N S * THE Wfpu6ic of the (Philippines COMMISSION ON AUDIT Commonweafth 4ve., Quezon City ANNUAL AUDIT REPORT on the LAND BANK OF THE PHILIPPINES For the years ended December 31, 2017 and 2016 PART I AUDITED FINANCIAL STATEMENTS Republic of the Philippines COMMISSION ON AUDIT Commonwealth Ave., Quezon City CORPORATE GOVERNMENT SECTOR CLUSTER 1 - BANKING AND CREDIT INDEPENDENT AUDITOR'S REPORT The Board of Directors Land Bank of the Philippines Manila Opinion We have audited the consolidated financial statements of Land Bank of the Philippines (LBP), and its subsidiaries (referred to as the "Group") which comprise the consolidated statements of financial position as at December 31, 2017 and 2016, and the consolidated statements of comprehensive income, consolidated statements of changes in equity and consolidated statements of cash flows for the years then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies. In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as at December 31, 2017 and 2016, and its consolidated financial performance and its consolidated cash flows for the years then ended in accordance with Philippine Financial Reporting Standards (PFRSs). Basis for Opinion We conducted our audit in accordance with International Standards of Supreme Audit Institutions (ISSAI). Our responsibilities under those standards are further described in the Auditor's Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of the Group in accordance with the ethical requirements that are relevant to our audit of the financial statements in the Philippine Public Sector, 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. Emphasis of Matter We draw attention to Note 10 to the Financial Statements which disclosed, among others, that the LBP's Available-for-sale investments - Domestic-Private account includes the undelivered 3,366,800 MERALCO shares. Likewise, the corresponding cash dividends earned amounting to P358.446 million and P297.086 million as at December 31, 2017 and 2016, respectively, and property dividends of 9,488,394 shares of stock in Rockwell Land Corporation, were still unpaid to LBP. To compel MERALCO to comply with the Supreme Court decision, LBP filed the Petition to cite MERALCO and other Respondents in Indirect Contempt before the Supreme Court on April 14, 2015. The Supreme Court has issued a Resolution on March 5, 2018 which (1) noted LBP's Motion for Early Resolution with Manifestation dated February 6, 2018; (2) gave due course to LBP's Petition; and (3) required parties to submit their respective Memoranda within thirty (30) days from notice thereof. LBP received the aforesaid Resolution on May 15, 2018 and forwarded the 32-page LBP Memorandum to the Office of the Government Corporate Counsel (OGCC) on May 28, 2018 for their consideration, review and/or signature. Our opinion is not modified in respect of the above matter. Responsibilities of Management and Those Charged with Governance for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with PFRSs, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. In preparing the consolidated financial statements, management is responsible for assessing the Group'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 Group or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Group's financial reporting process. Auditor's Responsibilities for the Audit of the Consolidated Financial Statements Our objectives are to obtain reasonable assurance about whether the consolidated 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 ISSAI 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 consolidated financial statements. As part of an audit in accordance with ISSAI, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: * Identify and assess the risks of material misstatement of the consolidated financial statements, 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 a 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, intentional 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 Group's internal control. * Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. * Conclude on the appropriateness of management's use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor's report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor's report. However, future events or conditions may cause the Group to cease to continue as a going concern. * Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation. * Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. COMMISSION ON AUDIT LIC S pervisi uditor June 14, 2018 LAND BANK OF THE PHILIPPINES kW 14001 CBTIMEU !ficii tpostur-/ of Ihe flepubfli: 04 0... Fr':Inhjpine STATEMENT OF MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS The management of the Land Bank of the Philippines and Subsidiaries (the Group) and the Land Bank of the Philippines (the Parent) is responsible for the preparation and fair presentation of the financial statements as at and for the years ended December 31, 2017 and 2016, including the additional components attached therein in accordance with the prescribed financial reporting framework indicated therein. This responsibility includes designing and implementing internal controls 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. The Board of Directors reviews and approves the financial statements before such statements are issued to the regulators, creditors and other users. The Commission on Audit has examined the financial statements of the Group and of the Parent Company in accordance with the International Standards of Supreme Audit Institutions (ISSAI) and has expressed opinion on the fairness of presentation upon completion of such audit, in its report to the Board of Directors. AN M. BAUTISTA ALAN V. BORNAS SVP, t 6ilership Group EYP, Operations Sector ALP B N TURA Pzre 'dent d C Signed this I3# day of J111* 2018 LANDBANK Plaza, 1598 M.H del Pilar corner Dr.J. Quintas Sts. Malate, Manila 1004 * Tel. Nos. 522-0000 -551-2200 * 450-7001 www.landbank.comr LAND BANK OF THE PHILIPPINES STATEMENTS OF FINANCIAL POSITION December 31, 2017 and 2016 (In Philippine Pesos) NOTE GROUP PARENT 2017 2016 2017 2016 As restated As restated ASSETS Cash and other cash items 4 31,385,326,196 28,251,826,726 31,384,484,693 28,250,784,197 Due from Bangko Sentral ng Pilipinas 5 305,343,193,269 355,405,020,009 305,343,193,269 355,405,020,009 Due from other banks 6 5,184,791,386 11,731,533,951 5,106,486,709 11,621,760,371 Interbank loans receivable 7 20,970,600,000 15,562,360,000 20,970,600,000 15,562,360,000 Securities purchased under agreements to resell 8 52,222,764,329 14,803,583,599 52,222,764,329 14,803,583.599 Held for trading 9 13,366,264,729 9,904,584,983 13,366,264,729 9,904.584,983 Available for sale investments - net 10 236,393,169,709 290,396,560,740 236,393,169,709 290,396,560,740 Held to maturity investments 11 318,240,517,135 152,818,697,546 317,123,977,928 151,928,198,623 Loans and receivables - net 12 & 17 614,454,235,900 501,160,840,640 612,715,409,602 499,956,723,754 Investments in subsidiaries 13 0 0 438,775,007 438,775,006 Investment property - net 14 & 30 5,683,999,567 6,288,135,905 5,571,611,003 6,159,908,096 Property and equipment - net 15 7,744,828,099 7,145,490,196 7,222,632,456 6,644,893,199 Non-current assets held for sale 325,698,390 267,045,114 321,980,850 258,659,819 Other assets - net 16 & 30 12,941,415,384 9,202,965,445 12,847,356,511 9,123,223,895 Deferred income tax 21 & 30 2,873,682,144 2,333,684,395 2,808,807,996 2,270,589,542 1,627,130,486,237 1,405,272,329,249 1,623,837,514,791 1,402,725,625,833 LIABILITIES AND EQUITY Liabilities Deposit liabilities 18 1,425,219,507,106 1,235,625,205,480 1,425,473,355,997 1,235,977,335,203 Bills payable 19 25,375,107,659 30,251,333,652 24,580,107,659 30,035,333,652 Derivative liabilities 18,892,674 18,504,560 18,892,674 18,504,560 Deposits from other banks 0 1,723,036 0 1.723,036 Treasurer's, Manager's and Cashier's checks 1,237,442,880 1,265,559,561 1,237,442,880 1,265,559,561 Payment order payable 53,631,992 94,188,109 53,631,992 94,188,109 Marginal deposits 14,984,223,824 15,025,639,549 14,984,223,824 15,025,639,549 Cash letters of credit 8,788,482,340 6,373,117,805 8,788,482,340 6,373,117,805 Other liabilities 20 34,839,504,002 20,824,901,209 34,677,450,701 20,748,875,021 1,510,516,792,477 1,309,480,172,961 1,509,813,588,067 1,309,540,276,496 Equity 29 & 30 Common stock 20,981,000,000 17,800,000,000 20,981,000,000 17,800,000,000 Paid-in surplus 101,098,220 101,098,220 101,098,220 101,098,220 Retained earnings free 32,125,960,648 29,143,602,631 30,753,073,583 27,871,317,945 Retained earnings reserve 42,311,448,508 30,794,448,508 41,271,448,508 29,771,448,508 Undivided profits 15,621,465,990 14,355,885,309 15,505,365,035 14,105,451,520 Revaluation increment 61,200,000 61,200,000 0 0 Other Comprehensive Income Net unrealized gains on securities available for sale 5,411,941,378 3,536,033,144 5,411,941,378 3,536,033,144 Remeasurement of retirement benefit obligation (420,984) (111,524) 0 0 116,613,693,760 95,792,156,288 114,023,926,724 93,185,349,337 1,627,130,486,237 1,405,272,329,249 1,623,837,514,791 1,402,725,625,833 The Notes on pages 11 to 73 form part of these financial statements. L 5 LAND BANK OF THE PHILIPPINES STATEMENTS OF COMPREHENSIVE INCOME For the years ended December 31, 2017 and 2016 (In Philippine Pesos) GROUP PARENT 2017 2016 2017 2016 NOTE As restated As restated INTEREST INCOME Loans 29,745,504,130 25,931,533,423 29,531,777,486 25,719,257,438 Investments 15.913,386,891 13,011,486,550 15,880,559,323 12,984,866,640 Due from Bangko Sentral ng Pilipinas 2,399,863,981 2,709,171,877 2,399,863,981 2,709,171,877 Deposit in banks 47,503,037 29,285,949 39,363,021 22,959,257 Others 1,248,452 1,087,878 1,248,452 847,370 48,107,506,491 41,682,565,677 47,852,812,263 41,437,102,582 INTEREST EXPENSE Deposit liabilities 8,923,169,074 9,409,271,625 8,923,675,095 9,410,204,824 Borrowed funds 900,650,066 843,737,159 897,055,307 844,998,335 Unsecured subordinated debt 0 46,265,625 0 46,265,625 Others 2,251 9,219,883 920,592 17,599,425 9,823,821,391 10,308,494,292 9,821,650,994 10,319,068,209 NET INTEREST INCOME 38,283,685,100 31,374,071,385 38,031,161,269 