Philippine Veterans Bank and Subsidiaries Financial Statements December 31, 2009 and 2008 and Independent Auditors Report SyCip Gorres Velayo & Co.

Transcription

1 Philippine Veterans Bank and Subsidiaries Financial Statements December 31, 2009 and 2008 and Independent Auditors Report SyCip Gorres Velayo & Co.

2 SyCip Gorres Velayo & Co Ayala Avenue 1226 Makati City Philippines Phone: (632) Fax: (632) BOA/PRC Reg. No SEC Accreditation No FR-2 INDEPENDENT AUDITORS REPORT The Stockholders and the Board of Directors Philippine Veterans Bank We have audited the accompanying financial statements of Philippine Veterans Bank and Subsidiaries (the Group) and of Philippine Veterans Bank (the Parent Company), which comprise the consolidated and the parent company statements of financial position as at December 31, 2009 and 2008, and the consolidated and parent company statements of income, the consolidated and the parent company statements of comprehensive income, the consolidated and the parent company statements of changes in equity and the consolidated and the parent company statements of cash flows for the years then ended, and a summary of significant accounting policies and other explanatory notes. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with Philippine Financial Reporting Standards. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Auditors Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Philippine Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor consider internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. A member firm of Ernst & Young Global Limited

3 - 2 - Opinion As discussed in Note 28 to the financial statements, in 2008, the Parent Company recognized P=1, million of the required allowance for probable losses on Interbank call loans (IBCL) to a thrift bank of P=1, million in The remaining required allowance and the required provision on the additional IBCL in 2007 totaling to P= million and the required allowance on accounts receivable amounting to P=19.54 million and P= million, representing the uninsured deposits assumed in 2009 and 2008, respectively, were deferred over 20 years as approved by the Banko Sentral ng Pilipinas. The Philippine Financial Reporting Standards require that the allowance on the IBCL be charged against 2007 and 2006 operations and the allowance on accounts receivable be charged against 2009 and 2008 operations. Had such allowance been charged to the proper accounting period, the Group and the Parent Company s net income in 2009 and 2008 would have been increased by P=4.43 million and P= million, net of related deferred income tax, respectively, and both the surplus and total assets would have been decreased by P=1, million as of December 31, 2009 and P=1, million as of December 31, As further discussed in Note 28, management computed that the earnings of the government securities from the special liquidity support will effectively cover the required allowance on the Parent Company s IBCL to the thrift bank and the assumed uninsured deposits. As discussed in Note 7 to the financial statements, the Parent Company sold a non-performing asset (NPA) to a special purpose vehicle (SPV) company on a without recourse basis. In accordance with regulatory accounting policies prescribed by the Bangko Sentral ng Pilipinas for banks and financial institutions availing of the provisions of RA No. 9182, the Special Purpose Vehicle Act of 2002, losses amounting to P=63.4 million from the sale of the NPA to the SPV company were deferred and are being amortized over a ten-year period. Had the loss from the sale of NPA been charged against current operations as required by the Philippine Financial Reporting Standards, the Group and the Parent Company s total assets as of December 31, 2009 and net income in 2009 would have been decreased by P=61.1 million. In our opinion, except for the effects on the 2009 and 2008 consolidated and parent company financial statements of the matters discussed in the preceding paragraphs, the consolidated and the parent company financial statements present fairly, in all material respects, the financial position of the Group and of the Parent Company as of December 31, 2009 and 2008, and their financial performance and their cash flows for the years then ended in accordance with Philippine Financial Reporting Standards. SYCIP GORRES VELAYO & CO. Janet A. Paraiso Partner CPA Certificate No SEC Accreditation No A Tax Identification No PTR No , January 4, 2010, Makati City April 13, 2010

