month verbal appraisal review, mid-year and other informal reviews as necessary throughout the year.

The discussion will be held in private. Information gained during the appraisal will be shared only with senior management. The exception is training needs that will be provided to the HR / administration for action. Confidentiality of appraisal will be respected.

The appraiser (usually the employee’s line manager) will be expected to have successfully completed appraiser training, and to be familiar with the appraisee’s work.

All appraisal documents should be issued to both parties prior to the discussion, in order to allow time for both parties to reflect and prepare. These will provide a framework and focus for the discussion.

A time and venue for the discussion will be advised at least one week before the meeting takes place.

The Appraisal Discussion

The appraisal discussion will allow an opportunity for both the appraisee, and the appraiser to reflect and comment on the previous year’s achievements. It will praise achievement and encourage the appraisee in his/her role.

The appraiser is accountable for giving the employee constructive, timely and honest appraisals of their performance, which should take into account both the goals of the organization and of the individual.

The discussion should be a positive dialogue, and will focus on assisting the appraisee to acquire the relevant knowledge, skills and competencies to perform his/her current role to the best of his/her abilities.

The appropriate forms will be completed and signed by both parties. The appraisee will be given the opportunity to note any comments that he/she does not agree with and complete a self-assessment.

The appraisee and line manager should agree on a Personal Development plan for the appraisee for the following year. This will reflect the appraisee’s aspirations and the organization’s requirements, and should align personal and organizational goals. The organization and the line manager will support the individual to achieve these goals during the forthcoming year.

Any training needs, future training requirements, planned qualifications, development opportunities and career planning should be discussed in the light of the Personal Development Plan.

Training and Monitoring

Senior Management are responsible for the appraisal process, and he/she shall ensure that appraisers and appraisees are adequately equipped and trained to undertake the performance appraisal.

Guidelines and Policies on Position Changes and Salary Grading

Salary Process

• Starting salary for new hires without experience shall be the minimum rates.
• Starting salary for new hires with experience, shall take into consideration the factors in the salary review:
• Applicant’s Experience: the number of years of previously worked in the industry and relevant functional experience the applicant possesses at the time of application.
• Applicant’s Education: relevant education, training and /or certifications that at least meet the minimum requirements for the job.
• Applicant’s Salary History: the salary history in positions similar to the new position or being considered as progressing towards the new position, may be taken into consideration.
• Internal equity: the skills and background of applicants should be compared to those of internal (department/division) employees performing similar work. Salary equity does not imply that all employees in similar positions who have similar years of experience and education should be paid the same salary. Recognition of varying levels of skills and performance, for example, will result in differences in salary among employees.
• Recruitment difficulties: skills in high demand or hard-to-find areas require additional salary consideration. Factors such as the scarcity of qualified applicants, the number of rejected job offers, and the turnover rate for the position may be considered.   

Qualications for salary increases at mid-point rate.

1. Employee must have no tardiness beyond the allowable time within a year.
2. Employee must have no memos pertaining to violations of company policies and rules within 2 years.
3. Employee must have passed the performance evaluation rate of at least 10 at 2 consecutive Performance Appraisal Activity.
4. Employee must have a positive recommendation from his/her immediate supervisor/manager. (With attached supporting documents to justify the recommendation.)
5. Employee must have passed the level of audit performance rate of least 30% as per Internal Audit System.

Qualifications for salary increases at maximum rate.

1. Employee must have no tardiness beyond the allowable time within the previous 2 years.
2. Employee must have no memos pertaining to violations of company policies and rules within the previous 2 years.
3. Employee must have pass the performance evaluation rate of at least 10 at 3 consecutive Performance Appraisal Activity.
4. Employee must have a positive recommendation of his/her immediate supervisor/manager. (With attached supporting documents to justify the recommendation.)
5. Employee must have passed the level of audit performance rate of least 30% as per Internal Audit System within the previous 2 years.

Promotional Process

-when an employee moves from a position to another position that is assigned with a higher salary grade, this is considered as promotion.

Qualifications:

1. He/she must already be on regular status, and full-time employee.
2. Employee must be in his/her current position for at least 6 months to 2 years consecutively.
3. Employee must have earned a performance rate of at least 10 during the 2years period.
4. Employee must have no tardiness beyond the allowable time within a year.
5. Employee must meet the required competence and requirements of the new position.
6. No memos pertaining to company policies/rules violation within the past 2years.
7. Employee must have no record of cash overage/shortage within a year. (for teller/cashier position).
8. Employee must have a positive recommendation of his/her immediate supervisor/manager. (With attached supporting documents to justify the recommendation.)
9. Employee must have passed the level of audit performance rate of least 30% as per Internal Audit System within the previous 2 years.

Lateral transfer

• When an existing employee is competitively selected as the most qualified candidate for an existing vacant position within the same pay grade of their current job level.

Qualifications:

1. He/she must already be on regular status, and full-time employee.
2. Employee must be in his/her current position for at least 6 months to 2 years consecutively.
3. Employee must have earned a performance rate of at least 10 during the 2 years’ period.
4. Employee must have no tardiness beyond the allowable time within a year.
5. Employee must meet the required competence and requirements of the new position.
6. No memos pertaining to company policies/rules violation within the past 2 years.
7. Employee must have no record of cash overage/shortage within a year. (for teller/cashier position)
8. Employee must have passed the level of audit performance rate of least 30% as per Internal Audit System within the previous 2 years.

Voluntary Demotion

• When an existing employee applies for and is competitively selected as the most qualified candidate for an existing vacant position within a pay grade lower than their current job. Because the employee voluntarily applied for and accepted a 1-step or lower-graded job, the employee pay level shall be steady. If the employee’s current salary aligns with the internal equity of the new pay grade, the employee’s salary will not be impacted. If the employee’s current salary does not align with the internal equity of the new pay grade, the employee’s salary grade for reasons other than performance, such as a department re-structuring, the salary will not be decreased; however, the employee may not be eligible to receive additional pay increases until parity is reached.

XI. Orientation and Education Program

EMPLOYEE ORIENTATION PROGRAM

All newly hired employees shall undergo orientation program to be coordinated by HR department.

ACTIVITY

• Company Profile
• Company Vision
• Organizational Chart
• Company Policies and Procedures
• Benefits
• Company Activities

After the orientation, new staff is given a tour of the office premises and is introduced to other staff of the Company.

GENERAL GUIDELINES

Attendance and Training Programs

• No overtime pay shall be allowed even if the seminar extends beyond regular office hours or held on Saturdays, whether inside or outside the office premises.
• An employee who is included in a training program is excused from his scheduled work hours during the duration covered by actual training program. In case of out-of-town seminars or seminar outside the office the office premises, duration shall also include a reasonable travel time.
• Training programs held outside the workstation is not considered out-of-base official business; hence, the employee is not entitled to per diem and/or meal allowance. However, the employee is entitled to reimbursement of travel expenses to/from training venue and meal expenses.

ELIGIBILITY FOR TRAINING

Any regular employee may be entitled to technical and Company sponsored training along the line of his present job or to some other lines where he will be transferred of promoted. Upon recommendation of his immediate superior or the President or General Manager.

EXPENSES FOR TRAINING

Expenses incurred for travel shall be borne by the Company.

SALARY FOR TRAINING

The employee’s salary shall continue to be paid. The absence from work shall not be charged to leave privileges. If the employee is expected to report back to work at a definite day but fails to do so, such absence shall be charged to his vacation leave. Unless he can show good cause for the delay, like non-availability of air transportation due to cancellation of flight, or strike in the airport where he is expected to depart. Should it happen, he should also advise the office of his delay.

TRAINING AGREEMENT

In consideration of the payment by the Company of the cost of the training /seminar, concerned employee shall continue working with Company until the end of the holding period that commences from the completeness of the training course subject to the following:

                     COST / FEE                                                                HOLDING PERIOD

             Php 25,000.00 or less                                                              6 months

            Php 50,000.00 or less                                                              12 months

            Php 75,000.00 or less                                                              18 months

           Php 100,000.00 or less                                                             24 months

In cases where an employee attends consecutive trainings/seminars, the holding period of the initial training/seminar should be completed first before continuing with the holding period of the subsequent training/seminar. Holding periods should not overlap with each other.

In case of voluntary or involuntary termination of employment, concerned employee shall reimburse the Company of the training/seminar cost on a pro-rata basis corresponding to the remaining portion of the holding period. The reimbursement will be deducted from his/her last pay and if there is any deficiency, concerned employee shall pay within 5 days without need of any demand.

REPORT ON TRAINING

An employee who attends the training program approved by the Management is required to submit a report on course and cascade the same within the month after the completion of the seminar. The employee concerned will be in-charge of his/her presentation materials, presentation date, among other things relative to the cascading. The schedule proposed will be subjected to the approval of HR department.  A copy of his/her Training materials and Certificate of Attendance shall be submitted to HR which will be filed on the employee’s 201 file.

XII. Retirement and Succession Policy

Importance of Succession Planning

The Bank considers succession planning as part of its strategic planning on human capital known as talent management. . It shall cover the  activities and processes throughout the employee life cycle: recruiting and hiring, onboarding, training, professional development, performance management, workforce planning, leadership development, career development, cross-functional work assignments, job leveling, and the employee exit process. When managing internal talents, the Bank will ensure that the right people are moving at the right pace into the right positions at the right time. An effective succession planning strategy, coupled with solid career development programs, will help paint a more promising future for employees and help them focus more on realizing the objectives of the Bank by actively guiding potential successors in their career development. In this way the Bank is assured of continuous loyalty of the employees who would do everything possible to ensure the growth and development of the Bank.

Roles and Responsibilities of the Board

• The board shall approve appropriate hiring and selection policies and processes, adopt a continuing professional development program, and institutionalize a framework for continuing assessment of fitness and propriety of employees.
  • Ensure that all branches/units have adequate resources, including personnel complement;
  • Oversee implementation of a sound succession planning program by creating and promoting an organizational culture that places high priority on business continuity. This shall include providing sufficient financial and human resources associated with the Bank’s business continuity initiatives.

Roles of the Senior Management

• Translate the approved succession plan into specific policies and processes covering all businesses and functions of the Bank. Said policies should be clearly documented, approved by the board of directors and communicated to personnel at all levels.
• Oversee the implementation of the program in close coordination with the Human Resource Head

Role of the Human Resource Head

• The Human Resource Head shall assist the Board and the Management in fulfilling the oversight responsibilities in the areas of recruitment, manpower planning, personnel development, performance appraisal, remuneration and other key human resource issues
• Implements policies and procedures as approved by the Board in achieving the objectives covered by the succession plan.

Processes

Identification of Critical Position and Potential Successor

Identifying critical positions is an important part of the succession planning process of the Bank. It allows the identification of talent investments to ensure leadership continuity and mitigate risk from leadership erosion. In this regard, the Bank has identified the following positions being critical in the succession planning and their potential successor, based on the Personnel Qualifications updated as of June 30, 2016, a copy of which is provided and attached as Annex A:

A. DIRECTORS AND SENIOR MANAGEMENT

• Independent Director – We expect a leadership transition in the next five years due to the provision of BSP Circular No. 749 allowing a 2-year cooling period after a 5 consecutive tenure of an Independent Director. Thus, the following Independent Directors will train the following identified successor for another term of reference for 5 years.
• President – The Bank does not see the President retiring in the next 5 years considering her young age. However, if it is so that the President need to be replaced, the BOD has the sole and exclusive responsibility to choose the replacement.
• General Manager – Also, the Bank does not see any immediate transition considering that the General Manager has just been hired by the Bank’s BOD last November 2015. Should there be a need to replace the GM, the BOD may hire from within, among the pool of qualified Branch Managers or hire from external source.
• Corporate Secretary – The Board has the sole and exclusive responsibility to decide who will succeed the Corporate Secretary in case the inevitability exist

B. OFFICERS

• Compliance Officer – The Internal Auditor is the most qualified to succeed the position of CO, subject to the approval of the BOD and BSP
• Internal Auditor – The Asst. Auditor, in turn, may succeed the Internal Auditor, subject to the approval of the BOD and BSP
• CLU/ROPA Head – The Management may select from a qualified pool of Branch Managers or from qualified senior loan officers, subject to confirmation of the Board
• Branch Manager – The Management shall hire internally from among the qualified staff of the Bank, the Branch Cashier being the next in line of priority.

C. STAFF

At the discretion of the Management, the Bank shall align existing rank and file positions in such manner as to fill vacant positions and hire new employees for all non-critical vacant positions. In this regard, the HR Head is tasked in fulfilling the responsibilities in the areas of recruitment, manpower planning, personnel development, performance appraisal and other key human resource issues.