31,118,034,373 PROVISION FOR CREDIT LOSSES 17 1,129,582,344 144,447,845 1,109,626,624 118,370,022 NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 37,154,102,756 31,229,623,540 36,921,534,645 30,999,664,351 OTHER OPERATING INCOME Dividends 1,582,606,081 1,942,212,386 1,582,606,081 1,942,183,297 Fees and commission 1,892,258,615 1,709,681,719 1,779,684,551 1,614,721,616 Gain from dealings in foreign currency 415,407,278 474,854,097 412,592.550 465,675,584 Gain from sale/redemption/reclass of non-trading of FA and Liab 451,832,549 320,019,255 451,875,346 325,844,255 Gain on financial assets - held for trading 893,560,913 893,560,913 Foreign exchange gains from revaluation 0 133,496,302 0 133,496,302 Miscellaneous income 30 & 31 1,320,450,134 1,559,241,090 1,122,775,823 1,501,487,166 6.556,115,570 6,139,504,849 6,243,095,264 5,983,408,220 OTHER OPERATING EXPENSES Compensation and fringe benefits 11,304,292,633 8,683,112,699 11,271,950,519 8,667,061,096 Taxes and licenses 3,122,761,706 2,754,498,888 3,097,464,757 2,726,700,282 Depreciation and amortization 1,051,745,668 944,040,528 1,035,285,806 927,664,127 Loss on financial assets and liabilities - held for trading 0 716,566,301 0 716,566,301 Foreign exchange loss from revaluation 574,046,924 0 574,046,924 0 Rent 968,795,158 629,009,957 1,002,024,401 675,124,454 Miscellaneous expenses 32 10,649,957,320 8,817,630,234 10,358,880,013 8,799,420,536 27,671,599,409 22,544,858,607 27,339,652,420 22,512,536,796 INCOME BEFORE INCOME TAX 16,038,618,917 14,824,269,782 15,824,977,489 14,470,535,775 PROVISION FOR INCOME TAX 21 & 30 417,152,927 468,384,473 319,612,454 365,084,255 NET INCOME 15,621,465,990 14,355,885,309 15,505,365,035 14,105,451,520 OTHER COMPREHENSIVE INCOME 29 1,875,598,774 (7,409,465,613) 1,875,908,234 (7,416,088,695) TOTAL COMPREHENSIVE INCOME 17.497,064,764 6,946,419,696 17.381,273269 6.689,362.825 The Notes on pages 11 to 73 form part of these financial statements. 6 LAND BANK OF THE PHILIPPINES STATEMENTS OF CHANGES IN EQUITY - GROUP For the years ended December 31, 2017 and 2016 (In Philippine Pesos) Other Common Stock (Note 29) Paid-in Retained Earnings Retained Earnings Undivided Revaluation Comprehensive Shares Amount Surplus Free Reserve Profits Increment Income (Loss) TOTAL (Note 29) (Note 29) Balance, December 31. 2015, as reated 1,197,100,000 11,971,000.000 101.098,220 24,513,920,642 27,190,507,032 13.965.866,598 61,200,000 10,945,387,233 88,748,979,725 Effect due to change in par value from P10 to P100 (1,077,390,000) Capital infusion from the National Government 58,290,000 5,829,000,000 5,829,000,000 Net income during the year, as restated 14,355,885,309 14,355,885,309 Net unrealized loss on securities (7,416,088,695) (7,416,088,695) Re-measurement of retirement benefit obligation 6,623,082 6,623,082 Declaration of cash dividends (6,764,159,431) (6,764,159,431) Transfer to retained earnings free 13,965,866,598 (13,965,866,598) 0 Transfer to retained earnings reserve (4,153,941,476) 4,153,941,476 0 PFRS/prior period adjustment 1,583,525,322 (550,000,000) 1,033,525,322 Closure of excess book value over cost of investment in subsidiaries (20) (20) Currency transation difference (1.609,014) (1.609,004) Balance, December 31. 2016, As restated (Note 30) 178,000,000 17,600,000,00 101,093220 20.143,602.631 30,74448.548 14.355,885,309 81,200.000 3,35,921620 9,792,156,28 Capital infusion rm the National Government 31,810,000 3,181.000,000 3,181,000,000 Net income during the year 15,621,465,990 15,621,465,990 Net unrealized loss on securities 1,875,908,234 1,875,908,234 Re-measurement of retirement benefit obligation (309,460) (309,460) Transfer to retained earnings free 14,355,885,309 (14,355,885,309) 0 Transfer to retained earnings reserve (11,517,000,000) 11,517,000,000 0 Payment of cash dividends (130,571,749) (130,571,749) PFRS/prior period adjustment 274,171,455 274,171,455 Closure of excess book value over cost of investment in subsidiaries 29 29 Currency translation difference (127,D27) (127,0M Balance, December 31. 2017 209.810,000 20,981,000,00 101,098.220 32,125,9i0,648 42.311.448,508 15,621,485,990 fi1,200,000 5,411,520,394 116813.693,760 The Notes on pages 11 to 73 form part of these financial statements. 7 LAND BANK OF THE PHILIPPINES STATEMENTS OF CHANGES IN EQUITY - PARENT For the years ended December 31, 2017 and 2016 (In Philippine Pesos) Other Common Stock (Note 29) Paid-in Retained Earnings Retained Earnings Undivided Comprehensive Shares Amount Surplus Free Reserve (Note 29) Profits Income (Loss) TOTAL Balance, December 31, 2015 1,1.7,100,000 11,971,000,000 101.098,220 23T273.646,428 26,282,507.032 13,663.584,070 10.5uj21,839 N.M243,957rWi9 Effect due to change in par value from P10 to P100 (1,077,390,000) Capital infusion from the National Government 58,290,000 5,829,000,000 5,829,000,000 Net income during the year, as restated 14,105,451,520 14,105,451,520 Net unrealized loss on securities (7,416,088,695) (7,416,088,695) Declaration of cash dividends (6,600,000,000) (6,600,000,000) Transfer to retained earnings free 13,663,584,070 (13,663,584,070) 0 Increase in retained earnings-reserve (4,038,941,476) 4,038,941,476 0 PFRS/prior period adjustment 1,574,637,927 (550,000,000) 1,024,637,927 Curreny translation difference (1,609,004) (1,609,004) Balance. Dectmber 31. 2016, A restated (Note 30) 178,000,000 17,8010000,000 101.093,220 27.871,3170945 29,771,448,50B 14.105.451,520 3,536,33,144 93,155.349,337 Capital infusion from the National Government 31,810,000 3,181,000,000 3,181,000,000 Net income during the year 15,505,365,035 15,505,365,035 Net unrealized loss on securities 1,875,908,234 1,875,908,234 Transfer to retained earnings free 14,105,451,520 (14,105,451,520) 0 Increase in retained earnings-reserve (11,500,000,000) 11,500,000,000 0 PFRS/prior period adjustment 276,431,145 276,431,145 Cumancy translation difference (1.27.027) (127,027) Baance, December 31, 2017 209,910,00 20.911.000:000 101.098,220 30,753.073.583 41,271,44,0 15.50.365,035 ,411,941,378 114.023.92,724 The Notes on pages 11 to 73 form part of these financial statements. 8 LAND BANK OF THE PHILIPPINES STATEMENTS OF CASH FLOWS For the years ended December 31, 2017 and 2016 (In Philippine Pesos) GROUP PARENT 2017 2016 2017 2016 As restated (Note 30) As restated (Note 30) CASH FLOWS FROM OPERATING ACTIVITIES Interest received 46,992,505,309 40,134,385,755 46,739,385,751 39,888,098,637 Interest paid (10,116,074,021) (9,974,587,863) (10,114,161,298) (9,985,246,934) Fees and commission received 1,892,258,615 1,709,681,719 1,779,684,551 1,614,721,616 Loss on financial assets and liabilities held for trading 893,560,913 (716,566,301) 893,560,913 (716,566,301) Gain from dealings in foreign currency 415,407,278 474,854,097 412,592,550 465,675,584 Miscellaneous income 1,320,450,134 1,559,241,090 1,122,775,823 1,501,487,166 General and administrative expenses (24,086,735.039) (21,529.500.928) (23.151.640,503) (21.484,465,722) Operating income before changes in operating assets and liabilities 17,311,373,189 11,657,407,569 17,682,197,787 11,283,704,046 Changes in operating assets and liabilities (Increase)/Decrease in operating assets Interbank loans receivable (5,408,240,000) 2,237,516,515 (5,408,240,000) 2,237,516,515 Held for Trading (3,461,679,746) (1,430,561,411) (3,461,679,746) (1,430,561,411) Loans and receivable (113,778,984,191) (50,454,014,676) (113,225,893,729) (50,653,983,574) Other assets (3,374,127,830) (783,469,378) (3,359,461,415) (728,729,376) Deferred income tax (539,997,749) (2,263,000,574) (538,218,454) (2,270,589,542) Increase/(Decrease) in operating liabilities Deposit liabilities 189,594,301,626 189,764,889,458 189,496,020,794 189,749,476,939 Derivative liabilities 388,114 18,504,560 388,114 18,504,560 Deposits from other banks (1,723,036) (15,034,483) (1,723,036) (15,034,483) Payment order payable (40,556,117) 2,982,521 (40,556,117) 2,982,521 Marginal deposits (41,415,725) 8,499,169,285 (41,415,725) 8,499,169,285 Cash letters of credit 2,415,364,535 (1,090,480,608) 2,415,364,535 (1,090,480,608) Treasurers, Manager's and Cashier's Checks (28,116,681) (672,022,924) (28,116,681) (672,022,924) Other liabilities 11,985,244,933 (1,851.517.672) 11.292.442,789 (1755,919,732) Net cash generated from operations 94,631,831,322 153,620,368,182 94,781,109,116 153,174,032,216 Income taxes paid. (90.429,132) (43;096,498) 0 0 Net cash generated from operating activities 94,541402,190 153,577,271,684 04,781,109.115 153,174,032,215 CASH FLOWS FROM INVESTING ACTIVITIES Additions to property and equipment (1,413,773,089) (1,071,509,092) (1,377,634.985) (1,083,684,370) Disposals of investment property 473,511,516 (96,143,872) 459,243,583 (83,041.232) Disposals of/(additions to) non-current assets held for sale (58.653,276) 103,989,457 (63,321,031) 88,621,268 Dividends received 1,582,606,081 1,942,212,386 1,582,606,081 1,942,183,297 Gain from investment securities 451,832,549 320,019,255 451,875,346 325,844,255 Decrease/(increase) in: Available for sale investments 55,879,299,265 (143,675,620,172) 55,879,299,265 (143,681,445,172) Held to maturity investments (165,421,819,589) (30,216,914,659) (165,195,779,305) (30,143,954,962) Investment in subsidiaries 0 0 (1) 0 Net casti provided by (used in) investing activities (1000506,996,543) (172,693,966,697) (108.263.711,047) (172.635,476,916) CASH FLOWS FROM FINANCING ACTIVITIES Cash dividends paid (130,571,749) (6,764,159,431) 0 (6,600,000,000) Capital infusion from National Government 3,181,000,000 5,829,000,000 3,181,000,000 5,829,000,000 Other charges to capital 279,198,360 1,028,528,452 276,304,118 1,023,028,923 Increase/(decrease) in: Bills payable (4,845,874,439) 8,212,596,224 (5,424,874,439) 8.396,596,224 Unsecured subordinated debt (10,500000.000) 0 (10,500,000,000) Net cash used in financing activities (1,516,247,828) (2.194,034,755) (1.967,570.321) (1,851,374,853) EFFECTS OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (574,046,924) 133,496.302 (574,046,924) 133,496,302 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (16,055,889,105) (21,177,233,466) (16,024,219,176) (21,179,323,251) 9 LAND BANK OF THE PHILIPPINES STATEMENTS OF CASH FLOWS For the years ended December 31, 2017 and 2016 (In Philippine Pesos) GROUP PARENT 2017 2016 2017 2016 As restated (Note 30) As restated (Note 30) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR Cash and other cash items 28,251,826,726 26,889,637,489 28,250,784,197 26,889,156,228 Due from Bangko Sentral ng Pilipinas 355,405,020,009 314,934,579,624 355,405,020,009 314,934,579,624 Due from other banks 11,731,533,951 5,890,980,638 11,621,760,371 5,782,735,575 Securities purchased under agreements to resell 14,803,583,5 99 83,654,000,000 14,803,583,599 83,654,000,000 410,191,964,285 431,369,197,751 410,081,148,176 431,260,471,427 CASH AND CASH EQUIVALENTS AT END OF YEAR Cash and other cash items 31,385,326,196 28,251,826,726 31,384,484,693 28,250,784,197 Due from Bangko Sentral ng Pilipinas 305,343,193,269 355,405,020,009 305,343,193,269 355,405,020,009 Due from other banks 5,184,791,386 11,731,533,951 5,106,486,709 11,621,760,371 Securities purchased under agreements to resell 52,222,764,329 14,803,583,599 52,222,764,329 14,803,583,599 394,136,075,180 410,191,964,285 394,056,929,000 410,081,148,176 The Notes on pages 11 to 73 form part of these financial statements. 