4 PHILIPPINE VETERANS BANK AND SUBSIDIARIES STATEMENTS OF FINANCIAL POSITION Consolidated Parent Company As of December ASSETS Cash and Other Cash Items (Notes 14 and 18) P=431,579,978 P=370,720,413 P=426,279,803 P=372,620,235 Due from Bangko Sentral ng Pilipinas (Notes 14 and 18) 13,055,098,382 6,489,794,735 13,055,098,382 6,489,794,735 Due from Other Banks (Note 18) 699,457, ,145, ,820, ,265,513 Interbank Loans Receivable and Securities Purchased Under Resale Agreement - net (Note 18) 2,633,259,478 8,295,911,067 2,633,259,478 8,295,911,067 Financial Assets at Fair Value Through Profit or Loss (Notes 6 and 18) 890,369, ,937, ,369, ,937,204 Available-for-Sale Financial Assets (Notes 6 and 18) 3,312,259,618 2,019,011,619 3,299,416,840 2,001,258,060 Held-to-Maturity Financial Assets (Notes 6 and 18) 4,433,330,690 4,461,745,452 4,433,330,690 4,461,745,452 Loans and Receivables (Notes 7 and 18) 22,245,927,049 19,133,993,885 22,200,814,995 19,127,903,145 Investment in Subsidiaries (Notes 8 and 19) 198,048, ,595,477 Investment in an Associate (Note 9) 6,348,778 10,269,688 Bank Premises, Furniture, Fixtures and Equipment (Note 10) 637,899, ,481, ,200, ,116,315 Investment Properties (Notes 11 and 18) 2,373,564,938 2,379,664,444 2,373,564,938 2,379,664,444 Deferred Tax Assets - net (Notes 18 and 22) 360,260, ,810, ,260, ,810,778 Other Assets - net (Notes 12, 18, 20 and 26) 711,112, ,070, ,376, ,151,767 P=51,790,468,249 P=45,587,288,155 P=51,803,112,669 P=45,610,774,192 LIABILITIES AND EQUITY Liabilities Deposit Liabilities (Notes 14, 18 and 26) Demand P=11,318,854,982 P=9,324,564,331 P=11,318,854,982 P=9,325,147,032 Savings 29,527,242,480 26,122,966,920 29,527,632,389 26,124,986,828 Time 2,167,695,730 1,680,084,425 2,167,695,730 1,682,175,755 43,013,793,192 37,127,615,676 43,014,183,101 37,132,309,615 Bills Payable (Notes 15 and 18) 1,559,833,678 1,283,116,309 1,559,833,678 1,283,116,309 Manager s Checks (Note 18) 54,883,736 94,692,098 54,883,736 94,692,098 Accrued Taxes, Interest and Other Expenses (Notes 16, 18 and 20) 382,631, ,631, ,671, ,863,521 Other Liabilities (Notes 17, 18 and 26) 1,823,654,072 1,951,704,707 1,823,169,641 1,951,420,288 46,834,795,967 40,915,760,097 46,850,741,669 40,936,401,831 Equity Equity attributable to equity holders of the Parent Company Capital stock (Note 19) 2,751,621,268 2,751,209,768 2,751,621,268 2,751,209,768 Additional paid-in capital (Note 19) 20,979,000 20,979,000 20,979,000 20,979,000 Surplus reserves (Notes 23 and 25) 905,515, ,698, ,515, ,698,505 Surplus (Notes 19, 23, 25 and 28) 1,341,812,819 1,141,662,214 1,338,703,823 1,144,697,475 Net accumulated unrealized losses on available-for-sale financial assets (Note S6) (64,448,566) (63,212,387) (64,448,566) (63,212,387) 4,955,479,996 4,671,337,100 4,952,371,000 4,674,372,361 Minority Interest 192, ,958 P=51,790,468,249 P=45,587,288,155 P=51,803,112,669 P=45,610,774,192 See accompanying Notes to Financial Statements.

5 PHILIPPINE VETERANS BANK AND SUBSIDIARIES STATEMENTS OF INCOME Consolidated Parent Company Years Ended December INTEREST INCOME Loans and receivables (Note 7) P=1,742,683,866 P=1,490,440,783 P=1,741,522,157 P=1,489,490,665 Trading and investment securities (Note 6) 490,386, ,903, ,386, ,903,025 Deposits with banks and others 406,824, ,288, ,824, ,288,915 Interbank loans receivable 114,690, ,818, ,690, ,818,070 2,754,584,622 2,386,450,793 2,753,422,913 2,385,500,675 INTEREST EXPENSES Deposit liabilities (Notes 14 and 26) 983,233, ,968, ,236, ,976,064 Bills payable and other borrowings (Note 15) 151,171, ,743, ,029, ,645,016 1,134,404, ,712,354 1,135,265, ,621,080 NET INTEREST INCOME 1,620,179,912 1,480,738,439 1,618,157,085 1,478,879,595 Day 1 gain (Notes 15 and 28) 1,103,693,778 1,103,693,778 Gains on sale of acquired assets 150,714, ,892, ,850, ,076,284 Service fees and commissions 119,739,846 70,733, ,982,195 70,733,186 Income from trust operations (Note 25) 29,524,396 27,170,407 29,524,396 27,170,407 Foreign exchange gain (losses) net 9,366,364 17,274,936 7,616,731 15,243,832 Gains (losses) on asset foreclosures and dacion transactions (63,887,140) 4,405,265 (63,887,140) 4,405,265 Trading gains (losses) - net (Note 6) 33,496,321 (22,521,918) 33,496,321 (22,521,918) Equity share in net loss in an associate (3,920,910) Other operating income (Note 11) 151,480, ,679, ,413, ,611,965 TOTAL OPERATING INCOME 2,046,693,752 2,959,065,666 2,026,153,162 2,953,292,394 Provision for impairment and credit losses (Notes 13 and 28) 160,443,301 1,097,531, ,443,301 1,097,531,979 Compensation and fringe benefits (Notes 20 and 26) 516,380, ,607, ,440, ,466,167 Taxes and licenses (Note 22) 208,009, ,528, ,809, ,412,871 Occupancy (Note 21) 188,491, ,830, ,271, ,399,127 Depreciation and amortization (Notes 10 and 11) 81,576,965 68,377,676 81,496,521 68,336,574 Insurance 72,233,747 64,948,981 72,146,605 64,931,413 Communications 37,794,897 37,859,475 37,610,414 37,609,629 Amortization of software costs (Note 12) 43,099,760 36,559,198 43,099,760 36,559,198 Litigation and expenses on acquired assets 34,449,615 36,570,087 34,449,615 36,570,087 Transportation and traveling expense 29,176,973 34,370,337 28,547,978 33,985,755 Advertising and publicity expense 26,850,717 20,804,557 26,850,717 20,804,557 Office supplies 14,612,533 14,544,482 14,450,868 14,467,094 Bangko Sentral ng Pilipinas supervision fees 13,814,452 10,378,930 13,814,452 10,378,930 Entertainment, amusement and representation expense (Note 22) 9,053,942 8,927,864 8,775,152 8,868,098 Professional fees 10,665,503 7,869,336 7,861,916 6,780,367 Freight expenses 3,439,836 3,762,648 3,434,590 3,761,658 Membership fees and dues 1,899,541 2,364,890 1,899,541 2,364,890 Finance charges 93,861 83,515 86,018 79,115 Miscellaneous (Notes 11 and 26) 49,643, ,231,523 47,172, ,003,982 TOTAL OPERATING EXPENSES 1,501,729,766 2,350,151,873 1,487,660,891 2,345,311,491 (Forward)