2. Identifying Competencies

The Bank shall implement a system of identification and competency-profiling of critical positions in order to develop strategies to transfer critical knowledge and attract, develop and retain qualified candidates to compete for these positions if and when they become vacant. The HR Head shall develop said identification and profiling process to assist the BOD/Management in the internal selection process.

3. Employees Training Program

Training is a program that helps employees learn specific knowledge or skills to improve performance in their current duties and responsibilities. The Bank believes that good training programs help keep the right people and contribute to its profitability.

On top of the training and seminars already undertaken by the personnel as indicated in the updated Personnel Qualifications (Annex A), the Bank is committed to providing the required and necessary trainings needed by the officers and employees of the Bank by adopting an Annual Training Program, copy of which is hereto attached as Annex B,  which will ensure continuous development of qualified pool of candidates ready to fill critical or key positions while helping them realize their career plans and aspirations and improve their ability to respond to changing work environment.

XIII. Remuneration Policy

Directors’ Fees and Other Remuneration. Each Director shall receive a fee or per diem for attendance at any meeting of the Board in an amount to be determined by Board of Directors from time to time.  However, subject to the approval of the stockholders in determining the amount, the Board shall consider the financial capabilities of the Association, provided, however, that nothing herein contained shall be constructed to preclude any Director from serving in any other capacity and receiving compensation therefore.  The Board shall fix the compensation and other remuneration of any Director who serves in any other official capacity or performs executive functions or any special service of the Corporation. (As amended on August 4, 1979)

XIV. Policies and Procedures on Related Party Transactions

A. Policies and Guidelines

1. Related party transactions shall be allowed provided that these comply with applicable regulatory limits/requirements and dealings are conducted at arm’s length basis. Said transactions shall only be made and entered into, substantially on terms and conditions not less favorable than those with other customers of comparable risks.
2. Related party transactions shall require the approval from the Board of Directors.
3. All approved related party transactions shall be reported by the Chief Compliance Officer (CCO) to the Audit Committee and to the Bangko Sentral ng Pilipinas (BSP) quarterly, as required under BSP Circular 895. Such transaction shall also be ratified and approved by the stockholders in the Annual Stockholders’ Meeting.
4. If an actual or potential conflict of interest arises on the part of a director, officer or employee, he is mandated to fully and immediately disclose the same and should not participate in the decision-making process relating to the transaction. Any member of the Board who has an interest in the transaction under discussion shall not participate therein and shall abstain from voting on the approval of the transaction.
5. Reportorial/Disclosure Requirements
   1. As explained in BSP Memorandum No. M-2012-032, transactions concerning deposit operations are excluded from the reporting requirement on related party transactions under BSP Circular No. 895.
   2. Also, lease and other similar contracts with recurring payment transactions shall only be reported once, upon approval of said transaction by the board of directors.
   3. In case the related parties involved in the transactions are both supervised by the BSP, only the lessor, in case of lease contract, or the party engaging/requesting for the services of the other financial institution, in case of other contracts, shall submit the report.
   4. Necessary disclosures shall be made also in the Notes to the Financial Statements of the Annual Report. At a minimum, the disclosures shall include:

• the amount of the transactions;
• the amount of outstanding balances and their terms and conditions, including whether they are secured, and the nature of the consideration to be provided in settlement, and details of any guarantees given or received;
• provisions for doubtful debts related to the amount of outstanding balances;
• the expense recognized during the period in respect of bad or doubtful debts due from related parties.

6. The following transactions shall not be deemed related party transactions for purposes of this policy/guidelines:
   1. Executive Officer and Director compensation arrangements;
   2. Transaction concerning deposit operations
   3. Transaction where the rates or charges involved in the transaction are determined by competitive bids or fixed by law or regulated by a governmental authority
   4. Transactions available to all employees in general, such as: deposit transactions and borrowings covered under the bank’s financial assistance program approved by BSP.

B.Procedures

1. All Directors and Officers shall submit to the Compliance Officer a filled up Related Party Transaction Information Statement Questionnaire on the following instances:

• At the beginning of term of the newly appointed/elected Director or Officer.
• At the beginning of the calendar year for all incumbents.
• Upon discovery of the unreported related party transactions.

The Questionnaire shall be accomplished as part of the responsibility of Directors and Officers to disclose related party transactions.  It shall include commitment to disclose proposed transactions that the director/officer or their related party will undertake with Pangasinan Bank, Inc.

2. Based on the Information Statement Questionnaire, the Compliance Officer shall submit/ elevate to the Board of Directors for ratification/approval.
3. A related party transaction shall be approved by the vote of the majority of the directors who are not related parties to the transaction. All credit and non-credit Related Party Transactions go through the normal approval processes of the bank after due consideration to existing DOSRI regulations and SB limits of the MORB.
4. The Chief Compliance Officer (CCO) shall prepare a quarterly report of all related party transactions to the Audit Committee for the latter’s information. Said committee shall be provided with all pertinent documents and material facts that support the transaction.
5. On a quarterly basis, the CCO shall also submit the required report to BSP using the existing report format.
6. If a related party transaction would be ongoing, the Board of Directors shall periodically review and assess ongoing relationships with related parties to determine and ensure compliance with the all the regulatory requirements.
7. No director may engage in any Board or Committee discussion or approval of any related party transaction in which he or she is a related party. However, such director must provide to the Board or Committee all material information reasonably requested concerning the transaction.
8. Consistent with corporate values and code of conduct observed by Pangasinan Bank, Inc., it shall encourage all personnel to report confidentially and without risk of reprisal, legitimate concerns about illegal, unethical or questionable Related Party Transaction’s.
9. In the event of a Related Party Transaction turning sour or becoming a problem transaction, the Bank shall collect the difference between the interest rate granted and the normal/regular rate of the transaction and also all the other waived charges extended to the related party/ies, who abuse the exceptional dealing given.

C. Roles of Senior Management and Assessment Function

1. The senior management shall implement appropriate controls to effectively manage and monitor Related Party Transactions on a per transaction and aggregate basis.
2. They shall also monitor exposures to related parties on an ongoing basis to ensure compliance with the bank’s policy and Bangko Sentral regulations.
3. The Internal Audit Committee shall conduct a periodic formal review of the effectiveness of bank’s system and internal control governing related party transactions to assess consistency with the board-approved policies and procedures.
4. The Compliance Dept. shall ensure that the bank complies with relevant rules and regulations and is informed of regulatory developments in area affecting related parties.
5. The Compliance Dept. shall aid in the review of the bank’s transactions and identify any potential related party transaction that would require review by the Board.
6. The Compliance Dept. shall ensure that the related party transaction policy is kept updated and is properly implemented throughout the bank.

XV. Self Assessment Function

1. The structure of the internal audit and compliance functions including its role, mandate/authority, and reporting process.

Authority:

Internal Audit Department (IAD) aims to promote effective controls at a reasonable cost.  To achieve this, IAD is authorized, in the course of its activities:

• To enter all areas of the auditable units  and have full, free, and unrestricted access to all levels of management, Bank’s internal records, including Board of Director (BOD) meetings, bank’s functions, systems, the documents and ledgers, property, and personnel of the Bank, considered necessary for the performance of its functions;
• To require all members of staff and management to supply such information and explanations as may be needed within a reasonable period of time;
• To have access to the Audit Committee and the President;
• To obtain the necessary assistance of personnel in units of the Bank where they perform audits, as well as other specialized services from within or outside of the Bank;

The IAD and its staff are not authorized to:

• Perform any operational duties for the Bank;
• Initiate or approve accounting transactions external to IAD.

Responsibilities:

The scope of work of IAD is to determine whether the Bank’s risk management, internal control systems, information systems and governance processes are adequate and functioning in a manner to ensure that:

• Risks are appropriately identified and managed;
• Significant financial, managerial, and operating information is accurate, reliable and timely;
• Review the adequacy of controls established to ensure compliance with policies, plans, procedures and business objectives;
• Resources are acquired economically, used efficiently, and adequately protected;
• Assess the means of safeguarding assets;
• Review established procedures and systems and propose improvements;
• Monitor recommendations forwarded to make sure that effective remedial action is taken;
• Carry out ad hoc appraisals, investigations, or reviews requested by the Audit Committee or the President;
• Develop a flexible annual audit plan using an appropriate risk-based methodology, including any risks or control concerns identified by the President;
• Implement the annual audit plan, including, as appropriate, any special tasks or projects requested by the Audit Committee or the President;
• Evaluate and assess significant merging/consolidating functions and new or changing activities, processes, operations, and control processes coincident with their development, implementation, and/or expansion;
• Keep the Audit Committee and the President informed of emerging trends, successful practices, and significant measurement criteria in internal auditing;
• Identify and report to the Audit Committee and the President actual and potential weakness in the systems or internal control where it exists, and recommend feasible ways to remedy it;
• Issue periodic reports on a timely basis to the Audit Committee and to the President of the Bank summarizing the result of the Audit activities;
• Maintain a team that collectively possesses the necessary knowledge, skills, and disciplines for the achievement of the IAD activities.  In cases of special need, IAD resources may be implemented by:
• Assistance of other suitable staff within the Bank;
• Engagement of consulting services;

The internal audit process, however, does not relieve departmental heads and staff of their responsibility for the maintenance and improvement of internal controls in their respective area.

Independence and Objectivity:

To ensure its independence, Internal Audit Department (IAD) is directly and functionally responsible to the Audit Committee, and administratively to the President.

In this context, functional accountability means that the Audit Committee would:

1. Approve the internal audit risk assessment and related audit plan;
2. Receive communications from the Head of IAD on the results of the internal audit activities or other matters that he/she determines to be necessary, including private meetings with him/her without management present;
3. Approve the charter of the internal audit function;
4. Determine whether there are scopes or budgetary limitations that impede the ability of the internal audit activity to execute its responsibilities;

Administrative accountability is the relationship of the IAD within the organization’s management structure that facilitates day-to-day operations of the internal audit activity and provides appropriate interface and support for effectiveness.  Administrative reporting typically includes:

1. Budgeting and management accounting;
2. Internal communications and information flows;
3. Administration of the organization’s internal policies and procedures;

To maintain objectivity, the Internal Audit Department (IAD) is not involved in day-to-day control procedures.  Instead, each business unit is responsible for its internal control.

Accountability:

The Head of IAD, in the discharge of his/her duties, shall be accountable functionally to the Audit Committee, and administratively to the President.  IAD Head shall send copies of his/her reports that are sent to the Audit Committee to the President.  The main functions of the IAD include, but are not limited to:

• Provide annually an assessment on the adequacy and effectiveness of the Bank’s processes for controlling its activities and managing its risks in the areas set forth under “Purpose and Objectives”;
• Report significant issues related to the processes for controlling the activities of the Bank, including potential improvements to these processes, and provide information concerning such issues;
• Furnish the annual audit plan and periodically provide information on the status and results of the annual audit plan and the sufficiency of IAD’s resources;
• Coordinate with and monitor the results of work performed by, other control and monitoring functions (e.g., risk management, security, ethics, evaluations, and external audit);
• Perform financial, accounting, administrative, information technology, and operational audits in a systematic and selective manner to provide adequate audit coverage over an appropriate period;
• Review the systems of internal controls maintained by the Bank to safeguard its financial and physical assets, verifying the existence of related assets, ascertaining high-risk areas, and recommending alternative approaches to correct any weaknesses;
• Maintain a continuing program for reviewing the effectiveness of lending and technical assistance activities in order to ascertain whether results are consistent with established Bank policies, objectives, and goals;
• Review the reliability, accuracy, and integrity of financial and operating information systems and related policies, plans, procedures, and records in order to appraise their adequacy regarding the intended objectives;
• Appraise the adequacy of the action taken by the President on recommendations to correct reported internal control weaknesses and/or deficient conditions and advise the Audit Committee and the President of the risk(s) assumed by not taking corrective action on reported findings;
• Continue direct communications with appropriate management staff members on corrective actions considered inadequate until the matter has been satisfactorily resolved.

Continuity and Impartiality:

• Internal Audit within the Bank shall be a permanent function.
• IAD shall be objective and impartial in performing its assignment.
• Objectivity and impartiality entail that the internal audit department it seeks to avoid any conflict of interest.

For the purpose of the impartiality and independence of the IAD, the appointment, and removal of IAD Head shall be executed in accordance with the Bank’s internal regulations, but in consultation with the Chairman of the Audit Committee.  Furthermore, personnel evaluation (performance appraisal) of the IAD Head shall be conducted by the Audit Committee.

Standards:

Internal Audit Department adheres to the standards of best professional practice, such as International Standards for the Professional Practice of Internal Auditing and the Code of Ethics of The Institute of Internal Auditors.