10 LAND BANK OF THE PHILIPPINES NOTES TO FINANCIAL STATEMENTS (All amounts in Philippine Peso unless otherwise stated) 1. Corporate Information The Land Bank of the Philippines (Parent) is a financial institution wholly-owned by the National Government. The Parent was established in 1963 as the financial intermediary of the Land Reform Program of the government. Later, it became the first universal bank by charter with expanded commercial banking powers to sustain its social mission of spurring countryside development. The Parent is a depository bank of the government and its various instrumentalities. The Parent services the requirements of the national government, local government units and government-owned and controlled corporations. As of December 31, 2017, 73 percent of the deposit portfolio came from the government while the rest came from private depositors. The Parent and its subsidiaries (Group) are engaged in the business of banking, financing, leasing, real estate, insurance brokering and other related services to personal, commercial, corporate and institutional clients. The Group's products and services include deposit-taking, lending and related services, treasury and capital market operations, trade services, payments and cash management, and trust services. The Parent's principal office of business is located at the LandBank Plaza, 1598 M.H. Del Pilar corner Dr. J. Quintos Streets, Malate, Manila. The accompanying comparative financial statements of the Parent were authorized for issue by the Parent's Board of Directors on May 22, 2018 while those of the subsidiaries were approved for issue by their respective Board of Directors on various dates. 2. Summary of Significant Accounting Policies 2.1 Basis of Financial Statements Preparation The accompanying financial statements have been prepared on a historical cost basis except for financial assets and financial liabilities at fair value through profit or loss (FVPL), available-for- sale (AFS) investments, and derivative financial instruments that have been measured at fair value. The financial statements of the Parent include the accounts maintained in the Regular Banking Unit (RBU) and Foreign Currency Deposit Unit (FCDU). The financial statements individually prepared for these units are combined after eliminating inter-unit accounts. The functional currency of RBU and FCDU is Philippine Peso and United States Dollar (USD), respectively. For financial reporting purposes, FCDU accounts and foreign currency-denominated accounts in the RBU are translated in Philippine Peso based on the Philippine Dealing System (PDS) closing rate prevailing at end of the year. 11 The consolidated financial statements are presented in Philippine peso, its functional currency and all values are rounded to the nearest peso except when otherwise indicated. 2.2 Statement of Compliance The consolidated financial statements of the Group and of the Parent have been prepared in compliance with the Philippine Financial Reporting Standards (PFRS). 2.3 Basis of Consolidation The consolidated financial statements include the financial statements of the Parent and the following wholly-owned subsidiaries: Country of Functional Name Incorporation Principal Activity Currency LBP Leasing and Finance Corporation Philippines Leasing Philippine peso LBP Insurance Brokerage, Inc. Philippines Insurance brokerage Philippine peso LBP Resources and Development Corporation Philippines Real estate Philippine peso Masaganang Sakahan, Inc. Philippines Trading Philippine peso The consolidated financial statements were prepared using consistent accounting policies for like transactions and other events in similar circumstances. All significant inter-company balances and transactions have been eliminated in consolidation. Significant Accounting Policies Foreign currency translation Transactions and balances The books of accounts of the RBU are maintained in Philippine Peso, while those of the FCDU are maintained in USD. For financial reporting purposes, the foreign currency- denominated monetary assets and liabilities in the RBU are translated in Philippine Peso based on the Philippine Dealing System (PDS) closing rate prevailing at the statement of financial position date. Foreign exchange differences arising from revaluation and translation of foreign-currency denominated assets and liabilities are credited to or charged against operations in the year in which the rates change. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions. Non- monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. Fair Value Measurement The methods and assumptions used by the Group in estimating the fair value of the financial instruments include the following: 12 Cash and cash equivalents and short-term investments - Carrying amounts approximate fair values due to the relatively short-term maturity of these instruments. Debt and Equity securities - Fair values are generally based upon quoted market prices. If the market prices are not readily available, fair values are estimated using either values obtained from counterparties or independent parties offering pricing services, values based on adjusted quoted market prices of comparable investments or values computed using the discounted cash flow methodology. Loans and receivables - Fair values of loans are estimated using the discounted cash flow methodology using the Parent's current incremental lending rates for similar types of loans. Mortgage loans - Fair values of loans on real estate are estimated using the discounted cash flow methodology using the Parent's current incremental lending rates for similar types of loans. Short-term investments - Carrying amounts approximate fair values. Others - Quoted market prices are not readily available for these assets. They are not reported at fair value and are not significant in relation to the Group's total portfolio of securities. Obligations to repurchase securities are recorded at cost which approximates fair value. Liabilities - Fair values are estimated using the discounted cash flow methodology using the Parent's current incremental borrowing rates for similar borrowings with maturities consistent with those remaining for the liability being valued. Except for the long-term fixed rates liabilities and floating rate liabilities with repricing periods beyond three months, the carrying values approximate fair values due to the relatively short term maturities of the liabilities or frequency of the repricing. Financial Instruments 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. Derivatives are recognized on trade 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 instruments, including trading and investment securities and loans and receivables, are initially measured at fair value. Except for financial assets and financial liabilities valued at FVPL, the initial measurement of financial instruments includes transaction costs. The Group classifies its financial assets in the following categories: financial assets at FVPL, HTM investments, AFS investments, and loans and receivables while financial liabilities are classified as financial liabilities at FVPL and 13 financial liabilities carried at amortized cost. The classification depends on the purpose for which the investments were acquired and if they are quoted in an active market. Management determines the classification of its investments at initial recognition and, where allowed and appropriate, re-evaluates such designation at every reporting date. 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. In the absence of an available current bid and asking prices, the price of the most recent transaction is used because it 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. Derivative Instruments The Parent enters into derivative contracts such as currency forwards and currency swaps to manage its foreign exchange exposure. These derivative financial instruments are initially recorded at fair value on the date at which the derivative contract is entered into and are subsequently remeasured at fair value. Any gains or losses arising from changes in fair values of derivatives (except those accounted for as accounting hedges) are taken directly to the statement of comprehensive income. Derivatives are carried as assets when the fair value is positive and as liabilities when the fair value is negative. Derivative instruments are booked at its notional amount under contingent account on trade date and subsequently measured using the mark to forward methods. Any gains/(losses) arising from the market valuation are booked under asset account "Derivatives with positive fair value" if the market valuation is positive and under the liability account "Derivatives with negative fair value" if the market valuation is negative contra foreign exchange gain/(loss) account. The Parent did not apply hedge accounting treatment for its derivative transactions. (a) Held for trading Financial assets held for trading are debt and equity securities recorded in the statement of financial position at fair value. Changes in fair value relating to the held for trading positions are recognized in 'Gain on Financial Assets HFT'. Interest earned or incurred is recorded in 'Interest income' or 'Interest expense', respectively, while dividend income is recorded in 'Dividends' 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. 