6 - 2 - Consolidated Parent Company Years Ended December INCOME BEFORE INCOME TAX P=544,963,986 P=608,913,793 P=538,492,271 P=607,980,903 PROVISION FOR INCOME TAX (Note 22) 120,405, ,552, ,079, ,206,982 NET INCOME (Notes 23 and 24) P=424,558,246 P=406,361,155 P=418,412,661 P=405,773,921 Attributable to: Equity holders of the Parent Company P=424,556,918 P=406,358,307 Minority interest 1,328 2,848 P=424,558,246 P=406,361,155 Basic/Diluted Earnings Per Share (Note 24) P=15.35 P=14.92 See accompanying Notes to Financial Statements.

7 PHILIPPINE VETERANS BANK AND SUBSIDIARIES STATEMENTS OF COMPREHENSIVE INCOME Consolidated Parent Company Years Ended December Net Income P=424,558,246 P=406,361,155 P=418,412,660 P=405,773,921 Other Comprehensive Income: Net unrealized loss on available-for-sale financial assets (Note 6) (1,236,179) (107,839,947) (1,236,179) (107,839,947) TOTAL COMPREHENSIVE INCOME P=423,322,067 P=298,521,208 P=417,176,481 P=297,933,974 Attributable to: Equity holders of the Parent Company P=423,320,739 P=298,518,360 Minority interest 1,328 2,848 P=423,322,067 P=298,521,208 See accompanying Notes to Financial Statements.

8 PHILIPPINE VETERANS BANK AND SUBSIDIARIES STATEMENTS OF CHANGES IN EQUITY Preferred Stock (Note 19) Common Stock (Note 19) Consolidated Equity Attributable to Equity Holders of the Parent Company Treasury Stock (Note 19) Total Capital Stock Additional Paid-in Capital (Note 19) Surplus Reserves (Note 23 and 25) Surplus (Note 19, 23, 25 and 28) Net Accumulated Unrealized Gains (Loss) on Available-for- Sale(AFS) Balance at January 1, 2009 P=361,867,100 P=2,394,784,268 (P=5,441,600) P=2,751,209,768 P=20,979,000 P=820,218,203 P=1,142,142,516 (P=63,212,387) P=4,671,337,100 P=190,958 P=4,671,528,058 Total comprehensive income 424,556,918 (1,236,179) 423,320,739 1, ,322,067 Transfer to capital stock from surplus representing shares of previously unlocated stockholders 72, ,000 14, ,300 (614,900) 7,400 7,400 Transfer to surplus reserve 85,297,272 (85,297,272) Distribution to the Board of Trustees of the Veterans of World War II (60,635,667) (60,635,667) (60,635,667) Dividends declared (78,338,776) (78,338,776) (78,338,776) Acquisition during the year of treasury stock (323,600) (323,600) (323,600) (323,600) Collections on subscriptions of common stock 112, , , ,800 Balance at December 31, 2009 P=361,939,600 P=2,395,432,068 P= (5,750,400) P=2,751,621,268 P=20,979,000 P=905,515,475 P= 1,341,812,819 (P=64,448,566) P=4,955,479,996 P=192,286 P=4,955,672,282 Financial Assets (Note 6) Total Minority Interest Total Equity See accompanying Notes to Financial Statements.

9 Preferred Stock (Note 19) Common Stock (Note 19) Treasury Stock (Note 19) Consolidated Equity Attributable to Equity Holders of the Parent Company Additional Paid-in Capital (Note 19) Surplus Reserves (Note 23 and 25) Surplus (Note 19, 23, 25 and 28) Net Accumulated Unrealized Gains (Loss) on Available-for- Sale(AFS) Total Capital Stock Total Minority Interest Total Equity Balance at January 1, 2008 P=361,764,600 P=2,393,825,225 (P=5,036,900) P=2,750,552,925 P=20,979,000 P=736,826,680 P=879,614,417 P=44,627,560 P=4,432,600,582 P=188,110 P=4,432,788,692 Total comprehensive income 406,358,307 (107,839,947) 298,518,360 2, ,521,208 Transfer to capital stock from surplus representing shares of previously unlocated stockholders 102, ,994 (100,800) 938,694 (1,198,400) (259,706) (259,706) Transfer to surplus reserve 83,391,523 (83,391,523) Distribution to the Board of Trustees of the Veterans of World War II (59,240,285) (59,240,285) (59,240,285) Acquisition during the year of treasury stock (303,900) (303,900) (303,900) (303,900) Collections on subscriptions of common stock 22,049 22,049 22,049 22,049 Balance at December 31, 2008 P=361,867,100 P=2,394,784,268 (P=5,441,600) P=2,751,209,768 P=20,979,000 P=820,218,203 P=1,142,142,516 (P=63,212,387) P=4,671,337,100 P=190,958 P=4,671,528,058 Financial Assets (Note 6) See accompanying Notes to Financial Statements.