COMPLIANCE FUNCTION

Compliance Department is manned by the Compliance Officer. The independence and seniority of the position is re-asserted. He has no line functions in the bank and functionally reports to the bank’s board-level Audit Committee.

1. A constructive working relationship between the bank and BSP

The Bank through its Compliance Officer, may consult with the BSP for clarifications on specific provisions of related laws and regulations. Similarly, BSP may initiate a dialogue with a bank to discuss the compliance program of the bank and its records of implementation of the same. The Bank is enjoined to discuss clarifications of pertinent laws and regulations with other appropriate agencies that issue market regulations and/or tax guidelines.

2. Clear and open communication lines within the bank to educate and address compliance matters

  Officers and staff shall be trained in the normal course of bank operations with respect to the compliance program of the bank and the identified business risks. The processes for imparting to bank personnel for the necessary appreciation of the bank’s compliance culture shall form part of the Compliance Manual.

Compliance Officer

1. The Compliance Officer is the lead Senior Officer for purposes of administering the compliance program and interacting with the BSP on compliance related issues. The principal function of the CO is to oversee the design of an appropriate compliance system, promote its effective implementation and address breaches that may arise. The CO shall also be responsible for ensuring the integrity and accuracy of all documentary submissions to the BSP.

2. The Bank has appointed a full-time CO to manage the compliance program. Given the importance of the compliance function, the CO is a senior officer functionally reporting to the bank’s Board of Directors. Such appointment/designation shall require prior approval of the Monetary Board. The CO’s qualifications shall be subject to the provisions of Section X142.2 of the MORB enumerating the qualifications of bank officers, particularly putting consideration to “fit and proper criteria” such as integrity/probity, competence, education, diligence and experience/training.

3. The CO shall have commensurate skills and expertise to provide appropriate guidance and direction to the bank on the development, implementation and maintenance of the compliance program.

Responsibilities of Directors and Senior Management on Compliance

Aside from the duties and responsibilities of the Board of Directors mentioned under X141.3, the Board shall ensure that a compliance program is defined for the bank and that compliance issues are resolved expeditiously.

Ensuring the bank personnel to the pre-defined compliance standards of the banks rests collectively with Senior Management, of which the CO is the lead operating officer on compliance. Senior Management, through the CO, should periodically report to the Board of Directors of its designated Committee that affect the design and implementation of the Compliance Program.

Compliance Issues

In order to ensure compliance with laws and regulatory issuance in the daily operations of the bank, the following shall be observed:

1. Each department/branch shall be furnished a list of laws, rules and regulations applicable to all their transactions which shall be observed by its officers and staff. A summary of the provisions of laws, rules and regulations relevant to banking is shown in ANNEX A.
   1. Banking Laws
   2. BSP Circulars
   3. Corporation Code
   4. Bureau of Internal Revenue
   5. Securities and Exchange Commission
   6. Local Government Code
   7. Philippine Deposit Insurance Corp.
   8. Department of Labor and Employment
   9. Social Security System
   10. Department of Justice
   11. Officer Orders/Memoranda
2. A list of reports required to be submitted to the BSP and other regulatory agencies shall be furnished each department/branch. Each department/branch responsible for the preparations/submission of such reports shall be identified. Each department/branch shall maintain a logbook containing information when each report is due and when such report was actually submitted to the regulatory body. Evidence of receipt of reports by the appropriate regulatory office shall be kept on file at all times. A list of required reports to be submitted to BSP is shown in ANNEX B.
3. To determine compliance of banks with prescribed internal control standards, a suggested set of Internal Control Questionnaires is attached as ANNEX C.
4. The reports of the Compliance Officer on the results of the compliance testing shall be submitted to the President together with his recommendations. The compliance rating of each department/branch shall be based among others, on the number of violations, amount involved and persistence in committing the violations. The level of risks are as follows:

Low                 –           Possibility of losses is minimal

Moderate       –           Risk of losses is manageable

High               –           Exposure to losses are very definite and imminent. The Compliance rating shall be considered as one of the basis for promotions, awards and other incentives that may be granted by the bank as well as for disciplinary actions.

The compliance risk rating of each department/branch be considered in determining the frequency and scope of the succeeding compliance review to be performed. Initially, the compliance audit shall be conducted quarterly. Thereafter, the audit of a department rated “low” may be reduced to once a year, those rated “moderate” shall continue to be audited quarterly, while those rated “high” shall be audited at least monthly.

1. The president shall inform in writing, the Heads of each department/branch subject of the report of the details of the violations noted and shall require the department head/branch manager to correct the violations immediately and to submit written reports on the action taken on the violations noted and the status of the corrective actions taken. Whenever necessary, meetings/discussion between the Compliance Officer and the Department Heads/Branch Managers shall be held. Such meetings shall be supported by minutes of the discussion and commitments made by the department heads/branch managers to correct the exceptions noted.
2. The President shall submit periodic reports, at least quarterly to the Board of Directors on violations noted by the compliance officer, the actions taken by the officer concerned to correct said violations and appropriate recommendations to prevent repetition thereof.

Risk-Assessment  and Testing

1. The Compliance Officer in coordination with the Internal Auditor if there is one or the Bank President shall establish a monitoring and assessment process, a checklist of regulations, to ensure that all directors, officers and staff of the bank are familiar with the compliance program.
2. Once the Compliance program is in place, a periodic compliance review/monitoring and assessment of each department/branch on a regular basis shall be enforced.
3. The internal and external auditors of the bank shall be required to inform the Compliance Officer of any violation of laws, rules and regulations noted in their audit work.

Reports on the monitoring and assessment shall be prepared and submitted to the President/Chief Operating Officer to documents findings, issues, concerns and remedial/corrective measures taken. The reports must be thoroughly reviewed and approved by the department/unit head/branch managers concerned before their submission to the President and the Board of Directors.

Reporting

The compliance officer must provide reports to other areas of the bank concerning the results of compliance reviews and training. They must also report changes in laws that result in policy amendments and new policies developed in accordance with new legislation. All changes to the compliance program of the bank must be cleared through and approved by the board of directors.

ANNUAL AUDIT PLAN

AUDIT APPROACH

The Internal Audit will consist of interviews with key employees, review of documents, inspections, data analysis, review of accounting entries and the usage of applicable audit tools. The audit will consist of the components described below.  The phases are listed in sequential order and should provide an overview of the sequencing of the proposed engagement.

 I. Mobilization Phase

The Internal Auditor will:

• Require the auditee units a list of schedules and relevant documents and materials that will support our fieldwork prior to the audit visit.
• Develop and have the audited branches and units undergo an initial interview of the officers and staff that we anticipate needing to meet with, in order to perform the audit.
• Develop an audit program to guide activities during the course of this audit. The audit program guide shall include a list of the controls and risk considerations that would be reviewed along with a defined approach for understanding the design of the control and how it would be tested to determine if it is operating effectively. 

II. Execution Phase:

Once the audit program has been finalized, and the appropriate resources have been identified, fieldwork will proceed in accordance with the audit plan. We will expect results from the execution of the detailed Audit Program and utilization of working papers that will support the results from the detailed Audit Program.

III.  Reporting Phase:

1. Audit Draft/Initial Report – As the audit progresses, the Internal Auditor/Staff shall provide draft reports containing the initial findings/observations in one or more risk areas. We expect that the branch/unit will respond quickly as possible. Our team will compile all draft reports of the audited branch/unit management within the specified days below to come up with preliminary audit report.

*Note: Branches with below 999 accounts (deposits and loans) 3 days
Branches with 1,000 or more accounts (deposits and loans) 5 days

2. Preliminary Audit Report will include our recommendation on how to effectively address the findings/violations among others. A period of a minimum of 15 days and a maximum of 30 days depending on the total number of accounts on loans and deposits will be provided to the branch/unit, within which to reply and make some corrections, if needed. A timeline to address the deficiencies/findings/observation shall be included in their reply.

*Note: Branches with below 500 accounts (deposits and loans) 15 days.
Branches with 501 to 1,000 accounts (deposits and loans) 20 days.
Branches with 1001 to 1500 accounts (deposits and loan) 25 days.
Branches with 1,501 or more accounts (deposits and loans) 30 days.

3. Final Audit Report – After receiving the response(s) to the Preliminary Audit Report, the Internal Auditor shall prepare a Final Audit Report (FAR). From the FAR matrix, the Internal Auditor shall objectively assess each response as to whether each audit deficiency/violation/observation has been addressed properly by indicating the word “Accepted or Complied” or “Not Acceptable or Not Complied.”

The Internal Auditor then will prepare a Memorandum Report addressed to the Audit Committee highlighting the material finding/violations/observations particularly items which are marked “Not Acceptable or Not Complied” in an annex supporting the Memo Report.

IV.Risk Assessment and Audit Rating:

Based on the information provided by each branch/unit during our initial conversation, combined with our understanding about the branch/unit operation, we will formulate risk considerations that we understand, are relevant to their respective operation.  Our goal is to incorporate these risk considerations in our audit program as developed in the Mobilization Phase of the internal audit.

The risks shall be evaluated as to their efficiency and Bank Management is expected to follow the process below:

1. Identifying the risk
2. Develop strategies and procedures to prioritize risk
3. Design policies to mitigate risk
4. Implement policies and assign responsibilities
5. Test effectiveness and monitor results
6. Revise ineffective policies

V. Manner of Communications:

Branch/unit responses are important elements of our internal audit.  Through regular meetings and ongoing communication with each branch/unit management, we will establish a relationship of openness through which we can discuss significant audit findings, recommendations for improving internal controls or operations, ultimately develop solutions to the issues.

It is our policy to discuss our findings and recommendations with the concerned branch/unit prior to issuance of each audit report so that we can verify factual accuracy. Our final report will only include findings and recommendations considered significant. Other matters will be communicated throughout the engagement and during our regular meetings and fieldwork.

In case of fraud discovery, the same process will be done, only that the Audit Committee and Senior Management shall be given advance information from time-to-time or when the need arises.

XVI.  Dividend Policy

Declaration of Dividends.  Dividends may be declared annually or oftener as the Board of Directors may determine.  The Board may declare dividends only from the surplus profits of the Corporation after making proper provisions for the necessary reserves in accordance with law and regulations of the Bangko Sentral ng Pilipinas, and the deductions provided in Article X and XI.

            Stock Dividends.  With the approval of the Stockholders representing two-thirds (2/3) of all stock then outstanding and entitled to vote given at a general meeting or at a special meeting duly called for the purpose, the Board may declare that dividends be paid in stock.

XVII.  Corporate Social Responsibility Initiatives

           The Board of Directors of Pangasinan Bank (A Rural Bank), Inc. is ultimately responsible in ensuring that consumer protection practices are embedded in the Bank’s business operations.  The bank must adhere to the highest service standards and embrace a culture of fair and responsible dealings in the conduct of its business through the adoption of a Financial Consumer Protection Framework embodies in the board-approved Financial Consumer Protection Manual.

Role and Responsibility of the Board of Directors. 

            The Board is responsible for developing the Bank’s consumer protection strategy and establishing an effective oversight over the Bank’s consumer protection program. 

XVIII.  Consumer Protection Practices

Role of the Board and Senior Management

            The Board of Directors shall be responsible for the delivery of effective recourse to its consumers. Pursuant thereto, the Board shall:

• Approve the Consumer Assistance policies and procedures;
• Approve Risk Assessment Strategies relating to Effective Recourse by the Consumer;
• Ensure compliance with Consumer Assistance policies and procedures;
• Provide adequate resources devoted to Consumer Assistance; and
• Review the Consumer Assistance policies at least annually

            The Bank’s Senior Management shall be responsible for the implementation of the Consumer Assistance policies and procedures.

Risk Assessment Strategies

Pursuant to the Bank’s Consumer Protection Risk Management  System, the Bank shall put in place appropriate management controls and take reasonable steps to ensure that in handling complaints/requests, it: i) identifies and remedies any recurring or systemic problems; and ii) identifies weaknesses in the Bank’s internal control procedure or process. This may be done by:

1. Analyzing complaints/requests data;
2. Analyzing causes for complaints/requests;
3. Considering whether such identified weaknesses may also affect other processes or products, including those not directly complained of/requested; and
4. Correcting, whether reasonable to do so, such causes taking into consideration the concomitant costs and other resources.

A. Consumer Assistance Channels

1. Consumers may lodge their concerns through any reasonable means, such as, a centralized web-portal, walk-in or personal visit, letter, e-mail, telephone, and facsimile
2. The Bank must maintain a Consumer Assistance Helpdesk or hotline dedicated for customer concerns and service and manned by CAO/HR Head.
3. The Bank shall ensure that consumers know how and where to lodge their concerns.

      4. The Bank is encourage to provide alternative modes of resolution, such as conciliation, mediation and arbitration, in order to achieve settlement of the issues at the Bank level.