14 (b) Loans and receivables, amounts due from BSP and other banks, interbank loans receivable and securities purchased under resale agreements These are financial assets with fixed or determinable payments and fixed maturities that are not quoted in an active market. They are not entered into with the intention of immediate or short-term resale and are not classified as other financial assets held for trading, designated as AFS investments. (c) Held-to-Maturity (HTM) investments HTM investments are 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. These investments are carried at amortised cost using the effective interest rate (EIR) method, reduced by any impairment in value. Gains and losses are recognized in statement of comprehensive income when the HTM investments are derecognized, impaired or revalued (in case of foreign currency denominated), as well as through the amortization process. (d) Available-for-sale (AFS) investments AFS investments are debt and equity securities which do not qualify to be classified as HFT, HTM or loans and receivables. They are purchased and held indefinitely, but which the Group anticipates to sell in response to liquidity requirements or changes in market conditions. AFS investments are carried at fair market value. The effective yield component (including premium, discounts and directly attributable transaction costs) and foreign exchange restatement results of AFS debt securities are reported in earnings. Dividends on AFS equity instruments are recognized in the statement of comprehensive income when the entity's right to receive payment is established. The unrealized gains and losses arising from the recognition of fair value changes on AFS assets are reported as a separate component of equity in the statement of financial position. Impairment of Financial Assets The Group determines at each reporting date if there is objective evidence that a financial asset may be impaired. Financial assets carried at amortized cost A financial asset or a group of financial assets is impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a 'loss event') and that loss event has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. The Group first assesses if objective evidence of impairment exists individually for financial assets that are individually significant, and individually or collectively for assets that are not individually significant. If it is determined that no objective evidence of impairment exists for individually assessed financial asset, whether significant or not, the asset is included in a group of financial assets with similar credit risk characteristics (i.e., on the basis of the Group's scoring process that considers asset term, industry and collateral) and that group of assets is collectively assessed for impairment. Those 15 characteristics are relevant to the estimation of future cash flows for group 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. If there is objective evidence that an impairment loss on loans and receivables carried at amortised cost has been incurred, the amount of the loss is measured as the difference between the asset's carrying amount and the present value of the estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset's original effective interest rate. The carrying amount of the asset is reduced through use of an allowance account. The amount of loss is charged to current operations. If a loan or HTM investment has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract. If, in a subsequent year, the amount of the estimated impairment loss decreases because of an event occurring after the impairment was recognized, any amounts formerly charged are credited to 'Provision for credit losses' in the statement of comprehensive income and the allowance account, reduced. The HTM investments, together with the associated allowance accounts, are written off when there is no realistic prospect of future recovery and all collateral has been realized. The calculation of the present value of the estimated future cash flows of a collateralized financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable. Future cash flows in a group of financial assets that are collectively evaluated for impairment are estimated on the basis of the contractual cash flows of the assets and historical loss experience for assets with similar credit risk characteristics. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the period on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not exist currently. Estimates of changes in future cash flows for groups of assets are made to reflect and be directionally consistent with changes in related observable data from period to period (such as changes in unemployment rates, property prices, payment status, or other factors indicative of changes in the probability of losses in the group and their magnitude). The methodology and assumptions used for estimating future cash flows are reviewed regularly by the Group to reduce any differences between loss estimates and actual loss experience. When a loan is uncollectible, it is written off against the related allowance for loan impairment. Such loans are written off after all the necessary procedures have been completed and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off are charged to income. 16 Restructured loans Where possible, the Group seeks to restructure loans rather than to take possession of collateral. This may involve extending the payment arrangements and the agreement of new loan conditions. Once the terms have been renegotiated, the loan is no longer considered past due. Management continuously reviews restructured loans to ensure that all criteria are met and that future payments are likely to occur. The loans continue to be subject to an individual or collective impairment assessment, calculated using the loan's original effective interest rate. The difference between the recorded value of the original loan and the present value of the restructured cash flows, discounted at the original effective interest rate, is recognized in 'Provision for credit losses' in the statement of comprehensive income. Assets Carried at Cost If there is objective evidence that an impairment loss on an unquoted equity instruments that are not carried at fair value because its fair value cannot be reliably measured, or on a derivative asset that is linked to and must be settled by delivery of such unquoted equity instrument has been incurred, the amount of the loss is measured as the difference between the asset's carrying amount and the present value of estimated future cash flows discounted at the current market rate of return for a similar financial asset. AFS Investments If an AFS investment is impaired, an amount comprising the difference between its cost (net of any principal payment and amortization) and its current fair value, less any impairment loss on that security previously recognized in profit or loss - is removed from equity and recognized in the statement of comprehensive income. Impairment losses on equity instruments recognized in the statement of comprehensive income are not reversed through the statement of comprehensive income. If, in a subsequent period, the fair value of a debt instrument classified as AFS investment increases and the increase can be objectively related to an event occurring after the impairment loss was recognized in profit or loss, the impairment loss is reversed through the statement of comprehensive income. 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 similar financial assets) is derecognized when: " the rights to receive cash flows from the asset have expired; * 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 substantially all the risks and rewards of the asset, but has transferred control of the asset. 17 Where the Group has transferred its rights to receive cash flows from an asset 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 the original carrying amount of the asset and the maximum amount of consideration that the Group could be required to repay. Financial Liabilities. Derecognition of a financial liability happens when the obligation under the liability is discharged or cancelled or expired. When 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 profit or loss. Offsetting financial instruments Offsetting of financial assets and financial liabilities are only made and the net amount are reported in the statement of financial position when there is a legally enforceable right to offset the recognized amounts and the Group intends to either settle on a net basis, or to realize the asset and the liability simultaneously. Fiduciary Activities Assets and income arising from fiduciary activities together with related undertakings to return such assets to customers are excluded from the financial statements where the Group acts in a fiduciary capacity such as nominee, trustee or agent. Subsequent Events Any post-year-end event that provides additional information about the Group's position at the statement of financial position date (adjusting event) is reflected in the financial statements. Post-year-end events that are non adjusting events, if any, are disclosed in the Notes to the Financial Statements, when material. Impairment of Property and Equipment, Investment Property and Other Resources At each reporting date, the Group assesses if there is any indication that the property and equipment and investment properties may be impaired. Where an indicator of impairment exists, the Group makes a formal estimate of recoverable amount. Where the carrying amount of an asset exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. Recoverable amount is the higher of an asset's or cash-generating unit's fair value less costs to sell and its value in use and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or group of assets. 