10 - 3 - Preferred Stock (Note 19) Common Stock (Note 19) Treasury Stock (Note 19) Parent Company Additional Paid-in Capital (Note 19) Surplus Reserves (Note 23 and 25) Surplus (Note 19, 23, 25 and 28) Net Accumulated Unrealized Gains (Loss) on Available-for- Sale Financial Assets (Note 6) Total Capital Stock Total Balance at January 1, 2009 P=361,867,100 P=2,394,784,268 (P=5,441,600) P=2,751,209,768 P=20,979,000 P=820,218,203 P=1,145,177,777 (P=63,212,387) P=4,674,372,361 Total comprehensive income 418,412,661 (1,236,179) 417,176,482 Transfer to capital stock from surplus representing shares of previously unlocated stockholders 72, ,000 14, ,300 (614,900) 7,400 Transfer to surplus reserve 85,297,272 (85,297,272) Distribution to the Board of Trustees of the Veterans of World War II (60,635,667) (60,635,667) Dividends declared (78,338,776) (78,338,776) Acquisition during the year of treasury stock (323,600) (323,600) (323,600) Collections on subscriptions of common stock 112, , ,800 Balance at December 31, 2009 P=361,939,600 P=2,395,432,068 (P=5,750,400) P=2,751,621,268 P=20,979,000 P=905,515,475 P=1,338,703,823 (P=64,448,566) P=4,952,371,000 See accompanying Notes to Financial Statements.

11 Preferred Stock (Note 19) Common Stock (Note 19) Treasury Stock (Note 19) Parent Company Additional Paid-in Capital (Note 19) Surplus Reserves (Note 23 and 25) Surplus (Note 19, 23, 25 and 28) Net Accumulated Unrealized Gains (Loss) on Available-for- Sale Financial Assets (Note 6) Total Capital Stock Total Balance at January 1, 2008 P=361,764,600 P=2,393,825,225 (P=5,036,900) P=2,750,552,925 P=20,979,000 P=736,826,680 P=883,234,064 P=44,627,560 P=4,436,220,229 Total comprehensive income 405,773,921 (107,839,947) 297,933,974 Transfer to capital stock from surplus representing shares of previously unlocated stockholders 102, ,994 (100,800) 938,694 (1,198,400) (259,706) Transfer to surplus reserve 83,391,523 (83,391,523) Distribution to the Board of Trustees of the Veterans of World War II (59,240,285) (59,240,285) Acquisition during the year of treasury stock (303,900) (303,900) (303,900) Collections on subscriptions of common stock 22,049 22,049 22,049 Balance at December 31, 2008 P=361,867,100 P=2,394,784,268 (P=5,441,600) P=2,751,209,768 P=20,979,000 P=820,218,203 P=1,145,177,777 (P=63,212,387) P=4,674,372,361 See accompanying Notes to Financial Statements.

12 PHILIPPINE VETERANS BANK AND SUBSIDIARIES STATEMENTS OF CASH FLOWS Consolidated Parent Company Years Ended December CASH FLOWS FROM OPERATING ACTIVITIES Income before income tax P=544,963,986 P=608,913,793 P=538,492,271 P=607,980,903 Adjustments for: Provision for impairment and credit losses (Notes 13 and 28) 160,443,301 1,097,531, ,443,301 1,097,531,979 Gain on sale of acquired assets (150,714,092) (160,892,090) (147,850,267) (159,076,284) Accretion on impaired loans (124,128,467) (65,346,169) (124,128,467) (65,346,169) Depreciation and amortization (Notes 10 and 11) 81,386,519 68,377,676 81,386,519 68,336,574 Gain on asset foreclosures and dacion transactions 63,887,140 (4,405,265) 63,887,140 (4,405,265) Amortization of software costs (Note 12) 43,099,760 36,559,198 43,099,760 36,559,198 Amortization of premium 28,414,762 6,510,087 28,414,762 6,510,087 Accretion of interest on bills payable 18,946,567 10,339,840 18,946,567 10,339,840 Equity share in net loss of an associate 3,920,910 Trading loss on reclassification of financial assets 2,727,477 2,727,477 Day-1 gain (Note 15) (1,103,693,778) (1,103,693,778) Changes in operating assets and liabilities: Decrease (increase) in amounts of: Financial assets at fair value through profit or loss (637,109,890) (304,095,611) (637,109,890) (304,095,611) Loans and receivables (3,125,704,690) (5,236,551,811) (3,086,683,376) (5,236,551,811) Other assets (214,668,535) (199,413,281) (217,950,245) (210,776,675) Increase (decrease) in amounts of: Deposit liabilities 5,886,177,516 7,503,004,351 5,881,873,486 7,503,946,068 Accrued taxes and other expenses (103,980,802) (80,274,343) (104,172,792) (79,322,393) Manager s checks (39,808,362) 36,399,460 (39,808,362) 36,399,460 Accrued interest payable (32,797,666) 49,553,053 (32,797,666) 49,553,053 Other liabilities (192,816,046) 157,348,865 (200,045,086) 169,913,509 Net cash generated from operations 2,209,511,910 2,422,593,431 2,225,997,655 2,426,530,162 Income taxes paid (229,386,811) (209,697,162) (229,386,811) (208,865,512) Net cash provided by operating activities 1,980,125,099 2,212,896,269 1,996,610,844 2,217,664,650 CASH FLOWS FROM INVESTING ACTIVITIES Investment in an associate (Note 9) (10,269,688) (10,269,688) Purchases of: Available-for-sale financial assets (4,278,271,496) (5,357,472,547) (4,278,271,496) (5,359,235,368) Held-to-maturity financial assets (2,327,008,268) (2,327,008,268) Proceeds from sale/maturities of: Available-for-sale financial assets 2,974,988,042 3,070,395,256 2,970,077,262 3,070,395,256 Additions to bank premises, furniture, fixtures and equipment (Note 10) (308,583,494) (72,425,885) (308,109,437) (72,425,885) Proceeds from sale of bank premises, furniture, fixtures and equipment 86,948,123 16,790,606 70,807,149 11,905,601 Proceeds from disposal of investment properties 82,872, ,313,024 80,008, ,497,218 Additions to software costs (Note 12) (67,302,655) (54,191,282) (67,302,655) (54,191,282) Net cash used in investing activities (1,519,618,678) (4,490,599,096) (1,543,060,200) (4,499,062,728) (Forward)