B. Consumer Assistance Process and Timelines

1. Complaint/Request

a.Receiving and acknowledging complaints/requests

1. The Bank shall obtain and record the following data from the consumer:

• Full name and contact details;
• Nature of complaint or request and its details;
• Resolution requested;
• Signature of the complainant/requester;
• Name of bank personnel handling/in-charge of the complaint

2.The Consumer Assistance Officer/HR Head must be able to explain the Consumer Assistance process and timelines.

3. The acknowledgment shall provide an assurance that the Bank is dealing with the complaint, request additional documents, if necessary, and that the complainant shall be kept informed of the progress of the measures being taken for the complaint’s resolution.

       b.Investigating and Resolving Complaints

• The Bank must establish an institutional approach in assessing and investigating complaints/request and options in resolving them, considering the peculiarities of the complaints/requests and the desired remedies of the party.
• If the assessment and investigation on complex complaints/requests cannot be completed within the timeframe stated above, complainants shall be informed of the:

1. Reason thereof;

2. Need for extended timeframe;

3. Date on which the complainant may expect the outcome of the Bank’s assessment and/or investigation; Provided, however, that the additional period shall not exceed forty-five (45) days. This will afford complainants opportunity to seek other means to resolve their complaints.

• Result of assessment, investigation, and the Bank’s final response shall be communicated to the complainant in writing in simple and clear language. The Bank shall likewise inform the complainant of the possible remedies available to the party, including resort to the BSP Consumer Assistance Mechanism and the courts.

F. CORPORATE INFORMATION

I.Bank’s Organization Structure

II. List of Major Stockholders’ of the Bank

III. Products and Services Offered

To help achieve its mission of encouraging the people to practice the habit of saving and the judicious use of credit in the communities that it serves, help eradicate usurious practices and provide quality services whether they are depositors or borrowers so that they can improve their economic standing, the bank hereby offers financial products which will help in nation-building in terms of giving economic benefits to the people.

DEPOSIT

LOANS

            *In addition to the preceding products, the bank is also an agent of ECPay for bills payment and other related services.

            The Bank has implemented the risk-based lending program adopted from Small Business Corporation (SBC). In line with the implementation is the creation of a new product line called Small Medium Enterprise (SME) loans which is offered to individuals or entity rightfully categorized as small and medium enterprises. Capacity to pay, secondary to collateral, are the main consideration in the approval of the loan application. A flexible and attractive Interest rate is offered to SME clients as it is computed based on the sum of cost of funds, credit risk, and a certain percentage of spread. Accounts already existing was categorized as SME loans qualified to cross-over in the product line. A new set of SME credit manual, separate and distinct from the existing credit manual applicable to other loan products, was developed for this purpose.

IV. Bank’s Website

www.pangasinanbank.com

V. Banking Units

PANGASINAN BANK (A Rural Bank), INC.
List of Banking Units
As of December 31, 2019

MANGALDAN-HEAD OFFICE
Rizal Avenue, Poblacion
Mangaldan, Pangasinan
Cell No. 0933-037-1313 (Mgr. Operation)
0906-556-5712 (Mang. Operation)
0923-9914-091 (ROPA)
Tel. No. (075) 523-58-59 (President)
(075) 513-5013 (Operation)
(075) 653-1570 (Admin)
(075) 540-9722 (ROPA)
ppbrb@yahoo.com
pbmangaldan@yahoo.com
Website: www.pangasinanbank.com

ALAMINOS BRANCH
30 Quezon Avenue, Poblacion
Alaminos City, Pangasinan
Cell No. 0951-351-9858 (Branch Mgr.)
0933-037-1284 (Branch Operation)
Tel. No. (075) 529-5972
cityalaminos@yahoo.com

BINMALEY BRANCH
Public Market, Poblacion
Binmaley, Pangasinan
Cell No. 0932-726-9320 (Branch Mgr.)
0933-037-1331 (Branch Operation
Tel. No. (075) 653-0568
pangbank.binmaley@yahoo.com.ph

MALASIQUI BRANCH
Don Vicente Quintans Street
Poblacion, Malasiqui, Pangasinan
Cell No. 0931-061-4606 (Branch Mgr.)
0932-597-1300 (Branch Operation)
Tel No. (075) 632-2407
pbmalasiqui0421@yahoo.com

ROSARIO BRANCH
Aquitania, Poblacion
Rosario, La Union
Cell No. 0995-882-8469 (Branch Mgr.)
0933-037-1415 (Branch Operation)
Tel. No. (072) 687-0367
pangbankrosario@yahoo.com

SAN FABIAN BRANCH
Rizal Street, Poblacion
San Fabian, Pangasinan
Cell No. 0933-037-1376 (Branch Mgr.)
0906-302-1745 (Branch Operation)
Tel No. (075) 653-1446
pbsanfabian@yahoo.com

G.AUDITED FINANCIAL STATEMENTS (AFS) WITH AUDITOR’S OPINION

Independent Auditor’s Report

The Board of Directors and Stockholders
PANGASINAN BANK (A RURAL BANK), INC.
Rizal Avenue, Mangaldan Pangasinan

Opinion

We have audited the financial statements of PANGASINAN BANK (A RURAL BANK), INC., which comprise the statement of financial position as at December 31, 2019, and
the statement of comprehensive income, statement of changes in equity and statement of cash flows for the year then ended, and notes to the financial statements, including a
summary of significant accounting policies.

In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2019, and of its
financial performance and its cash flows for the year then ended in accordance with Philippine Financial Reporting Standards (PFRSs).

Basis for Opinion

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

Other Information

The Board of Directors is responsible for the other information. The other information comprises the ‘Submitted Consolidated Statement of Financial Position and Income’, ‘Adjusting Journal Entries’ and ‘Certificate Authorizing Registration’.

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

In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially
inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.

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

Management is responsible for the preparation and fair presentation of the financial statements in accordance with PFRSs, 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.

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

Those charged with governance are responsible for overseeing the Company’sfinancial reporting process.

Auditor’s Responsibilities for the Audit of the Financial Statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or
error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in
accordance with PSAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually
or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.

As part of an audit in accordance with PSAs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:

• Identify and assess the risk of material misstatement of the financial statement, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, international omissions, misrepresentations, or the override of internal control.
• Obtain an understanding of internal control relevant to the audit 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 Company’s internal control.
• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting and estimates and related disclosures made by management
• Conclude the appropriateness of management’s use of the going concern basis of accounting and based on the evidence obtained, whether a material uncertainty exist related to events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern. If we conclude that a material uncertainty exist, we are required to draw attention in our auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained to date by our auditors report. However, future events or conditions may cause to cease to continue as a going concern.
• Evaluate the overall presentation structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including significant deficiencies in internal control that we could identify during our audit.

Report on the Supplementary Information Required Under RR 15-2010

Our audit was conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplementary information on taxes and alike in the
Notes to Financial Statements is presented for purposes of filing with the Bureau of Internal Revenue and is not required part of the basic financial statements. Such
information is the responsibility of management. 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.

Other Matters

As part of our audit of the 2019 financial statements, we also audited the adjustments described in “Adjusting Entries” a schedule attached for BSP reporting, that were
applied to restate the 2018 financial statements. In our opinion, such adjustments are appropriate and have been properly applied. We were not engaged to audit, review, or
apply any procedures to the 2018 financial statements of the Bank other than with respect to the adjustments, and accordingly, we do not express an opinion or any other
form of assurance on the 2018 financial statements as a whole.

The financial statements of the Bank for the year ended 31 December 2018, were audited by another auditor who expressed an unmodified opinion on those amended statements on 20 February 2020.

DAROYA & CO.
BOA AN 221, valid until September 05, 2020
SEC AN. 0350-F, valid until December 6, 2020

(Sgd.) JOVENCIO N. DAROYA JR.
Partner
CPA Certificate No. 0090369, valid until April 10, 2023
PTR No. 1210331 (2020) Dagupan City
TIN 161-520-408
BIR AN. 010046780012109, valid until November 25, 2022

Dagupan City, Pangasinan
March 18, 2020

PANGASINAN BANK (A RURAL BANK), INC.
Rizal Avenue, Mangaldan Pangasinan

Notes to Financial Statements

For the years ended December 31, 2019 and 2018

Pangasinan Bank (A Rural Bank), Inc. was incorporated in the Philippines and registered with the Securities and Exchange Commission (SEC) under registration number 69494. The Bank’s main purpose is to carry and engage in the business of extending rural credit to small farmers and tenants and to deserving rural industries and enterprises and to have and exercise all authority and powers and to so and perform all acts and transacts all business which may legally be had and done by rural bank organized under and in accordance with the Rural Bank’s Act and transacts all business which may legally exist or be amended and to have all other things thereto and necessary and proper in connection with said purposes within such authority as may be determined by the Monetary Board of Bangko Sentral ng Pilipinas.

The bank’s principal place of business is located at Rizal Avenue, Mangaldan, Pangasinan with branches in Pangasinan in the towns of Binmaley, San Fabian, Alaminos, Malasiqui, and in Rosario, La Union.

Approval for Issuance of Audited Financial Statements

The Board of Directors (BOD) of the bank has reviewed and approved the release of the accompanying financial statements for the year ended December 31, 2019 (including comparative figures for December 31, 2018) on March 17, 2020.

A summary of more significant policies and practices of the bank are set forth below to facilitate the understanding of data presented in the financial statements.

Basis of Preparation

The financial statements of the Bank have been prepared in accordance with Philippine Financial Reporting Standards (PFRS). PFRS are adopted by the
Financial Reporting Standards Council (FRSC) from the pronouncements issued by the International Accounting Standards Board and approved by the Philippine Board of Accountancy

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and settlement of liabilities in the normal course of business.

Currency of Presentation

Unless otherwise stated, all amounts are expressed in Philippine Pesos (Php), the domestic currency. All financial information presented in Philippines Peso has been rounded-off to the nearest peso.

Presentation of Financial Statements

The statements of financial position of the Bank are presented in order of liquidity. An analysis regarding recovery of assets or settlement of liabilities within 12 months after the reporting date (current) and more than 12 months after the reporting date (non-current) is presented in Note 4.3.

Income and expenses are not offset in the statement of income unless required or permitted by any accounting standard or interpretation, and as specifically disclosed in the accounting policies of the Bank.

For purposes of reporting cash flows, cash and cash equivalents include cash and other cash items, due from BSP and other banks that are highly liquid, readily
convertible to known amounts of cash with original maturities of three months or less from dates of placements and which are subject to insignificant risk of changes in value. Due from BSP includes statutory reserves required by the Bank which the Bank considers as cash and cash equivalents as withdrawals can be made to meet the Bank’s cash requirements as allowed by the BSP.

Changes in Accounting Policies and Disclosures

The accounting policies adopted are consistent with those of the previous financial year except for the adoption of the following amended standards, which became
effective as of January 1, 2019. Except as otherwise indicated, these changes in the accounting policies did not have any significant impact on the financial position or performance of the Bank:

New and Amended Standards

• Amendments to PFRS 2, Share-based Payment, Classification and Measurement of Share based Payment
• Amendments to PFRS 4, Insurance Contracts, Applying PFRS 9, Financial Instruments, with PFRS 4, Insurance Contracts
• PFRS 15, Revenue from Contracts with Customers, PAS 18, Revenue and related Interpretations and it applies, with limited exceptions, to all revenue
  arising from contracts with customers. PFRS 15 establishes a five step model to account for revenue arising from contracts with customers and requires that
  revenue be recognized at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a
  customer. In addition, guidance on interest and dividend income have been moved from PAS 18 to PFRS 9 without significant changes to the requirements.
  The adoption of PFRS 15 has no significant impact to the Bank, since its revenue, primarily interest income from loans and receivables, are outside the
  scope of such standard.
• Philippine Interpretation IFRIC 22, Foreign Currency Transactions and Advance Consideration.

Annual Improvements to PFRSs (2014 – 2017 Cycle)

• Amendments to PAS 28, Investments in Associates and Joint Ventures, Measuring an Associate or Joint Venture at Fair Value (Part of Annual
  Improvements to PFRSs, 2014 – 2016 Cycle).
• Amendments to PAS 40, Investment Property, Transfers of Investment Property
• PAS 12 (Amendments), Income taxes – Tax Consequences of Dividends. The amendments clarify that all income tax consequence of dividend payments
  should be recognized in profit or loss.
• PAS 23 (Amendments), Borrowing costs – Eligibility for Capitalization. The amendments clarify that any specific borrowing which remains outstanding after
  the related qualifying asset is ready for its intended purpose, such borrowing will then form part of the entity’s general borrowings when calculating the
  capitalization rate for capitalization purposes.