18 Investments in Subsidiaries The Parent's investments in subsidiaries in which the Parent has control are accounted for under the cost method of accounting in the separate financial statements. These are carried in the statement of financial position at cost less any impairment in value. Property and Equipment Property and equipment are carried at cost less accumulated depreciation and amortization and any impairment in value. When the assets are sold or retired, their cost and accumulated depreciation and amortization are eliminated from the accounts and any gain or loss resulting from their disposal is recognized in the profit or loss. The initial cost of property and equipment comprises its purchase price and any directly attributable cost of bringing the asset to its working condition and location for its intended use. Expenditures incurred after the fixed assets have been put into operation, such as repairs and maintenance costs, are normally charged to profit and loss in the period in which the costs are incurred. Depreciation and amortization is calculated on a straight-line basis over the estimated useful life (EUL) of the property and equipment as follows: Number of Years Buildings 10- 30 Furniture, fixtures and equipment 5-10 Leasehold rights 10 - 30* Transportation equipment 7- 10 *EUL shall depend on the length of the lease. It shall be the period of the lease or the EUL of the assets, as given, whichever is shorter. The useful life and depreciation and amortization methods are reviewed periodically to ensure that the period and method of depreciation and amortization are consistent with the expected pattern of economic benefits from items of property and equipment. Investment properties Property acquired by the Group in settlement of loans through foreclosure or dation in payment, and that is not significantly occupied by the Group, is classified as investment property. Investment property comprises land and building. Investment properties are measured at their fair value as the deemed cost as allowed under PFRS 1 and PAS 40. Subsequent to initial recognition, investment properties are stated at cost less accumulated depreciation and impairment loss. Investment properties are derecognized when they have either been disposed of or when the investment property is permanently withdrawn from use and no future benefit is expected from its disposal. Any gains or losses on derecognition of an investment property are recognized in the profit and loss in the year of derecognition. 19 Expenditures incurred after the fixed investment properties have been put into operation, such as repairs and maintenance costs, are normally charged to expense in the period in which the costs are incurred. Depreciation is calculated on a straight-line basis over 10 to 30 years, which is the estimated useful life of the investment properties. Non-Current Assets Held for Sale Non-current assets held for sale include other properties (chattels, auto and real estate) acquired through repossession or foreclosure that the Group intends to sell within one year from the date of classification as held for sale. The Group classifies a non-current asset as held for sale if its carrying amount will be recovered principally through a sale transaction rather than through continuing use. The Group is committed to a plan to sell these foreclosed assets and the assets are actively marketed for sale at a price that is reasonable in relation to their current fair values. In the event that the sale of the asset is extended beyond one year, the extension of the period required to complete the sale does not preclude an asset from being classified as held for sale if the delay is caused by events or circumstances beyond the control of the Group and there is sufficient evidence that the Group remains committed to sell the asset. Assets classified as held for sale are measured at the lower of their carrying amounts immediately prior to their classification as assets held for sale and their fair value less costs to sell. The cost of assets foreclosed includes the carrying amount of the related loan less allowance for impairment at the time of foreclosure. The Group recognizes an impairment loss for any initial and subsequent write-down of the asset to fair value less cost to sell. Gain for any subsequent increase in fair value less cost to sell of an asset is recognized to the extent of the cumulative impairment loss previously recognized. Assets classified as held for sale are not subject to depreciation or amortization. Intangible Assets Computer software Acquired computer software licenses are capitalized on the basis of the costs incurred to acquire and bring to use the specific software. These costs are amortized on the basis of the expected useful lives (three to five years) using the straight line method. Costs associated with developing or maintaining computer software programs are recognized as an expense as incurred. Income Taxes Current taxes 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 taxing authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted at the statement of financial position date. 20 Deferred taxes Deferred tax is provided on temporary differences at the statement of financial position date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax liabilities are recognized for all taxable temporary differences, except: a. Where the deferred tax liability arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss. b. In respect of taxable temporary differences associated with investments in subsidiaries, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future. Deferred tax assets are recognized for all deductible temporary differences, carryforward of unused tax credits from the excess of minimum corporate income tax (MCIT) over the regular income tax, and unused net operating loss carryover (NOLCO), to the extent that it is probable that taxable income will be available against which the deductible temporary differences and carryforward of unused tax credits from MCIT and unused NOLCO can be utilized except: a. Where the deferred tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss. b. In respect of deductible temporary differences associated with investments in subsidiaries, deferred tax assets are recognized only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilized. The carrying amount of deferred tax assets is reviewed at each statement of financial position date and reduced to the extent that it is no longer probable that sufficient future taxable profit will be available to allow all or part of the deferred income tax asset to be utilized. Unrecognized deferred tax assets are reassessed at each statement of financial position date and are recognized to the extent that it has become probable that future taxable income will allow the deferred tax asset to be recovered. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the statement of financial position date. Current tax and deferred tax relating to items recognized directly in equity are recognized in other comprehensive income and not in the statement of income. 21 Deferred tax assets and deferred tax liabilities are offset if a legally enforceable right exists to set off current tax assets against current tax liabilities and deferred taxes relate to the same taxable entity and the same taxation authority. Employee Benefits A defined contribution plan is maintained under which the entity pays fixed contributions into a separate entity (a fund) and will have no legal or constructive obligation to pay further contributions if the fund does not hold sufficient assets to pay all employee benefits relating to employees service in the current and prior period. The standard requires an entity to recognize contributions to a defined contribution plan when an employee has rendered service in exchange for those contributions. The fund comes from the Bank's annual contribution based on the total number of employees as of December 31 of each year, which for 2017 amounts to P6.61 million. The fund is being administered by the Provident Fund Office and it is kept separate and distinct from its other funds. The Group maintains a defined contribution plan which provides for estimated pension benefits on its contributory retirement plan covering all regular employees. Leases (a) LBP Group is the lessee (i) Operating lease - leases in which substantially all risks and rewards of ownership are retained by another party, the lessor, are classified as operating leases. Payments, including prepayments, made under operating leases (net of any incentives received from the lessor) are charged to the statement of comprehensive income on a straight-line basis over the period of the lease. (ii) Financial lease - leases of assets where the LBP Group has substantially all the risks and rewards of ownership are classified as finance leases. Finance leases are capitalized at the lease's commencement at the lower of the fair value of the leased property and the present value of the minimum lease payments. Each lease payment is allocated between the liability and the finance charges so as to achieve a constant rate on the finance balance outstanding. The corresponding rental obligations, net of finance charges, are included in deferred credits and other liabilities. The interest element of the finance cost is charged to the statement of comprehensive income over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. (b) LBP Group is the lessor (i) Operating lease - properties leased out under operating leases are included in investment property in the statement of financial position. Rental income under operating leases is recognized in the statement of comprehensive income on a straight-line basis over the period of lease. 