13 - 2 - Consolidated Parent Company Years Ended December CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from bills payable P= 284,501,250 P=2,300,000,000 P= 284,501,250 P=2,300,000,000 Payments of bills payable (26,730,448) (20,889,293) (26,730,448) (20,889,293) Acquisitions of treasury shares (308,800) (303,900) (308,800) (303,900) Collections on subscriptions of capital stock 720,301 22, ,301 22,049 Dividends paid (Note 19) (13,077,070) (13,077,070) Net cash provided by financing activities 258,182,303 2,265,751, ,182,303 2,265,751,786 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 718,688,724 (10,413,971) 711,732,946 (15,646,292) CASH AND CASH EQUIVALENTS AT BEGINNING OF THE YEAR Cash and other cash items 370,720, ,025, ,620, ,425,254 Due from Bangko Sentral ng Pilipinas 6,489,794,735 7,528,133,219 6,489,794,735 7,528,133,219 Due from other banks 970,145, ,204, ,265, ,056,617 Interbank loans receivable (Note 29) 7,730,004,845 6,895,716,530 7,730,004,845 6,895,716,530 15,560,665,884 15,571,079,855 17,218,285,328 15,564,331,620 CASH AND CASH EQUIVALENTS AT END OF THE YEAR Cash and other cash items 431,579, ,720, ,279, ,620,235 Due from Bangko Sentral ng Pilipinas 13,055,098,382 6,489,794,735 13,055,098,382 6,489,794,735 Due from other banks 699,457, ,145, ,820, ,265,513 Interbank loans receivable (Note 29) 2,093,219,131 7,730,004,845 2,093,219,131 7,730,004,845 P=16,279,354,608 P=15,560,665,884 P=17,930,018,274 P=15,548,685,328 OPERATIONAL CASH FLOWS FROM INTERESTS Consolidated Parent Company Years Ended December Interest paid P=1,167,202,376 P=856,159,301 P=1,168,063,494 P=857,068,027 Interest received 2,533,727,023 2,575,450,920 3,228,507,613 2,574,186,922 See accompanying Notes to Financial Statements.

14 PHILIPPINE VETERANS BANK AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS 1. Corporate Information Philippine Veterans Bank (the Parent Company) operates as a domestic commercial bank and provides services such as deposit-taking, loans and trade finance, domestic and foreign fund transfers, treasury, foreign exchange and trust services. The subsidiaries are engaged primarily in real estate and insurance business. Principal place of business is of the Parent Company at 101 V.A. Rufino corner Dela Rosa Streets, Legaspi Village, Makati City. On June 18, 1963, the Philippine Veterans Bank was created with the enactment of Republic Act No. 3518, which became its charter. On October 30, 2003, the Board of Directors (BOD) approved the merger of Monarch Properties, Inc. (MPI), a wholly owned subsidiary, with the Parent Company. The merger was subsequently approved by the Parent Company s stockholders on May 30, As of December 31, 2009, the approval of the merger is still pending with the SEC and BSP. 2. Summary of Significant Accounting Policies Basis of Preparation The accompanying financial statements have been prepared on a historical basis except for financial assets at fair value through profit or loss (FVPL) and available-for-sale (AFS) financial assets that are measured at fair value. The accompanying financial statements of the Parent Company include the accounts maintained in the Regular Banking Unit (RBU) and Foreign Currency Deposit Unit (FCDU). For financial reporting purposes, FCDU accounts and foreign currency denominated accounts in the RBU are translated into their equivalents in Philippine Peso (see accounting policy on Foreign currency translation). The financial statements of these units are combined after eliminating interunit accounts. The consolidated financial statements are presented in Philippine Peso (P=) which is also the Parent Company s functional currency. Statement of Compliance The Group and the Parent Company prepared its financial statements in accordance with Philippine Financial Reporting Standards (PFRS), except for the recognition in 2008 of the allowance for credit losses on interbank call loans (IBCL) to a thrift bank required in 2007 and 2006, and the staggered recognition of the remaining required allowance for credit losses on IBCL and the required allowance for credit losses on accounts receivable over 20 years approved by BSP as discussed in Note 28 and the deferral of loss on sale of non-performing assets to a Special Purpose Vehicle as discussed in Note 7. Basis of Consolidation The financial statements which include the financial statements of the Parent Company and its subsidiaries (collectively referred to as the Group ) are prepared for the same reporting year as the Parent Company, using consistent accounting policies.