Standard that has been adopted and that is deemed to have significant impact on the financial statements or performance of the Bank is described below:

• PFRS 9 (2014), Financial Instruments The Bank adopted the final version of PFRS 9 effective January 1, 2018. As a result, the Bank changed to the following accounting policies beginning 2018.

a. Classification and Measurement The 2009 version of PFRS 9 in December 2010 specified how an entity should classify and measure its financial assets.                         It required all financial assets to be classified in their entirety on the basis of the entity’s business model for managing the financial assets and the                                   contractual cash flow characteristics of the financial assets. Financial assets are measured either at amortized cost or fair value. The final version of                                 PFRS 9 introduced a new FVOCI classification for debt instruments where the objective of the business model is both to collect contractual cash flows
and to realize fair value changes.

b. Impairment

The Bank may record expected credit losses (ECL) for all loans and other debt financial assets not classified as FVTPL. ECL represents credit
losses that reflect an unbiased and probability-weighted amount which is determined by evaluating a range of possible outcomes, the time value of
money and reasonable and supportable information about past events, current conditions and forecasts of future economic conditions. The
objective is to record lifetime losses on all financial instruments which have experienced a significant increase in credit risk (SICR) since their initial                              recognition. As a result, allowance for ECLs is measured at amounts equal to either:

                         i. 12-month ECL; or

                         ii. Lifetime ECL for those financial instruments which have experienced a SICR since initial recognition.

The 12-month ECL is a portion of lifetime ECL that results from default events on a financial instrument that are possible within 12 months
after the statement of financial position date.

For non-credit-impaired financial instruments:

1. Stage 1 is comprised of all non-impaired financial assets which have not experienced a SICR since initial recognition or is considered
of low credit risk as of the reporting date. The Bank recognizes a 12-month ECL for Stage 1 financial instruments.

2. Stage 2 is comprised of all non-impaired financial assets which have experienced a SICR since initial recognition.
The Bank recognizes a lifetime ECL for Stage 2 financial instruments.

For credit-impaired financial instruments:

1. Stage 3 is comprised of all financial assets that have objective evidence of impairment as a result of one or more loss events that
have occurred after initial recognition with a negative impact on the estimated future cash flows of a loan or a portfolio of loans. The Bank                                                  recognizes a lifetime ECL for impaired financial instruments.

However, in line with the PFRS 9 requirement on the adoption of the expected credit loss (ECL) in recognizing impairment, the Bank shall
be allowed to adopt the existing guidelines (Attachment 3 APP 18/Q 10/N-11) in setting up allowance for credit losses as per Circular No. 1011 series of 2018

c. Hedge accounting

The new hedge accounting model under PFRS 9 aims to simplify hedge accounting, align the accounting for hedge relationships more closely with
an entity’s risk management activities and permit hedge accounting to be applied more broadly to a greater variety of hedging instruments and                                        risks eligible for hedge accounting. Adoption of these amendments did not have an impact on the Bank’s financial statements as it does not apply
hedge accounting.

• PFRS 16, Leases (effective from January 1, 2019). The new standard will replace PAS 17, Leases.
  For lessees, it requires to account for leases “on-balance sheet” by recognizing a “right of use” asset and a lease liability. The lease liability is initially measured as the present value of future lease payments. For this purpose, lease payments include fixed, non-cancellable payments for lease elements, amounts due under
  residual value guarantees, certain types of contingent payments and amounts due during optional periods to the extent that extension is reasonably certain. In
  subsequent periods, the “right-of-use” asset is accounted for similar to a purchased asset subject to depreciation or amortization. The lease liability is accounted for similar to a financial liability which is amortized using the effective interest method.

However, the new standard provides important reliefs or exemptions for short-term leases and leases of low-value assets. If these exemptions are used, the accounting is similar to operating lease accounting under PAS 17 where lease payments are recognized as expenses on a straight-line basis over the lease term or another systematic basis (if more representative of the pattern of the lessee’s benefit). For lessors, lease accounting is similar to PAS 17’s. In particular, the distinctionbetween finance and operating leases is retained. The definitions of each type of lease, and the supporting indicators of a finance lease, are substantially the same as PAS 17’s. The basic accounting mechanics are also similar, but with some different or more explicit guidance in few areas. These include variable payments, sub-leases, lease modifications, the treatment of initial direct costs and lessor disclosures.

• IFRIC 23, Uncertain over Income Tax Treatments (effective from January 1, 2019). The interpretation provides clarification on the determination of taxable
  profit, tax bases, unused tax losses, unused tax credits, and tax rates when there is uncertainty over income tax treatments. The core principle of the
  interpretation requires the Bank to consider the probability of the tax treatment being accepted by the taxation authority. When it is probable that the tax
  treatment will be accepted, the determination of the taxable profit, tax bases, unused tax losses, unused tax credits, and tax rates shall be on the basis of the
  accepted tax treatment. Otherwise, the Bank has to use the most likely amount or the expected value, depending on the surrounding circumstances, in
  determining the tax accounts identified immediately above.

Fair Value Measurement
For measurement and disclosure purposes, the Bank determines the fair value of an asset or liability at initial measurement or at each reporting date. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either: a.) in the principal market for the asset or liability, or b.) in the absence of a principal market, in the most advantageous market for the asset or liability. The principal or the most
advantageous market must be accessible to the Bank.

The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that
market participants act in their economic best interest. If the asset or liability measured at fair value has a bid and ask price, the price within the bid-ask spread
that is most representative of fair value in the circumstances shall be used to measure fair value, regardless of where the input is categorized within the fair value
hierarchy.

A fair value measurement of a non-financial asset takes into account a market participant’s ability to generate economic benefits by using the asset in its highest
and best use or by selling it to another market participant that would use the asset in its highest and best use. The Bank uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs.

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

Level 1 – Quoted (unadjusted) market prices in active markets for identical assets or liabilities
Level 2 – Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable
Level 3 – Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable

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

The carrying amounts of the financial assets and liabilities as at December 31 for both years approximate their fair values based on the bank’s fair value hierarchy.

Classification, Measurement and Reclassification of Financial Assets
Classification and measurement of financial assets
For purposes of classifying financial assets, an instrument is an ‘equity instrument’ if it is a no derivative and meets the definition of ‘equity’ for the issuer (under PAS 32, Financial Instruments: Presentation). All other non-derivative financial instruments are ‘debt instruments’. Financial assets are classified, at initial recognition, as subsequently measured at amortized cost, FVTOCI, and FVTPL. The classification depends on the financial asset’s contractual cash flow characteristics and the Bank’s business model for managing them. In order for a financial asset to be classified and measured at amortized cost or FVTOCI, it needs to give rise to cash flows that are solely payments of principal and interest (SPPI) on the principal amount outstanding. This assessment is referred to as the SPPI test and is performed at an instrument level. The Bank’s business model for managing financial assets refers to how it manages its financial assets in order to generate cash flows. The business model determines whether cash flows will result from collecting contractual cash flows, selling the financial assets, or both.

Business model test
The Bank determines its business model at the level that best reflects how it manages Banks of financial assets to achieve its business objective. The Bank’s
business model is not assessed on an instrument-by-instrument basis, but at a higher level of aggregated portfolios and is based on observable factors such as:
a. How the performance of the business model and the financial assets held within that business model are evaluated and reported to the Bank’s key management
personnel
b. The risks that affect the performance of the business model and the financial assets held within that business model and, in particular, the way those risks are
managed
c. How managers of the business are compensated (for example, whether the compensation is based on the fair value of the assets managed or on the
contractual cash flows collected)
d. The expected frequency, value and timing of sales are also important aspects of the Bank’s assessment The business model assessment is based on reasonably
expected scenarios without taking ‘worst case’ or stress case’ scenarios into account. If cash flows after initial recognition are realized in a way that is different
from the Bank’s original expectations, the Bank does not change the classification of the remaining financial assets held in that business model, but incorporates such information when assessing newly originated or newly purchased financial assets going forward.

SPPI test
As a second step of its classification process, the Bank assesses the contractual terms of financial instruments to identify whether they meet the SPPI test. ‘Principal’
for the purpose of this test is defined as the fair value of the financial asset at initial recognition and may change over the life of the financial asset (for example, if there are repayments of principal or amortization of the premium/discount). The most significant elements of interest within a lending arrangement are typically the consideration for the time value of money and credit risk. To make the SPPI assessment, the Bank applies judgment and considers relevant factors such as the
currency in which the financial asset is denominated, and the period for which the interest rate is set. In contrast, contractual terms that introduce a more than de
minimis exposure to risks or volatility in the contractual cash flows that are unrelated to a basic lending arrangement do not give rise to contractual cash flows that are SPPI on the amount outstanding. In such cases, the financial asset is required to be measured at FVTPL.

Financial Assets at Amortized Cost
Financial assets are measured at amortized cost if both of the following conditions are met:

1. The asset is held within a business model with the objective to hold assets in order to collect contractual cash flows; and
2. The contractual terms of the instrument give rise on specified dates to cash flows that are SPPI on the principal amount outstanding.

Financial assets meeting these criteria are measured initially at fair value plus transaction costs. These are subsequently measured at amortized cost using the
effective interest rate (EIR) method, less allowance for credit losses, with the interest calculated recognized as ‘Interest income’ in the statement of income.
Gains and losses are recognized in the statement of income when the financial assets are derecognized and impaired, as well as through the amortization process.
The losses arising from impairment of such assets are recognized in the statement of income under ‘Provision for credit and impairment losses – net’. The effects of
restatement on foreign currency-denominated financial assets at amortized cost are recognized in the statement of income.

The Bank classified ‘Cash and other cash items’, ‘Due from BSP’, ‘Due from other banks’, ‘Loans and receivables’, ‘Investment securities at amortized cost’, if any,
and certain financial assets, if any, under ‘Other assets’ as financial assets at amortized cost. This will also include, as prescribed by BSP Circular 1011, Held-to Maturity Financial Assets.

Financial Assets at FVTOCI
Financial assets at FVTOCI include Available for Sale (AFS) Financial Assets.

Financial Assets at FVTPL
Debt instruments that do not meet the amortized cost or FVTOCI criteria, or that meet the criteria but the Bank has chosen to designate as at FVTPL at initial
recognition, are measured at fair value through profit or loss. Investments in equity instruments are classified as at FVTPL, unless the Bank designates an equity instrument that is not held for trading as at FVTOCI at initial recognition. The Banks’s financial assets at FVTPL include government securities and private bonds held for trading purposes, or Financial Assets Held for Trading.

Derivative Instruments
Derivative instruments are initially recorded at fair value and carried as financial assets when their fair value is positive and as financial liabilities when their 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. Derivatives embedded in non-derivative host contracts that are not financial assets within the scope of PFRS 9 (for example, financial
liabilities and non-financial host contracts) are treated as separate derivatives when their risks and economic characteristics are not closely related to those of the host contracts and the host contracts are not measured at FVTPL. The Bank assesses the existence of an embedded derivative on the date it first becomes a party to the contract, and performs re-assessment only when there is a change to the contract that significantly modifies the contractual cash flows.

Reclassification of financial assets
The Bank can reclassify financial assets if the objective of its business model for managing those financial assets changes. The Bank is required to reclassify as
follows:
1. From amortized cost or FVTOCI to FVTPL, if the objective of the business model changes so that the amortized cost or FVTOCI criteria are no longer
met;
2. From FVTPL to amortized cost or FVTOCI, if the objective of the business model changes so that the amortized cost or FVTOCI criteria start to be met
and the characteristics of the instrument’s contractual cash flows are SPPI; and
3. From amortized cost to FVTOCI if the business model changes so that the objective becomes both to collect contractual cash flows and to sell or from
FVTOCI to amortized cost if the business model becomes solely for the collection of contractual cash flows.

Reclassification of financial assets designated as at FVTPL or equity financial assets at FVTOCI at initial recognition is not permitted. A change in the objective of
the Bank’s business model must be effected before the reclassification date. The reclassification date is the beginning of the next reporting period following the
change in the business model.

Classification and Measurement of Financial Liabilities
Financial liabilities are classified, at initial recognition, either as financial liabilities at FVTPL or other financial liabilities at amortized cost.

Financial liabilities at amortized cost
These liabilities are classified as such when the substance of the contractual arrangement results in the Group 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.

These financial liabilities are measured initially at fair value, net of directly attributable transaction costs. After initial measurement, these liabilities 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.

This accounting policy relates to the statement of financial position captions ‘Deposit liabilities’, ‘Bills payable’, ‘Outstanding acceptances’, ‘Manager’s checks’,
and certain financial liabilities under ‘Accrued interest, taxes and other expenses’ and ‘Other liabilities’ which are not designated at FVTPL.