22 (ii) Finance lease - when assets are leased out under a finance lease, the present value of the lease payments is recognized as a receivable. The difference between the gross receivable and the present value of the receivable is recognized as unearned income. Lease income under finance lease is recognized over the term of the lease using the net investment method before tax, which reflects a constant periodic rate of return. Revenue Recognition Interest income and fees which are considered an integral part of the effective yield of a financial asset are recognized using the effective interest method, unless collectability is in doubt. Interest is recognized on impaired loans and other financial assets based on the rate used to discount future cash flows to their net present value. Dividend income is recognized when the right to receive payment is established. Gains or losses arising from the trading of securities and foreign currency are recognized in the profit or loss. Generally, commissions, service charges and fees are recognized only upon collection or accrued where there is reasonable degree of certainty as to its collectability. Commitment fees received to originate a loan when the loan commitment is outside the scope of PAS 39 are deferred and recognized as an adjustment to the effective interest rate. If the loan commitment expires, the fee is recognized as revenue on expiry. Borrowing Costs Borrowing costs are expensed when incurred. Standards issued but not yet effective Pronouncements issued but not yet effective are listed below. Unless otherwise indicated, the Group does not expect that the future adoption of the said pronouncements to have a significant impact on its consolidated financial statements. The Group intends to adopt the following pronouncements when they become effective. Effective beginning on or after January 1, 2018 * Amendments to PFRS 2, Share-based Payment, Classification and Measurement of Share-based Payment Transactions The amendments to PFRS 2 address three main areas: the effects of vesting conditions on the measurement of a cash-settled share-based payment transaction; the classification of a share-based payment transaction with net settlement features for withholding tax obligations; and the accounting where a modification to the terms and conditions of a share-based payment transaction changes its classification from cash settled to equity settled. 23 On adoption, entities are required to apply the amendments without restating prior periods, but retrospective application is permitted if elected for all three amendments and if other criteria are met. Early application of the amendments is permitted. This amendment is not applicable to the Group. Amendments to PFRS 4, Insurance Contracts, Applying PFRS 9, Financial Instruments, with PFRS 4 The amendments address concerns arising from implementing PFRS 9, the new financial instruments standard before implementing the forthcoming insurance contracts standard. They allow entities to choose between the overlay approach and the deferral approach to deal with the transitional challenges. The overlay approach gives all entities that issue insurance contracts the option to recognize in other comprehensive income, rather than profit or loss, the volatility that could arise when PFRS 9 is applied before the new insurance contracts standard is issued. On the other hand, the deferral approach gives entities whose activities are predominantly connected with insurance an optional temporary exemption from applying PFRS 9 until the earlier of application of the forthcoming insurance contracts standard on January 1, 2021. The overlay approach and the deferral approach will only be available to an entity if it has not previously applied PFRS 9. The amendments are not applicable to the Group because none of the entities within the Group have activities that are predominantly connected with insurance or issue insurance contracts. * PFRS 9, Financial Instruments PFRS 9 reflects all phases of the financial instruments project and replaces PAS 39, Financial Instruments: Recognition and Measurement, and all previous versions of PFRS 9. The standard introduces new requirements for classification and measurement, impairment, and hedge accounting. PFRS 9 is effective for annual periods beginning on or after January 1, 2018, with early application permitted. Retrospective application is required, but providing comparative information is not compulsory. For hedge accounting, the requirements are generally applied prospectively, with some limited exceptions. The Group assessed that the adoption of PFRS 9 will have a significant effect on the classification and measurement of the Group's financial assets and impairment methodology for financial assets, but will have no impact on the classification and measurement of the Group's financial liabilities. The adoption will also have an effect on the Group's application of hedge accounting and on the amount of its credit losses. The Group is currently assessing the quantitative impact of adopting this standard. 24 * Amendments to PAS 28, Measuring an Associate or Joint Venture at Fair Value (Part of Annual Improvements to PFRSs 2014-2016 Cycle) The amendments clarify that an entity that is a venture capital organization, or other qualifying entity, may elect, at initial recognition on an investment-by- investment basis, to measure its investments in associates and joint ventures at fair value through profit or loss. They also clarify that if an entity that is not itself an investment entity has an interest in an associate or joint venture that is an investment entity, the entity may, when applying the equity method, elect to retain the fair value measurement applied by that investment entity associate or joint venture to the investment entity associate's or joint venture's interests in subsidiaries. This election is made separately for each investment entity associate or joint venture, at the later of the date on which (a) the investment entity associate or joint venture is initially recognized; (b) the associate or joint venture becomes an investment entity; and (c) the investment entity associate or joint venture first becomes a parent. The amendments should be applied retrospectively, with earlier application permitted. The amendment is not applicable to the Group. * Amendments to PAS 40, Investment Property, Transfers of Investment Property The amendments clarify when an entity should transfer property, including property under construction or development into, or out of investment property. The amendments state that a change in use occurs when the property meets, ceases to meet, the definition of investment property and there is evidence of the change in use. A mere change in management's intention for the use of a property does not provide evidence of a change in use. The amendments should be applied prospectively to changes in use that occur on or after the beginning of the annual reporting period in which the entity first applies the amendments. Retrospective application is only permitted if this is possible without the use of hindsight. * Philippine Interpretation IFRIC-22, Foreign Currency Transactions and Advance Consideration The interpretation clarifies that in determining the spot exchange rate on initial recognition of the related asset, expense or income (or part of it) on the derecognition of a non-monetary asset or non-monetary liability relating to advance consideration, the date of the transaction is the date on which an entity initially recognizes the non-monetary asset or non-monetary liability arising from the advance consideration. If there are multiple payments or receipts in advance, then the entity must determine a date of the transactions for each payment or receipt of advance consideration. The interpretation may be applied on a fully retrospective basis. Entities may apply the interpretation prospectively to all assets, expenses and income in its scope that are initially recognized on or after the beginning of the reporting period in which the entity first applies the interpretation or the beginning of a prior reporting period presented as comparative information in the financial statements of the reporting period in which the entity first applies the interpretation. 25 Effective beginning on or after January 1, 2019 * PFRS 16, Leases Under the new standard, lessees will no longer classify their leases as either operating or finance leases in accordance with PAS 17, Leases. Rather, lessees will apply the single-asset model. Under this model, lessees will recognize the assets and related liabilities for most leases on their balance sheets, and subsequently, will depreciate the lease assets and recognize interest on the lease liabilities in their profit or loss. Leases with a term of 12 months or less or for which the underlying asset is of low value are exempted from these requirements. The accounting by lessors is substantially unchanged as the new standard carries forward the principles of lessor accounting under PAS 17. Lessors, however, will be required to disclose more information in their financial statements, particularly on the risk exposure to residual value. 