15 - 2 - The Parent Company has the following wholly and majority owned subsidiaries: Effective Subsidiary Country of Incorporation Principal Activities Percentage of Ownership Vetgroup Intervest Projects, Inc. Philippines Real estate Monarch Properties, Inc. Philippines Real estate Veterans Venture Capital Corporation Philippines Financing All significant intra-group balances, transactions, income and expenses and profits and losses resulting from intra-group transactions are eliminated in full in the consolidation. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. Control is achieved where the Group has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. Consolidation of subsidiaries ceases when control is transferred out of the Group or Parent Company. The results of subsidiaries acquired or disposed of during the year are included in the consolidated statement of income from the date of acquisition or up to the date of disposal, as appropriate. Minority Interest Minority interest represents the portion of profit or loss and the net assets not held by the Group and is presented separately in the consolidated statement of income and within equity in the consolidated statement of financial position, separately from Parent Company s equity. Acquisitions of minority interest are accounted for using the entity concept method, whereby the difference between the consideration and the book value of the share of the net assets acquired is recognized as an equity transaction. Minority interest represents the equity interest in Veterans Venture Capital Corporation, a 60% owned subsidiary. Changes in Accounting Polices The accounting policies are consistent with the previous year except for the adoption of the following amendments to PFRS and Philippine Interpretations starting January 1, 2009: New Standards and Interpretations PAS 1, Presentation of Financial Statements effective January 1, 2009 PAS 23, Borrowing Cost (Revised) effective January 1, 2009 PFRS 8, Operating Segments effective January 1, 2009 Philippine Interpretation IFRIC 13, Customer Loyalty Programmes effective July 1, 2008 Philippine Interpretation IFRIC 16, Hedges of a Net Investment in a Foreign Operations effective October 1, 2008 Philippine Interpretation IFRIC 18, Transfer of Assets from Customers effective July 1, 2009 Amendments to Standards PAS 1 and PAS 32 Amendments, Puttable Financial Instruments and Obligations Arising on Liquidation effective January 1, 2009 PFRS 1 and PAS 27 Amendments, Cost of an Investment in a Subsidiary, Joint Controlled Entity or Associate effective January 1, 2009 PFRS 2 Amendment, Vesting Conditions and Cancellations effective January 1, 2009 PFRS 7 Amendment, Improving Disclosures about Financial Instruments effective January 1, 2009

16 - 3 - Philippine Interpretation IFRIC 9 and PAS 39 Amendments, Embedded Derivatives effective June 30, 2009 Improvements to PFRSs (2008) Improvements to PFRSs (2009), with respect to the amendment to the Appendix to PAS 18, Revenue New and amended standards that have been adopted and that have impact on the financial statements and disclosures of the Group are described below: Philippine Accounting Standards (PAS) 1, Presentation of Financial Statements The revised standard separates owner and non-owner changes in equity. The statement of changes in equity includes only details of transactions with owners, with non-owner changes in equity presented in a reconciliation of each component of equity. In addition, the standard introduces the statement of comprehensive income: it presents all items of recognized income and expense, either in one single statement, or in two linked statements. The Group has elected to present two linked statements. Amendments to Standards PFRS 7 Amendments - Improving Disclosures about Financial Instruments The amendments to PFRS 7, Financial Instruments: Disclosures, require additional disclosures about fair value measurement and liquidity risk. Fair value measurements related to items recorded at fair value are to be disclosed by source of inputs using a three level fair value hierarchy, by class, for all financial instruments recognized at fair value. In addition, a reconciliation between the beginning and ending balance for level 3 fair value measurements is now required, as well as significant transfers between levels in the fair value hierarchy. The amendments also clarify the requirements for liquidity risk disclosures with respect to derivative transactions and financial assets used for liquidity management. The fair value measurement disclosures are presented in Note 5. The liquidity risk disclosures are not significantly impacted by the amendments and are presented in Note 4. Improvements to PFRS 2008 The omnibus amendments to PFRSs issued in 2008 were issued primarily with a view to remove inconsistencies and clarify wordings. There are separate transitional provisions for each standard. The adoption of the amendments resulted in changes in accounting policies but did not have any impact on the financial position or performance of the Group. Significant Accounting Policies Foreign Currency Translation Transactions and balances The books of accounts of the RBU are maintained in Philippine pesos, while those of the FCDU are maintained in USD. For financial reporting purposes, foreign currency-denominated monetary assets and liabilities of the RBU are translated in Philippine peso based on the Philippine Dealing and Exchange Corporation (PDEx) closing rate prevailing at end of the year. Transactions denominated in foreign currencies are recorded using the exchange rates prevailing at the transaction dates. Foreign exchange differences are recognized in the statement of income. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined.