Cash and Cash Equivalents
Cash includes cash on hand and in vault and checks and other cash items. Cash equivalents include highly liquid investments, if any, that are readily convertible to
known amounts of cash with maturities of three months or less from the date of acquisition and that are subject to an insignificant risk of change in value.
Due from Bangko Sentral ng Pilipinas
This account represents deposit of the bank to the Bangko Sentral ng Pilipinas as part of its legal reserve requirement to secure its deposit liabilities.
Due from Other Banks
This account represents deposits with other banking institutions earning variable interest rates prevailing at market.

Financial Assets Held for Trading
This refers to the debt and equity securities that are:
(1) acquired principally for the purpose of selling or repurchasing them in the near term; or
(2) part of a portfolio of identified securities that are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking.

HFT securities shall be measured upon initial recognition at their fair value. Transaction costs incurred at the acquisition of HFT securities shall be recognized
directly in profit or loss. After initial recognition, a bank shall measure HFT securities at their fair values without any deduction for transaction costs that it may incur on sale or other disposal. A gain or loss arising from a change in the fair value of HFT securities shall be recognized in profit or loss under the account “Gain/ (Loss) on Financial Assets and Liabilities Held for Trading”.

The Bank has no Financial Assets Held for Trading for the two years ended 31 December.

Available-for-Sale (AFS) Financial Assets
This refers to securities that are designated as available-for-sale, which shall be measured upon initial recognition at their fair value plus transaction costs that are
directly attributable to the acquisition of securities. After initial recognition, a bank shall measure AFS at their fair values, without any deduction for transaction costs it may incur on sale or other disposal. A gain or loss arising from a change in the fair value of an AFS security shall be recognized directly in equity under the account “Net Unrealized Gains/ (Losses) on AFS Financial Assets” and reflected in the statement of changes in equity, except for impairment losses and foreign exchange gains and losses, until the financial asset is derecognized, at which time the cumulative gain or loss previously recognized in equity shall be recognized in profit or loss. However, interest calculated using the effective interest method is recognized in profit or loss. Dividends on an AFS equity security are recognized in
profit or loss when the financial institution’s right to receive payment is established.

The Bank has no AFS Financial Assets for the two years ended 31 December.

Held-to-Maturity (HTM) Financial Assets
This refers to debt securities, quoted in an active market with fixed or determinable payments and fixed maturity that a bank has the positive intention and ability to hold to maturity other than:
(a) those that meet the definition of Financial Assets Designated at Fair Value Through Profit or Loss; or
(b) those that the financial institution designates as Available for Sale Securities (AFS).

Loans and Receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and with no intention of trading.

Loans and receivables shall be measured at amortized cost using the effective interest method. Loans and receivables are stated at the outstanding balance reduced by allowance for credit losses and impairment losses.

Interest on non-supervised loans collected in advance (Unearned Income) is amortized to income over the term of the loans. Interest income on past due loans
arising from discount amortization (and not from the contractual interest of the accounts) shall be accrued as provided in PAS 39. Interest on charges on
supervised credits are recognized as income upon collection. Such assets are carried at cost or amortized cost using the effective interest method. Gains and
losses are recognized in the statement of income when the loans and receivables are derecognized or impaired, as well as through the amortization process.

Specific and general loan loss provision were determined and set-up after conducting a loans and other assets review classification, through aging, analysis
and other criteria and after considering the guidelines in the classification of loans and the provisioning requirements for classified and unclassified loan
accounts. After classifying loans as either current, past due or items in litigation the same are qualitatively appraised and categorized. Loans and other credit
accommodations shall be grouped into the following classification:

1) Pass. These are loans and other credit accommodations that do not have a greater-than normal credit risk. The borrower has the apparent ability and
willingness to satisfy obligations in full and therefore no loss in ultimate collection is anticipated.
2) Especially Mentioned (EM). These are loans and other credit accommodations that have potential weaknesses that deserve management’s close attention. If left
uncorrected, these weaknesses may affect the repayment of the loan.
3) Substandard. These are loans and other credit accommodations that have well-defined weaknesses that may jeopardize repayment/liquidation in full, either in
respect of the business, cash flow or financial position, which may include adverse trends or developments that affect willingness or repayment ability of the borrower.
4) Doubtful. These are loans and other credit accommodations that exhibit more severe weaknesses than those classified as “Substandard”, who’s characteristics
on the basis of currently known facts, conditions and values make collection or liquidation highly improbable, however the exact amount remains undeterminable
as yet. Classification as “Loss” is deferred because of specific pending factors which strengthen the assets.
5) Loss. These are loans and other credit accommodations which are considered uncollectible or worthless and of such little value that their continuance as bankable
assets is not warranted although the loans may have some recovery or salvage value. This shall be viewed as a transitional category for loans and other credit
accommodations which have been identified as requiring write-off during the current reporting period even though partial recovery may be obtained in the future.

Credit exposures shall be classified into three stages using the following time horizons in measuring ECL:

Following the “Basic Guidelines in Setting Up of Allowance for Credit Loss”, as a general rule, Especially Mentioned and Substandard – Underperforming [e.g., substandard accounts that are unpaid or with missed payment of less than ninety (90) days) shall be considered as Stage 2 accounts, while Substandard Non performing, Doubtful, and Loss accounts shall be considered as Stage 3 accounts.

1. lndividually Assessed Credit Exposure 🙁 include investments in debt securities measured at fair value through other comprehensive income and amortized cost, loan commitments, sales contract receivables, accounts receivables, accrued interest receivables, and advances).

A. Loans and other credit exposures with unpaid principal and/or interest shall be classified and provided with allowance for credit losses (ACL) based on the number of days of missed payments as follows:

Provided, that where the quality of physical collaterals or financial guarantees securing the loans and advances are determined to be insufficient, weak or without recoverable values, such loans and advances shall be treated as if these are unsecured.

B. Loans and other credit exposures that exhibit the characteristics for classified accounts described under Subsection x178.17/4178Q.17/4191N.16 shall be provided with ACL as follows:

2. Collectively Assessed Loans and Other Credit Exposures. (include microfinance loans, micro enterprises and small business loans and consumer loans such as salary loans, credit card receivables, auto loans, housing loans and other consumption loans, and other loan types which fall below the FL’s materiality threshold for individual assessment.)

General and Specific Provisions for Loan Accounts

1. The Bank shall treat Stage 1 provisions for loan accounts as General Provision (GP), while Stages 2 and 3 provisions shall be treated as Specific provisions (Sp).

2. The Bank shall set up general loan loss provision (GLLP) equivalent to one percent (1%) of all outstanding Stage 1 on-balance sheet loans, except for accounts considered as credit risk-free under existing regulations. The Banks is not required to provide a one percent (l %) GP on other credit exposures covered by PFRS 9 such as off-balance sheet accounts and investments

3. Allowance for credit losses for Stages 1, 2, and 3 accounts shall be recognized in profit or loss statement. In cases when the computed allowance for credit losses on Stage 1 accounts is less than the 1 percent GP required, the deficiency shall be recognized by appropriating the Retained Earnings account (Bank shall use Retained Earnings Reserve – others as temporary account of Retained Earnings General Provision).. GP recognized in profit or loss as allowance for credit losses for Stage 1 accounts and the amount appropriated in RE shall be considered as Tier 2 capital subject to the limit provided under the Capital Adequacy Ratio (CAR) framework.

(As a temporary presentation in CAR reports, the Retained Earnings (RE) included in Common Equity Tier (CET)/Core Tier 1 shall be net of RE-GP. In computing Tier 2 Capital, the General Loan Loss provision (GLLP) shall include the RE-GP. However, the GLLP added back to on-balance sheet assets subject to risk-weight shall not include the RE-GP since when appropriating the RE, total assets is not affected.)

Sales Contract Receivables

This refers to the amortized cost of assets acquired in settlement of loans through foreclosure or dation in payment and subsequently sold on installment basis whereby the title to the said property is transferred to the buyers only upon full payment of the agreed selling price. This shall be recorded initially at the present value of the installment receivable discounted at the imputed rate of interest Discount shall be accreted over the life of the SCR by crediting interest income using the effective interest method. Any difference between the present value of the SCR and the derecognized assets shall be recognized in profit or loss at the date of sale in accordance with the provisions of PAS 18.

Investment in Associates

This refers to the cost of the bank’s investments in the equity instruments of associates, which shall be accounted for using the equity method. As provided under PAS 28, an associate is an entity over which the investor has significant influence and that is neither a subsidiary nor an interest in a joint venture. Significant influence is presumed to exist if an investor holds, directly or indirectly through subsidiaries, 20 percent or more of the voting power of the investee, unless it can be clearly demonstrated that that is not the case. Conversely, if the investor holds, directly or indirectly through subsidiaries, less than 20 percent of the voting power of the investee, it is presumed that the investor does not have significant influence, unless such influence can be clearly demonstrated. Under the equity method, profit and loss from the investee increase the investment account by an amount proportionate to the bank’s shares in the investee. This is known as the “equity pick-up.” Dividends paid out by the investee are deducted from this account.

The Bank has no Investment in Associates for the two years ended 31 December.

Unearned Income

Interest on non-supervised loans collected in advance is amortized to income over the term of the loans.

Bank premises, furniture, fixtures and equipment

Properties and equipment are initially measured at cost less any subsequent accumulated depreciation and amortization. The cost of an asset consists of its purchase price and costs directly attributable to bringing the asset to its working condition for its intended use.

Subsequent expenditures relating to an item of properties and equipment that have already been recognized are added to the carrying amount of the asset when it is probable that future economic benefits, in excess of the originally assessed standard of performance of the existing asset, will flow to the bank. All other subsequent expenditures are recognized as expenses in the period in which those are incurred.

Major spare parts and stand-by equipment qualify as properties and equipment when the bank expects to use them during more than one period. Similarly, if the spare parts and servicing equipment can be used only in connection with an item of properties and equipment, they are accounted for as properties and equipment.

Estimated future dismantlement costs of items of properties and equipment arising from legal or constructive obligations are recognized as part of properties and equipment and are measured at present value at the time when the obligation was incurred.

Depreciation is computed on the straight-line method with estimated useful lives of the assets as follows:

Buildings and improvements                                   10-20 years

Office equipment                                                        3-5 years

Furniture and fixtures                                               5-10 years

Transportation equipment’s                                    3-5 years

Information and technology                                    1-3 years

Leasehold improvement                                          3-5 years

Stand-by equipment is depreciated from the date it is made available for use over the shorter of the life of the stand-by equipment or the life of the asset the stand-by equipment is part of while major spare parts are depreciated over the period starting when it is brought into service, continuing over the lesser of its useful life and the remaining expected useful life of the asset to which it relates. Depreciation of these assets, on the same basis as other property assets, commences when the assets are ready for their intended use. Gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognized in the income statement.

Investment Properties

Real and other properties acquired (ROPA) in settlement of loans through foreclosure or dation in payment shall be booked initially at the carrying amount of the loan plus booked accrued interest less allowance for probable losses plus transaction costs incurred upon acquisition (such as non-refundable capital gains tax and documentary stamp tax paid in connection with the foreclosure/purchase of the acquired real estate property): Provided, That where the booked amount of ROPA exceeds the appraised value of the acquired property, an allowance for probable losses equivalent to the excess of the amount booked over the appraised value shall be set up: Provided, further, That if the carrying amount of ROPA exceeds P5 million, the appraisal of the foreclosed/ purchased asset shall be conducted by an independent appraiser acceptable to the BSP.

Other Assets

Other assets are recognized at cost. The account includes prepaid expenses, deferred income taxes, accrued interest receivables and other resources. Unused supplies, if any, are measured initially at cost. Subsequent measurement of unused supplies is at cost less impairment loss, if any. Intangible assets, at cost less amortization and impairment loss, also included.

Financial Liabilities

Financial liabilities include Deposit Liabilities, other non-interest bearing borrowings and advances from affiliates if any. Financial liabilities are recognized when the bank becomes a party to the contractual provisions of the instrument.

Deposit Liabilities

Deposits are measured at cost, which is a reflection of their fair values.

Bills payable

This refers to the amortized cost of obligations to the BSP or the amortized cost of borrowings from other banks and non-bank financial institutions with quasi-banking authority, other than those payable on call/demand.

Other Liabilities

Other liabilities are recognized upon incurrence of transaction/s wherein the Bank has an obligation to settle the same in the future. The account includes accrued interest expense, accrued taxes and other expenses and other payables.

Paid-in Capital / Share Capital

Share capital is determined using the nominal value of shares that have been issued and fully paid. The costs of acquiring bank’s own shares are shown as a deduction from equity attributable to the bank’s equity holders until the shares are cancelled or reissued. When such shares are subsequently sold or reissued, any consideration received, net of directly attributable incremental transaction costs and the related income tax effects, and is included in equity attributable to the bank’s equity holders.