3. Significant Accounting Judgments and Estimates The preparation of the financial statements in compliance with PFRS requires the Group to make estimates and assumptions that affect the reported amounts of resources, liabilities, income and expenses and disclosure of contingent resources and contingent liabilities. Future events may occur which will cause the assumptions used in arriving at the estimates to change. The effects of any change in estimates are reflected in the financial statements as they become reasonably determinable. Estimates and judgments 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 process of applying the Group's accounting policies, Management has made the following judgments, apart from those involving estimations, which have the most significant effect on the amounts recognized in the financial statements: a. Operating lease commitments The entity has entered into commercial property leases on its investment property portfolio. The entity has determined that it retains all the significant risks and rewards of ownership of these properties which are leased out on operating leases. b. Impairment losses on loans and receivables and HTM investments The Group reviews its loans and receivables and HTM investments to assess impairment at least on an annual basis or earlier when an indicator of impairment exists. In determining if an impairment loss should be recorded in the statement of comprehensive income, the Group makes judgments on any observable data which indicates a measurable decrease in the estimated future cash flows of a financial asset 26 from a portfolio before the decrease can be identified with an individual asset in that portfolio. This evidence may include observable data indicating that there has been an adverse change in the payment status of borrowers in a group, or national or local economic conditions that correlate with defaults on assets in the group. Management uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the portfolio when scheduling its future cash flows. The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. The carrying values of receivables from customers and HTM investments of the Group and the Parent are P932,694,753,035 and P929,839,387,530 as of December 31, 2017 and P653,979,538,186 and P651,884,922,377 as of December 31, 2016, respectively. c. Impairment of AFS investments The Group determines that available-for-sale investments are impaired when there has been a significant or prolonged decline in the fair value below its cost. This determination of what is significant or prolonged requires judgment. In making this judgment, the Group evaluates among other factors, the normal volatility in price. In addition, impairment may be appropriate when there is evidence of deterioration in the financial health of the investee, industry and sector performance, changes in technology, and operational and financing cash flows. The carrying values of AFS investments for both the Group and the Parent are P236,393,169,709 as of December 31, 2017 and P290,396,560,740 as of December 31, 2016. d. Classification under HTM investments The classification of non-derivative financial assets with fixed or determinable payments and fixed maturity as held-to-maturity requires significant judgment. In making this judgment, the Group evaluates its intention and ability to hold such investments to maturity. Further, the Group determines whether the investments are quoted or not; unquoted debt investments are classified under Loans and receivables. If the Group fails to keep these investments to maturity other than for specific circumstances - for example, selling an insignificant amount or close to maturity - it will be required to reclassify the entire held-to-maturity portfolio as available-for-sale. The investments would therefore be measured at fair value instead of amortised cost. The carrying values of held-to-maturity investments of the Group and the Parent are P318,240,517,135 and P317,123,977,928 as of December 31, 2017 and P152,818,697,546 and P151,928,198,623 as of December 31, 2016, respectively. Estimation uncertainty The key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. a. Fair value of financial instruments (including derivatives) The fair value of financial instruments that are not quoted in active markets are determined by using generally accepted valuation techniques. Where valuation 27 techniques (for example, models) are used to determine fair values, they are validated and periodically reviewed by the Risk Management Group. All models are reviewed before they are used to ensure that outputs reflect actual data and comparative market prices. To the extent practicable, models use only observable data, however, areas such as credit risk (both own and counterparty), volatilities and correlations require Management to make estimates. Changes in assumptions about these factors could affect reported fair values of financial instruments. b. Useful lives of property and equipment The Group's Management determines the estimated useful lives and related depreciation charges for its property and equipment. The Bank will increase the depreciation charge where useful lives are less than previously estimated, or it will write- off or write-down technically obsolete or non-strategic assets that have been abandoned or sold. The carrying values of property and equipment of the Group and the Parent are P7,744,828,099 and P7,222,632,456 as of December 31, 2017 and P7,145,490,196 and P6,644,893,199 as of December 31, 2016, respectively. 4. Cash and Other Cash Items This account consists of: Group Parent 2017 2016 2017 2016 Cash on hand 31,202,307,803 27,820,116,755 31,202,262,803 27,820,045,782 Checks and other cash items 102,351,901 319,185,867 102,351,901 319,185,867 Returned checks and other cash items 42,674,041 103,786,468 42,674,041 103,786,468 Miscellaneous checks and other cash items 68,445 0 68,445 0 Petty cash fund 8,236,000 6,842,000 7,646,000 6,750,000 Revolving fund 442,011 1,115,064 235,508 235,508 Payroll fund 29,245,995 780,572 29,245,995 780,572 31,385,326,196 28,251,826,726 31,384,484,693 28,250,784,197 5. Due from Bangko Sentral ng Pilipinas This account represents the Parent's demand and special deposits in local currency maintained with BSP to meet reserve requirements and to serve as clearing account for interbank claims consistent with BSP guidelines. 6. Due from Other Banks This account consists of: Group Parent 2017 2016 2017 2016 Deposit with local banks 264,150,453 399,159,167 185,845,776 289,385,587 Deposit with foreign banks 4,920,640,933 11,332,374,784 4,920,640,933 11,332,374,784 5,184,791,386 11,731,533,951 5,106,486,709 11,621,760,371 28 The Group maintains nostro accounts on global basis with 24 foreign depository banks totaling 28 and 29 bank accounts in 2017 and 2016, respectively, the most significant of which are as follows: 2017 2016 1. Wells Fargo Bank, N.A. 1. Wells Fargo Bank, N.A. 2. Standard Chartered Bank, N.Y. 2. Standard Chartered Bank, N.Y. 3. The Bank of New York 3. The Bank of New York 4. Standard Chartered Bank, Frankfurt 4. JP Morgan Chase Bank 5. LandesBank Baden-Wurttemberg 5. LandesBank Baden-Wurttemberg 7. Interbank Loans Receivables This account consists of the Parent's loans receivable from domestic and foreign banks. Interbank loans receivable carry interest rates at December 31, as follows: 2017 2016 Domestic 2.55% to 2.75% 2.55% to 4.11% Foreign 0.55% to 1.90% 0.12% to 0.80% 8. Securities Purchased under Agreements to Resell This account consists of: Group Parent 2016 2016 2017 2016 Domestic Government Securities Purchased under Reverse Repurchase Agreement BSP 50,390,420,809 14,792,325,450 50,390,420,809 14,792,325,450 Private Corporation 1,832,343,520 0 1,832,343,520 0 FCDU Margin Call on the Bank's Report Transactions Derivative with positive 0 11,258,149 0 11,258,149 52,222,764,329 14,803,583,599 52,222,764,329 14,803,583,599 Securities Purchased under Agreements to Resell with BSP interest rate at 3.00 per cent and 4.00 per cent as at December 31, 2017 and 2016, respectively. While Repo with Private Corporation carry interest at 3.50 per cent. 29 9. Held for Trading This consists of: Group Parent 2017 2016 2017 2016 Government Securities - Domestic 11,273,543,561 8,465,657,400 11,273,543,561 8,465,657,400 Private Securities - Domestic 4,318,924 7,227,302 4,318,924 7,227,302 Derivative with positive fair value 2,088,402,244 1,431,700,281 2,088,402,244 1,431,700,281 13,366,264,729 9,904,584,983 13,366,264,729 9,904,584,983 The Held for Trading (HFT) financial assets of the Group carry interest rates at December 31 as follows: 2017 2016 Domestic 1.120% to 10.50% 1.215% to 10.50% Foreign 0% to 0% 0% to 9.625% HFT includes the foreign exchange (FX) risk cover of the Parent's borrowings from multilateral agencies amounting to P1,481,384,331 and P1,213,761,006 in 2017 and 2016, respectively, which is treated as a derivative financial instrument per BSP Monetary Board Resolution No. 1063 dated August 14, 2008. Under a Memorandum of Agreement between the National Government (thru the Department of Finance) and the Parent, the former shall guarantee and assume the FX risk relating to foreign currency denominated borrowings from multilateral agencies (i.e. World Bank, Asian Development Bank, JICA, etc.) which are relent in local currencies. The fair value changes on the FX risk cover are reported immediately in the statement of comprehensive income. As of December 31, 2017, the outstanding notional amount of the FX risk cover amounted to JPY7,047,442,607 and EUR6,932,914. Prior to 2007, the value of the FX risk cover as an option derivative varies on the movement of the foreign exchange rates of the Bills Payable. Beginning 2007, in accordance with Monetary Board Resolution No. 1063 dated August 14, 2008, the Bank applied the standard option valuation model approach which resulted in an increase in the derivative asset amounting to P267,623,325 in 2017 and P69,741,440 in 2016. The derivative with positive fair value comprise of the following: 2017 2016 Foreign Exchange Risk Cover 1,481,384,331 1,213,761,006 Debt Warrants 93,046,402 92,655,060 Forward Contracts 513,971.511 125,284,215 2,088,402,244 1,431,700,281 The Garman-Kohlhagen valuation model used in pricing the derivative Foreign Exchange Risk Cover (FXRC) was found acceptable by the Bangko Sentral ng Pilipinas (BSP) during the conduct of their on-site validation in 2009. 