17 - 4 - FCDU As at the reporting date, the assets and liabilities of FCDU are translated into the Parent Company s presentation currency (the Philippine peso) at PDEx closing rate prevailing at the statement of financial position date, and their income and expenses are translated at PDEx weighted average rates for the period. Exchange differences arising on translation are taken to statement of comprehensive income. Financial Instruments - Initial Recognition and Subsequent Measurement Date of recognition Purchases or sales of financial assets that require delivery of assets within the time frame established by regulation or convention in the marketplace are recognized on the settlement date - the date that an asset is delivered to or by the Group. Securities transactions are also recognized on settlement date basis. Deposits, amounts due to banks and customers and loans are recognized when cash is received by the Group or advanced to the borrowers. Initial recognition of financial instruments All financial assets and financial liabilities are initially recognized at fair value. Except for financial assets and financial liabilities at FVPL, the initial measurement of financial assets and financial liabilities includes transaction costs. The Group classifies its financial assets in the following categories: financial assets at FVPL, HTM financial assets, AFS financial assets, and loans and receivables. The financial liabilities, on the other hand, are classified into (a) financial liabilities at FVPL and (b) other financial liabilities. The classification depends on the purpose for which the financial assets were acquired and whether they are quoted in an active market and for HTM financial assets, the ability and intention to hold the investment until maturity. Management determines the classification of its investments at initial recognition and, where allowed and appropriate, re-evaluates such designation at every reporting date. Reclassification of financial assets A financial asset is reclassified out of the FVPL category when the following conditions are met: the financial asset is no longer held for the purpose of selling or repurchasing it in the near term; and there is a rare circumstance. A financial asset that is reclassified out of the FVPL category is reclassified at its fair value on the date of reclassification. Any gain or loss already recognized in the statement of is not reversed. The fair value of the financial asset on the date of reclassification becomes its new cost or amortized cost, as applicable. For financial assets reclassified out of the AFS category to held-to-maturity investments, any previous gain or loss on that asset that has been recognized under other comprehensive income in the statement of comprehensive income is amortized to profit or loss over the remaining life of the investment using the effective interest rate (EIR) method. Any difference between the new amortize cost and the expected cash flows is also amortized over the remaining life of asset using EIR method. If the asset is subsequently determined to be impaired then the amount recorded under other comprehensive income is recycled to the statement of income.

18 - 5 - Determination of fair value The fair value for financial instruments traded in active markets at the statement of financial position date is based on their quoted market price or dealer price quotations (bid price for long positions and ask price for short positions), without any deduction for transaction costs. When current bid and asking prices are not available, the price of the most recent transaction provides evidence of the current fair value as long as there has not been a significant change in economic circumstances since the time of the transaction. For all other financial instruments not listed in an active market, the fair value is determined by using appropriate valuation techniques. Valuation techniques include net present value techniques, comparison to similar instruments for which market observable prices exist, options pricing models, and other relevant valuation models. Day 1 difference Where the transaction price in a non-active market is different from the fair value based on other observable current market transactions in the same instrument or based on a valuation technique whose variables include only data from observable market, the Group recognizes the difference between the transaction price and fair value ( Day 1 difference) in the statement of income unless it qualifies for recognition as some other type of assets. In cases where use is made of data which is not observable, the difference between the transaction price and model value is only recognized in the statement of income when the inputs become observable or when the instrument is derecognized. For each transaction, the Group determines the appropriate method of recognizing the Day 1 difference amount. Financial assets or financial liabilities held for trading Financial assets or financial liabilities held for trading are recorded in the statement of financial position at fair value. Changes in fair value relating to the held-for-trading positions are recognized in Trading gains (losses) - net. Interest earned or incurred is recorded in Interest income or expense, respectively, while dividend income is recorded in Other operating Income when the right to receive payment has been established. Included in this classification are debt and equity securities which have been acquired principally for the purpose of selling or repurchasing in the near term. As of December 31, 2009 and 2008, the Group does not have financial liabilities held for trading. Financial assets or financial liabilities designated at FVPL Financial assets or financial liabilities classified in this category are designated by management on initial recognition when the following criteria are met: The designation eliminates or significantly reduces the inconsistent treatment that would otherwise arise from measuring the assets or liabilities or recognizing gains or losses on them on a different basis; or The assets and liabilities are part of a group of financial assets, financial liabilities or both which are managed and their performance evaluated on a fair value basis, in accordance with a documented risk management or investment strategy; or The financial instrument contains an embedded derivative, unless the embedded derivative does not significantly modify the cash flows or it is clear, with little or no analysis, that it would not be separately recorded.