Deposits for Stock Subscription

Deposits for stock subscription refer to payments made by existing stockholders or new subscribers of the bank on subscription to the increase in the authorized capital, which may be recognized either as a liability or equity. Deposits for stock subscription shall be recognized as part of equity for prudential reporting purposes when all of the conditions set forth in the 2017 MORB section 123.

Retained Earnings

Retained earnings include all current and prior period results as disclosed in the statement of income.

Revenue Recognition

Revenue is recognized to the extent that is probable that the economic benefits will flow to the bank and revenue can be reliably measured. Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for goods or services provided in the normal course of business. The following specific criteria must also be met before revenue is recognized:

• Interest Income is recognized as the interest accrues (taking into account the effective yield on the asset).

• Service charges and commissions are recognized on an accrual basis, when the service has been provided, unless collectability is in doubt.

• Gain on sale of acquired assets is recognized if transactions indicate that the full ownership is transferred to the acquiree

• Miscellaneous income comprise of processing fees, banking fees and insurance. These are recognized on an accrual basis when the service has been provided, unless collectability is in doubt.

Retirement Benefits

The Bank operates a defined benefit retirement plan and a defined contribution plan, which require contributions to be made to a separately administered fund.

Defined benefit retirement plan

The net defined benefit liability or asset is the aggregate of the present value of the defined benefit obligation at the reporting date reduced by the fair value of plan assets, adjusted for any effect of limiting a net defined benefit asset to the asset ceiling (if any). The asset ceiling is the present value of any economic benefits available in the form of refunds from the plan or reductions in future contributions to the plan. The cost of providing benefits under the defined benefit plans is actuarially determined using the projected unit credit method.

Defined benefit costs comprise the following:

1. Service cost

2. Net interest on the net defined benefit liability or asset

3. Remeasurements of net defined benefit liability or asset

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

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

Remeasurements comprising actuarial gains and losses, return on plan assets and any change in the effect of the asset ceiling (excluding net interest on retirement liability) are recognized immediately in OCI in the period in which they arise. Remeasurements are not reclassified to the statement of income in subsequent periods.

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

Employee leave entitlement

Employee entitlements to annual leave are recognized as a liability when they are accrued to the employees. The undiscounted liability for leave expected to be
settled after the end of the annual reporting period is recognized for services rendered by employees up to the end of the reporting period. For leave entitlements
expected to be settled for more than twelve months after the reporting date, the estimated liability is actuarially determined and reported under ‘Other Liabilities’ in
the statement of financial position. Currently the Bank requires all employees to avail forced leaves before the end of the reporting date.

Related Parties

Parties are considered related if one party has control, joint control, and significant influence over the other party in making financial and operating decisions. The key management personnel of the bank and post-employment benefit plans for the benefit of bank’s employees are also considered to be related parties.

Basic Earnings per Share

Basic earnings per share is calculated by dividing the net income for the year attributable to the common shareholders by the weighted average number of
common shares outstanding during the year, after considering the retroactive effect of stock dividend declaration, if any.

Taxation

Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the tax authority. The tax
rates and tax laws used to compute the amount are those that have been enacted or substantively enacted as at the balance sheet date.

Deferred tax is recognized on temporary differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit. Deferred tax liabilities are generally recognized for all taxable temporary differences. Deferred tax assets are generally recognized for all deductible temporary differences to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilized. Such deferred tax assets and liabilities are not recognized if the temporary difference arises from goodwill or from the initial
recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.

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

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset realized, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Bank expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities

Leases

The determination of whether an arrangement is, or contains a lease is based on the substance of the arrangement and requires an assessment of whether the fulfillment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset. A reassessment is made after inception of the lease only if one of the following applies:

a. There is a change in contractual terms, other than a renewal or extension of the arrangement;

b. A renewal option is exercised or extension granted, unless the term of the renewal or extension was initially included in the lease term;

c. There is a change in the determination of whether fulfillment is dependent on a specified asset; or

d. There is a substantial change to the asset.

Provisions

Provisions are recognized when an obligation (legal or constructive) is incurred as a result of a past event and when it is probable that an outflow of assets embodying economic benefits will be required to settle the obligation and a reliable estimatecan be made of the amount of the obligation. When the Group 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. When discounting is used, the increase in the provision due to the passage of time is recognized as an ‘Interest expense’ in the statement of income.

Contingent Assets and Contingent Liabilities

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

Events After the Reporting Period

The bank identifies subsequent events as events that occurred after the balance sheet date but before the date when the financial statements were authorized for issue. Any subsequent events that provide additional information about the bank’s financial position at the balance sheet date are reflected in the financial statements. Events that are not adjusting events are disclosed in the notes to the financial statements when material.

Note 3 – Management Accounting Judgment and Estimates

The preparation of the Bank’s financial statements in accordance with PFRS requires the management to make judgments and estimates that affect the reported amounts of assets, liabilities, revenue and expenses and disclosure of contingent assets and contingent liabilities at reporting date. Future events may occur which will cause the judgments used in arriving at the estimates to change. The effects of any change in estimates are reflected in the financial statements as they become reasonably determinable. Judgments and estimates are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

Judgments

In the application of the bank’s accounting policies, management is required to make judgments, estimates and assumptions about the carrying amounts of assets and liabilities that are not easily apparent from other source. The estimates and associated assumption are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.

In 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. Business model test

The Bank manages its financial assets based on business models that maintain adequate level of financial assets to match expected cash outflows and maintain
adequate level of high quality liquid assets while maintaining a strategic portfolio of financial assets for trading activities. The Bank’s business model can be to hold
financial assets to collect contractual cash flows even when sales of certain financial assets occur. PFRS 9, however, emphasizes that if more than an
infrequent number of sales are made out of a portfolio of financial assets carried at amortized cost and those sales are more than insignificant in value (either
individually or in aggregate), the entity should assess whether and how such sales are consistent with the objective of collecting contractual cash flows. In making this judgment, the Bank considers the circumstances surrounding the disposal as well as the requirements of BSP Circular No. 1011, Guidelines on the adoption of PFRS 9.

b. Cash flow characteristics test

In determining the classification of financial assets under PFRS 9, the Bank assesses whether the contractual terms of these financial assets give rise on specified dates to cash flows that are solely payments of principal and interest on the principal outstanding, with interest representing time value of money and credit risk associated with the principal amount outstanding. The assessment as to whether the cash flows meet the test is made in the currency in which the financial asset is denominated. Any other contractual term that changes the timing or amount of cash flow.

c. Determination of significant influence over another entity

The determination of significant influence over another entity, other than the rebuttable presumption of ownership over twenty percent (20.0%), requires significant judgment. In making judgment, the Bank evaluates existence of the following:

1. representation on the Board of Directors (BOD) or equivalent governing body of the investee;

2. participation in policy-making processes, including participation in decisions about dividends or other distributions;

3. material transactions between the entity and its investee;

4. interchange of managerial personnel; or

5. provision of essential technical information.

Estimating useful lives of properties and equipment

The useful lives of properties and equipment are estimated based on the period over which the assets are expected to be available for use. The estimated useful
lives of properties and equipment are reviewed periodically and are updated if expectations differ from previous estimates due to physical wear and tear, technical
or commercial obsolescence and legal or other limits on the use of the bank’s assets. In addition, the estimation of the useful lives of property, plant and
equipment is based on bank’s collective assessment of industry practice, internal technical evaluation and experience with similar assets. It is possible, however, that
future results of operations could be materially affected by changes in estimates brought about by changes in factors mentioned above. The amounts and timing of
recorded expenses for any period would be affected by changes in these factors and circumstances. A reduction in the estimated useful lives of property, plant and
equipment would increase the recognized operating expenses and decrease noncurrent assets.

Impairment on financial assets

The bank assesses at each balance sheet date whether there is objective evidence that a financial asset or 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.

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 bank. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the period on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not exist currently. 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.

Impairment on non-financial assets

The bank is required to perform an impairment review when certain impairment indicators are present. Purchase accounting requires extensive use of accounting estimates and judgment to allocate the purchase price to the fair market values of the assets.

Determining the fair value of non-financial assets, which require the determination of future cash flows expected to be generated from the continued use and ultimate disposition of such assets, requires the bank to make estimates and assumptions that can materially affect the financial statements. Future events could cause the bank to conclude that properties and equipment, investments and intangible assets associated with an acquired business is impaired. Any resulting impairment loss could have a material adverse impact on the financial condition and results of operations.

Estimating allowances for credit losses

The Company estimates the allowance for credit losses related to its receivables based on assessment of specific accounts where the Company has information that  certain customers are unable to meet their financial obligations. In these cases judgment used was based on the best available facts and circumstances including but not limited to, the length of relationship with the customer and the customer’s current credit status based on third party credit reports and known market factors. The Company follows the BSP-prescribed guidelines in computing the specific and general loan loss provisions. These specific reserves are re-evaluated and adjusted as additional information received impacts the amounts estimated.

The amounts and timing of recorded expenses for any period would differ if different judgments were made or different estimates were utilized. An increase in the allowance for credit losses would increase the recognized operating expenses and decrease current assets.

Revenue and expense recognition

The bank’s revenue recognition policies require the use of estimates and assumptions that may affect the reported amounts of revenues and receivables.
Differences between the amounts initially recognized and actual settlements are taken up in the accounts upon reconciliation. However, there is no assurance that
such use of estimates may not result to material adjustments in future periods.

Expenses are recognized in the statement of income upon utilization of the service or in the date they are incurred. Finance costs, if any, are reported on an accrual
basis.

Note 4 – Financial Risk Management

The Bank’s activities expose it to a variety of financial risks and those activities involve the analysis, evaluation, acceptance and management of some degree of
risk or combination of risks. Taking risk is core to the financial business, and the operational risks are an inevitable consequence of being in business. The Bank’s
aim is therefore to achieve an appropriate balance between risk and return and minimize potential adverse effects on the Bank’s financial performance.

The Bank’s risk management policies are designed to identify and analyze these risks, to set appropriate risk limits and controls, and to monitor the risks and
adherence to limits by means of reliable and up-to-date information systems. The Bank regularly reviews its risk management policies and systems to reflect changes in markets, products and emerging best practice.

The Board provides written principles for overall risk management, as well as written policies covering specific areas, such as foreign exchange risk, interest rate
risk, credit risk, and financial risk. In addition, internal audit is responsible for the independent review of risk management and the control environment. The most
important types of risks are credit risk, liquidity risk, market risk and other operational risks. Market risk includes currency risk, interest rate and other price
risk.

The bank is exposed to financial risk through its financial assets and financial liabilities. The most important components of this financial risks are credit risk,
liquidity risk and market risk.

4.1 Credit Risk

The Bank takes on exposure to credit risk, which is the risk that counterparty will cause a financial loss for the Bank by failing to discharge an obligation. Credit risk is the most important risk for the Bank’s business; management therefore carefully manages its exposure to credit risk. Credit exposures arise principally in lending
activities that lead to loans and receivables. There is also credit risk in off-balance sheet financial instruments, such as loan commitments and guarantees.

Credit risk measurement

Credit risk is the possibility of losses associated with changes in the credit profile of borrowers or counterparties. These losses, associated with changes in portfolio
value, could arise due to default or due to deterioration in credit quality.

• Default risk: obligor fails to service debt obligations

• Recovery risk: recovery post default is uncertain

• Spread risk: credit quality of obligor changes leading to a fall in the value of the loan

• Concentration risk: over exposure to an individual obligor, group or industry

• Correlation risk: concentration based on common risk factors between different borrowers, industries or sectors which may lead to simultaneous default limits, diversification strategy, and its risk based pricing of loans and receivables based on its credit risk appetite and the size of its capital.

The Bank has adopted the standardized measurement of credit risk. In this regard, the tasks under the credit risk unit are as under, among others:

• Segmentation of the credit portfolio (in terms of risk but not size);

• Model Requirements (for risk assessments);

• Data requirements;

• Credit risk reporting requirements for regulatory / control and decision-making  purposes at various levels;

• Policy requirements for credit risk (credit process & practices, monitoring & portfolio management etc.);

• Align risk strategy & business strategy.

Risk limit control and mitigation policies

The Bank structures the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to one borrower, or groups of borrowers, and
industry segments. Such risks are monitored on a revolving basis and subject to an annual or more frequent review, when considered necessary. Limits on the level of credit risk by industry sector are set out in the credit policy. Exposure to credit risk is also managed through regular analysis of the ability of borrowers and potential borrowers to meet interest and capital repayment obligations and by changing these lending limits where appropriate.