19 - 6 - Designated financial assets and financial liabilities at FVPL are recorded in the statement of financial position at fair value. Changes in fair value are recorded in Trading gains(losses) - net on financial assets and liabilities designated at FVPL. Interest earned or incurred is recorded in interest income or expense, respectively, while dividend income is recorded in Other operating income according to the terms of the contract, or when the right of the payment has been established. As of December 31, 2009 and 2008, the Group has no existing financial assets or financial liabilities designated at FVPL. HTM financial assets HTM financial assets are quoted, non-derivative financial assets with fixed or determinable payments and fixed maturities for which the Group s management has the positive intention and ability to hold to maturity. Where the Group would sell other than an insignificant amount of HTM financial assets, the entire category would be tainted and reclassified as AFS financial assets. After initial measurement, these investments are subsequently measured at amortized cost using the effective interest rate (EIR) method, less any impairment in value. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees that are an integral part of the EIR. The amortization is included in Interest income in the statement of income. Gains and losses are recognized in the statement of income when the HTM financial assets are derecognized and impaired, as well as through the amortization process. The losses arising from impairment of such investments are recognized in the statement of income under Provision for impairment and credit losses. The effects of restatement on foreign currency denominated HTM financial assets are recognized in the statement of income. Loans and receivables, amounts due from BSP and other banks, and interbank loans receivables and SPURA This accounting policy relates to the statement of financial position captions Due from BSP, Due from other banks, Interbank loans receivables and SPURA, Securities purchased under resale agreement and Loans and receivables. These are non derivative financial assets with fixed or determinable payments and fixed maturities that are not quoted in an active market. They are not entered into with the intention of immediate or short-term resale and are not classified as Financial assets held for trading, designated as AFS financial assets or financial assets designated at FVPL. After initial measurement, Loans and receivables, Due from BSP, Due from other banks and Interbank loans receivables and SPURA are subsequently measured at amortized cost using the EIR method, less allowance for impairment. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees and costs that are an integral part of the EIR. The amortization is included in the Interest income in the statement of income. The losses arising from impairment are recognized in Provision for impairment and credit losses in the statement of income. AFS financial assets AFS financial assets are those which are designated as such or do not qualify to be classified as designated as financial assets at FVPL, HTM financial assets or loans and receivables. They are purchased and held indefinitely, and may be sold in response to liquidity requirements or changes in market conditions. They include equity investments and other debt instruments.

20 - 7 - After initial measurement, AFS financial assets are subsequently measured at fair value. The effective yield component of AFS debt securities, as well as the impact of restatement on foreign currency-denominated AFS debt securities, is reported in statement of income. The unrealized gains and losses arising from the fair valuation of AFS financial assets are excluded, net of tax, from reported income and are reported as Net unrealized gains (losses) on AFS financial assets under other comprehensive income in the statement of comprehensive income. When the security is disposed of, the cumulative gain (losses) or loss previously recognized in equity is recognized as Trading gains (losses) - net in the statement of income. Where the Group holds more than one investment in the same security, these are deemed to be disposed of on a specific identification. Interests earned on holding AFS financial assets are reported as interest income using the EIR. Dividends earned on holding AFS financial assets are recognized in the statement of income as Other operating income when the right to receive payment has been established. The losses arising from impairment of such investments are recognized as Provisions for impairment and credit losses in the statement of income. Bills payable and other borrowed funds Issued financial instruments or their components, which are not designated as financial liabilities at FVPL, are classified as liabilities under Bills payable or other appropriate financial liability accounts, where 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. After initial measurement, bills payable and similar financial liabilities not qualified as and not designated as FVPL, are subsequently measured at amortized cost using the EIR method. Amortized cost is calculated by taking into account any discount or premium on the issue and fees that are an integral part of the EIR. Derecognition of Financial Assets and Liabilities Financial assets A financial asset (or, where applicable, a part of a financial asset or part of a group of financial assets) is derecognized where: the rights to receive cash flows from the asset have expired; or the Group retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a pass-through arrangement; or the Group has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained the risk and rewards of the asset but has transferred the control of the asset. Where the Group has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement, and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognized to the extent of the Group s continuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of original carrying amount of the asset and the maximum amount of consideration that the Group could be required to repay.

21 - 8 - Financial liabilities A financial liability is derecognized when the obligation under the liability is discharged or cancelled or has expired. Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognized in statement of income. Repurchase and reverse repurchase agreements Securities sold under agreements to repurchase at a specified future date ( repos ) are not derecognized from the statement of financial position. The corresponding cash received, including accrued interest, is recognized in the statement of financial position as a loan to the Group, reflecting the economic substance of such transaction. Securities purchased under resale agreements (SPURA) are recorded as loans and advances to banks or counterparty. The difference between the purchase price and resale price is treated as interest income and is accrued over the life of the agreement using EIR. Impairment of Financial Assets The Group assesses at each statement of financial position 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. Evidence of impairment may include indications that the borrower or a group of borrowers is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganization and where observable data indicate that there is measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults. Financial assets at amortized cost For financial assets at amortized cost which includes HTM financial assets, Loans and receivables, Due from BSP, Interbank loans receivables SPURA and due from other banks, the Group first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, or collectively for financial assets that are not individually significant. If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the asset s carrying amount and the present value of the estimated future cash flows (excluding future credit losses that have not been incurred). If the Group determines that no objective evidence of impairment exists for individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses for impairment. Those characteristics are relevant to the estimation of future cash flows for groups of such assets by being indicative of the debtors ability to pay all amounts due according to the contractual terms of the assets being evaluated. Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be, recognized are not included in a collective assessment for impairment.