Impairment and provisioning policies

The Bank has adopted a Credit Impairment and Income Recognition Policy, whereby the impairment and provisioning policies are defined. The Bank assesses at each balance sheet date whether there is objective evidence that loans and receivables are impaired. The criteria that the Bank uses to determine that there is objective evidence of an impairment loss include:

•Delinquency in contractual payments of principal or interest;

•Cash flow difficulties experienced by the borrower;

•Breach of loan covenants or conditions;

•Initiation of bankruptcy proceedings;

•Deterioration of the borrower’s competitive position; and

•Deterioration in the value of collateral.

Maximum exposure to credit risk before collateral held

The above table represents a worst case scenario of credit risk exposure to the Bank at 31 December, without taking account of any collateral held or other credit enhancements attached. For on-balance sheet assets, the exposures set out above are based on net carrying amounts as reported in the balance sheet. As shown above, the total maximum exposure is derived from loans and receivables.

Contingencies, Commitments, Secured Liabilities and Pledged Assets

Contingencies and commitments arising from off-balance sheet items include direct credit substitutes (e.g., export LCs confirmed, underwritten accounts unsold), transaction-related contingencies (e.g., performance bonds, bid bonds, standby LCs), short-term self-liquidating trade related contingencies arising from the movement of goods (e.g., sight/usance domestic LCs, sight/usance import LCs), sale and repurchase agreements not recognized in the balance sheet; interest and foreign exchange rate related items; and other commitments.

As of December 31, no amount of contingencies and commitments that arises from off-balance sheet items exist. Furthermore, there are no amount of assets pledged
as collateral/security nor liabilities secured and no implied obligations considered as contingent liabilities present, except otherwise stated in the succeeding notes to
financial statements.

4.2 Market Risks

Market risk is the risk of loss resulting from adverse movements in the value of financial instruments. It encompasses exposure to interest rates, foreign exchange rates, equity prices and commodity prices. Sound market risk management practices include the measurement and monitoring of market risk as well as the communication and enforcement of risk limits throughout the Bank’s trading businesses.

Foreign Exchange Risk Management

Foreign exchange risk is the risk that the Bank’s earnings and economic value will be adversely affected with the movements in the foreign exchange rate, though it may sometimes have an insignificant effect. The Bank is exposed to this risk since interest rate risks arises when the total present value of assets in a particular currency does not equal the present value of liabilities in that currency.

The Bank monitors its foreign exchange risk exposure based on BSP’s rate publications.

Interest Rate Risk Management

Interest rate risk results from mismatches between asset and liability positions which are subject to unfavorable movements in interest rates with potentially adverse impact on margins, net interest income and economic value of a bank’s assets, liabilities and shareholders’ value. Interest rate risk may be measured using methods which include sensitivity analysis and simulation modelling. The Bank has its Interest Rate Risk Policy in which risks limits are laid down.

4.3 Liquidity Risk Management

Liquidity risk is defined within the Bank’s policy framework as ‘the risk that, at any time, the Bank does not have sufficient realizable financial assets to meet its financial obligations as they fall due’.

The liquidity policy of the Bank is to ensure that it:

•can meet its financial obligations as they fall due in the normal course of business;and

•maintains an adequate stock of highly liquid assets to enable it to meet unexpected funding needs at short notice.

The Bank’s liquidity policy requires establishment and maintenance of three lines of defense:

•Cash flow management where the Bank creates a continuously maturing stream of assets and liabilities;

•Maintenance of a liquid assets portfolio; and

•Maintenance of a diversified liability base.

The following table presents the Bank’s assets and liabilities as at December 31, 2019, analyzed according to when they are expected to be recovered or settled within one year and beyond one year:

4.4 Capital Risk Management

The bank’s objective when managing capital are to safeguard the ability to continue as a going concern in order to provide returns to shareholders and to maintain an optimal capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure, the bank can adjust the amount of dividends to be paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt.

Capital adequacy and the use of regulatory capital are monitored quarterly the Bank’s management, employing techniques based on the guidelines developed by BSP as implemented by the Bank. The required information is submitted to BSP and filed by Bank on a quarterly basis.

4.5 Regulatory Framework

The operations of the bank is also subject to the regulatory requirements of SEC. Such regulations not only prescribe approval and monitoring of activities but also impose certain restrictive provisions.

The bank is subject to the inherent risk that the application of prescribed standards may conflict or differ from the application of regulations as prescribed from other regulatory bodies resulting to disparity of financial reports. Hence, there is a need to reconcile the disparity in a systematic and clear manner. The BOD ensures that management are updated in relation to pronouncements made by concerned regulatory bodies.

However, in cases where there are differences between BSP regulations and PFRS/PAS as when more than one (1) option are allowed or certain maximum or minimum limits are prescribed by the PFRS/PAS, the option or limit prescribed by BSP regulations shall be adopted by the bank.

Note 5 – Cash and cash equivalents

Note 6 – Due from Bangko Sentral ng Pilipinas

‘Due from BSP’ account represents the aggregate balance of noninterest-bearing peso deposit account with the BSP which the Bank maintains primarily to meet reserve requirements.

2017 MORB Section 251 prescribed the 5%, 3% and 3% rates on the required reserves against demand, savings and time deposits respectively. As of December 31, 2019, the required reserves amounted to P 9,479,248. The bank has complied with this provision. The required reserves are broken down as follows:

Note 7 – Due from Other Banks

Note 8 – Loans and Receivables

The movements in allowance for credit losses on loans and receivables from borrowers are as follows:

The following table shows the secured and unsecured portions of receivables from borrowers, net of unamortized discount, as at December 31:

The following table shows the receivables from borrowers, net of unamortized discount, classified as to terms as at December 31:

As at December 31 information on the concentration of loans and receivables, net of unamortized discount, as to industry follows:

The BSP considers that loan concentration of credit exists when the total loan exposure to a particular industry or economic sector exceeds 30.00% of total loan portfolio. Identified concentrations of credit risks are controlled and managed accordingly except those that are under ‘For Household Consumption – Auto Loans’.

As required by BSP, the Bank discloses loan transactions with investees and with certain DOSRI. Existing banking regulations limit the amount of individual loans to DOSRI, 70.0% of which must be secured, to the total of their respective deposits and book value of their respective investments in the lending company within the Bank. In the aggregate, loans to DOSRI generally should not exceed total equity or 15.0% of total loan portfolio, whichever is lower. As at December 31 the Bank is in compliance with the regulatory requirements. As at December 31 DOSRI accounts under the existing regulations are shown in the table below (as reported to BSP):

The following table shows the receivables from borrowers, net of unamortized discount, classified as to status as at December 31:

Classified as to status of loans for 2019

Classified as to status of loans for 2018

Note 9 – Held-to-Maturity Financial Assets

Classified as Financial Assets at Amortized Cost, these quoted T-bills and bonds have fixed annual interest rates ranging from 3.150% to 10.00%. The terms of these investments range from 1 to 7 years. These refer to debt securities, quoted in an active market with fixed or determinable payments and fixed maturity that a bank has the positive intention and ability to hold to maturity.

Note 10 – Bank Premises, Furniture, Fixtures and Equipment

Note 11 – Investment Properties

Note 12 – Other Assets

Note 13 – Deposit Liabilities

Interest rates for regular deposits is at 0.50% per annum. Time deposits, however, is at 1.30% to 1.5% per annum depending on the amount and duration of the holding period.

Note 14 – Unearned Income

Note 15 – Other Liabilities

Note 16 – Income Tax Payable / (Income Tax Credit)

Note 17 – Share Capital / Retained Earnings

Preferred shares has the following features: (a) Both Class A and B with a total of 50,000 shares have a fixed 10.0% cumulative dividends and are non-voting, (b) 25,000 Class A preferred shares are convertible after five (5) years and its optional, and (c) 25,000 Class B preferred shares are non-convertible.

Dividend Declaration

On January 30, 2018, the board of directors has approved the declaration of 50% of the 2017 Net Income as cash dividends to all stockholders as follows: 10% to preferred shares and P 1.386 per common shares. Cash dividends declared amounted to P 1,122,638.

On January 29, 2019, the board of directors has approved the declaration of 5% cash dividends to all common shares and 10% cash dividend to all preferred shares with a total amount of P 2,750,000.

Note 18 – Interest Income

This account refers to interest earned and/ or actually collected from the borrowers. The banks follows the accrual method of accounting in recognizing interest income on customer accounts. Accordingly, unearned discount is amortized over the term of the loan.

The interest rates applied to loans and receivables varies depending on type of loans or services provided. It ranges from 8% to 31% for terms 12 months to 60 months respectively for financing of brand new cars. Rates of financing second hand cars, REM loans and Hold-out deposits charge different rates.

Note 19 – Interest Expense

This account refers to payments and or monthly accruals of interest on deposits. The computation of savings deposit is on quarterly basis while the time/special savings deposit are on monthly accruals.

Note 20 – Non – Interest income

Note 21 – Non – Interest expenses

The bank is a lessee under non-cancellable operating lease. The lease have terms ranging from 3 to 10 years with renewal options. The future minimum rentals payable under these non-cancellable operating lease as of December 31 are as follows:

Other expenses include notarial expenses, local fares, seminars and trainings, foreign currency exchange losses (if any), PR-related expenses, some meals during official meetings, bookbinding costs, and other small value expenses that are non-recurring.

Note 22 – Income Tax Expense

Current tax expense is 30% of profit before tax. The bank is also subject to the Minimum Corporate Income Tax (MCIT) which is 2% of Gross Profit. The bank is liable whichever is higher between Regular Income Tax and Minimum Corporate Income Tax.

Minimum Corporate Income Tax is computed as follows:

Note 23 – Earnings Per Share / Book Value Per Share

The earnings per share is computed as follows:

Note 24 – Related Party Transactions

Related party relationship exists when one party has the ability to control, directly, or indirectly through one or more intermediaries, the other party or exercises significant influence over the other party in making financial and operating decisions. The Bank’s related parties include:

1. Key management personnel, close family members of key management personnel and entities which are controlled, significantly influenced by or for which significant voting power is held by key management personnel or their close family members

2. post-employment benefit plans for the benefit of the Bank’s employees, and

3. other related parties within the Bank.

Remunerations of Key Management Personnel

Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Bank, directly or indirectly. The Bank considers the members of the senior management to constitute key management personnel for purposes of PAS 24. The compensation of key management personnel included under ‘Compensation and benefits’ in the statements of income are as follows:

BSP-Approved Financial Assistance Program

The Bank has loans extended to officers and employees not classified as DOSRI transactions but a financial assistance program which has been approved by BSP. As of December 31, 2019 and 2018, outstanding balances amounted to P1,  753,638 and P1, 566,940, respectively

Deposit Liabilities

The Bank, in the ordinary course of business, has deposit transactions with certain DOSRI and with outstanding deposit balance as of December 31, 2019 and 2018.

Note 25 – Events After the Reporting Period

No any significant events took place after the Balance Sheet date that could affect the presentation of the financial statements.

Note 26 – Disclosures on Capital Adequacy

For disclosure on computed capital adequacy, refer to the submitted of Computation of the Risk-based Capital Adequacy Ratio Covering Credit Risks as of December 31, 2019 as submitted by the Bank.

The deployment of assets in loans is good at 39%. The bank has minimized its total assets deployed as cash and cash equivalents at just 1% and has liquid deposits with BSP and other banks at high 45%. On the liability side, the bank has relied primarily on savings. Savings mobilized from the clients constitute 96% of total liabilities.

The risk weighted capital adequacy ratio of the bank, as submitted, has moved to 17.66 as at December 31, 2019 from 18.92 as at December 31, 2018.

The following table presents the components in the computation of the Risk-based Capital Adequacy Ratio, before audit adjustments:

Note 27 – Supplementary Information Required under Revenue Regulations 15-2010

The components of ‘Taxes and licenses’ recognized in the statement of income for the year ended December 31, 2019, follow:

DST in 2019 consists of taxes on special savings account, loans, and capital increase, if any.

Withholding taxes in 2019 are categorized into:

Note 28 – Quantitative Indicators of Financial Performance

H.CAPITAL STRUCTURE AND CAPITAL ADEQUACY

PANGASINAN BANK (A Rural Bank), INC

Risk-Based Capital Adequacy Ratio

As of December 31, 2019

Schedule A: Computation of Capital

Tier 1 (Core) Capital

Tier 2 (Supplementary) Capital

Upper Tier 2 Capital

PANGASINAN BANK (A RB), INC.
Name of Bank

COMPUTATION OF THE RISK-BASED CAPITAL ADEQUACY RATIO COVERING COMBINED
CREDIT MARKET AND OPERATIONAL RISKS

SIMPLIFIED SOLO BASIS
As of DECEMBER 31, 2019
CONTROL PROOFLIST