30 10. Available for Sale Investments This account consists of: Group Parent 2017 2016 2017 2016 Domestic Government 171,600,159,961 222,882,526,585 171,600,159,961 222,882,526,585 Private 16,755,064,692 13,825,136,451 16,755,064,692 13,825,136,451 Foreign Government 38,498,020,707 43,680,900,441 38,498,020,707 43,680,900,441 Private securities 2,198,840,173 2,656,479,215 2,198,840,173 2,656,479,215 Investment in non-marketable securities, net of allowance for probable losses of P1,409,212,337 in 2017 and P1,407,712,336 in 2016 7,341,084,176 7,351,518,048 7,341,084,176 7,351,518,048 236,393,169,709 290,396,560,740 236,393,169,709 290,396,560,740 Available-for-sale investments of the Group carry interest rates at December 31 as follows: 2017 2016 Domestic 2.12% to 12.88% 2.12% to 12.88% Foreign 1.50% to 10.63% 0.00% to 10.63% a Available-for-sale investments-Domestic Private include 42,002,750 MERALCO shares of stocks with market value of P13,802,103,650 which are subject of legal disputes. In November 2008, MERALCO unlawfully cancelled the 42,002,750 shares of stocks registered in the name of the Parent and reissued the same in favor of another individual allegedly in compliance with the Demand to Comply issued by the Sheriffs of the Department of Agrarian Reform (DAR) Regional Adjudicator. Of these 42,002,750 shares, 3,366,800 shares had been negotiated by another party; 37,233,200 shares remained quarantined at the Philippine Depository and Trust Corporation (PDTC); and another 1,402,750 shares has not yet been lodged with PDTC. However, the execution sale which was the basis for the issuance of the Demand to Comply was null and void from the beginning because of the Supreme Court's Temporary Restraining Order (TRO) enjoining the sale and the Resolution quashing all acts done pursuant to the Adjudicator's Writ. On December 17, 2008, the DAR Adjudication Board so ordered and required: 1) For MERALCO to cancel the Stock Certificates issued in favor of another party; 2) To restore the ownership of the subject MERALCO shares of stock to the Land Bank of the Philippines and to record the same in the Stock and Transfer Book of MERALCO; and 3) For the Philippine Stock Exchange, Inc. (PSE), the Philippine Depository and Trust Corporation (PDTC), the Securities Transfer Services, Inc. (STS), the Philippine Dealing System Holdings, Corp. and Subsidiaries (PDS Group) and any stockholder, dealer or agent of subject MERALCO shares to forthwith STOP: 31 trading or dealing those shares and/or affecting settlement thereof, inter alia, so as to undo the foregoing contravening acts. The Parent's shares of stock in MERALCO are not part of the Agrarian Reform Fund (ARF), a fund which is solely answerable to the obligation of the National Government pursuant to its Agrarian Reform Program. In accordance with Section 63 of Republic Act 6657 (Comprehensive Agrarian Reform Law), assets of the bank cannot be used to pay for land acquisition as this shall only be sourced from the ARF. In its December 14, 2011 Decision in G.R. No. 188376, the Supreme Court directed MERALCO to return to the Land Bank of the Philippines (LBP) 42,002,750 MERALCO shares of stock. The Supreme Court further declared that the MERALCO shares of stocks are corporate assets of LBP illegally taken to satisfy the payment of just compensation that should have been appropriated only from the ARF. This ruling has become final and executory on September 11, 2012 (Entry of Judgment). LBP immediately filed a motion before the Regional Agrarian Reform Adjudicator (RARAD) for the issuance of a writ of execution to implement the Supreme Court decision. This was, however, vigorously opposed by the other party. On April 1, 2013, the RARAD finally issued the Writ of Execution. As partial compliance, MERALCO delivered to LBP 38,635,950 shares including cash dividends in the total amount of P1,206,955,618; and property dividends consisting of 108,884,212 shares of stock in Rockwell Land Corporation. Still undelivered are 3,366,800 shares, plus accrued cash dividends thereon, amounting to P358,446,362 and P297,086,432 as of December 31, 2017 and 2016, respectively, plus 9,488,394 shares of stock in Rockwell Land Corporation as property dividends, and the unpaid dividends due from the 1,402,750 MERALCO shares amounting to P8,145,010. These 1,402,750 shares are part of the 38,635,950 shares restored to LBP, but certificated in the name of the other party before the Supreme Court decision was partially implemented. To recover fully the MERALCO shares and dividends, LBP sent its June 18, 2014 Letter to the Office of the Regional Adjudicator Region IV - B (MIMAROPA) requesting the office to direct the Sheriff to perform all necessary acts for the full implementation of the April 1, 2013 Writ of Execution such as, but not limited to, the issuance of another Demand to Comply to be served upon MERALCO. LBP again sent the August 15, 2014 Letter to RARAD reiterating its request to expedite the full implementation of the Supreme Court's ruling in G.R. No. 188376 and to prevent further damage to LBP. On February 6, 2015, LBP received the January 24, 2014 Sheriffs Report from the Sheriff of the Regional Adjudicator Region IV-B (MIMAROPA) regarding MERALCO's partial compliance of the December 14, 2011 Supreme Court Decision in G.R. No. 188376. LBP's June 18, 2014 Letter and August 15, 2014 Letter were not acted upon by the RARAD, and no further writ of execution or demand to comply were issued. Since RARAD no longer issued a writ of execution or demand to comply, LBP sent the February 11, 2015 Letter addressed to MERALCO to demand the delivery of the remaining 3,366,800 shares of stocks plus unpaid dividends. MERALCO failed to respond to LBP's demand. 32 On account of the January 24, 2014 Sheriffis Report and MERALCO's failure to respond to LBP's February 11, 2015 Letter, LBP prepared a petition for contempt against MERALCO and its representatives for failing to deliver the remaining 3,366,800 shares of stocks plus accrued dividends and the unpaid dividends due from the 1,402,750 MERALCO shares delivered to LBP, and to compel full compliance with the December 14, 2011 Supreme Court Decision. On March 10, 2015, the petition was sent to the Office of the Government Corporate Counsel (OGCC) for review and signature. OGCC approved the filing of the petition before the Supreme Court. On April 14, 2015, the Petition to Cite Respondents in Indirect Contempt was filed before the Supreme Court. On February 8, 2018, LBP filed its Motion for Early Resolution with Manifestation dated February 6, 2018. On March 5, 2018, the Supreme Court (SC) issued a Resolution which (1) Noted LBP's Motion for Early Resolution with Manifestation dated February 6, 2018; (2) Gave due course to LBP's Petition; and (3) Required parties to submit their respective Memoranda within thirty (30) days from notice thereof. LBP received the aforesaid Resolution on May 15, 2018. On May 28, 2018, LBP forwarded the 32-page LBP Memorandum to the Office of the Government Corporate Counsel (OGCC) for their consideration, review and/or signature. As of this writing, the LBP Memorandum is still within the OGCC but assurance was given that the same will be filed on time counting the deadline from OGCC's receipt of the pertinent Resolution. * The Parent's Accumulated market gains/losses on AFS government and private issues as of December 31, 2017 amounted to P7,570,565,922. Parent's Net unrealized gains/losses on AFS was P5,411,941,378. * The difference in the amount outstanding of the accumulated market gains/losses and net unrealized gains/losses on AFS as of December 31, 2017 in the amount of P2,158,624,544 represents the remaining unamortized portion of the net unrealized gain or loss, that has been recognized directly in equity when the Available- for-sale securities has been reclassified to Held to maturity securities on various dates. The said amount shall be continuously amortized to profit or loss over the remaining life of the Held-to-maturity securities. * Total Investment in Non-Marketable Equity Securities (INMES) account of the Parent includes investment of US$143,146,324 (P6,781,381,460) in Metro Rail Transit Corporation's (MRTC) preference shares and Unsecuritized Equity Rental Payments. In 2008, the National Government, as confirmed through Executive Order No. 855 dated January 18, 2010, instructed LBP and the Development Bank of the Philippines (DBP) to acquire majority interest in MRTC as a result of the recommendation made by the inter- agency Committee tasked to review the MRT Ill project. In the same year, the LBP Board of Directors approved the purchase of MRTC interests in the form of unsecuritized portion of the Equity Rental Payment (ERP), MRT Bonds (See Notes to the Financial Statements No.12) and Preference Shares issued by MRT Ill Funding Corporation. LBP together with DBP completed its acquisition in May 2009, collectively owning around 80 33 per cent of MRTC interests. LBP owns approximately 37.77 per cent economic interest in MRTC. The acquisition cost, book value and percentage of economic interest in MRTC are as follows: Acquisition Cost Book Value As of December 31, As of December 31, 2017 2017 Percentage (In US Dollars) (In US Dollars) in MRTC MRT III Bonds 97,086,626 198,764,801 MRT Ill Preferred Shares 54,000,000 54,000,000 Securitized ERPs 151,086,626 252,764,801 26.65% Unsecuritized ERPs 90,579,859 89,146,324 11.12% 241,666,485 341,911,125 37.77% The decrease in the investment in unsecuritized ERP was brought about by the refund of US$1,433,535 (equally shared by the Bank and DBP) received from a third party in 2010. The refund represents cash that was already in the account of the third party, hence this did not affect the LBP's percentage of economic interest in MRTC. Another refund of US$1,381,747 was received by the Bank and DBP in early 2011 representing Accrued ERPs. 11. Held to Maturity Investments This account consists of: Group Parent 2017 2016 2017 2016 Government Domestic 305,478,395,955 140,122,852,716 304,414,216,748 139,232,353,793 Foreign 7,483,993,748 7,548,562,307 7,483,993,748 7,548,562,307 Private Domestic 4,660,033,453 4,525,200,772 4,607,673,453 4,525,200,772 Foreign 618,093,979 622,081,751 618,093,979 622,081,751 318,240,517,135 152,818,697,546 317,123,977,928 151,928,198,623 Held to maturity investments of the Group carry interest rates at December 31 as follows: 2017 2016 Domestic 2.12% to 18.25% 2.12% to 18.25% Foreign 1.50% to 10.63% 3.70% to 11.63% 34 12. Loans and Receivables This account consists of: Group Parent 2017 2016 2017 2016 Interbank loans receivable 23,381,523,497 13,933,991,858 23,381,523,497 13,933,991,858 Allowance for credit losses (494,034,413) (377,489,237) (494,034,413) (377,489,237) 22,887,489,084 13,556,502,621 22,887,489,084 13,556,502,621 Loans to Government 85,003,110,577 75,362,941,773 86,610,312,991 77,323,717,031 Allowance for credit losses (58,695,811) (39,254,484) (58,695,811) (37,475,575) 84,944,414,766 75,323,687,289 86,551,617,180 77,286,241,456 Agrarian Reform and other Agriculture Loans 94,308,830,739 82,676,676,393 94,296,074,627 82,656,139,911 Allowance for credit losses (501,725,947) (813,149,563) (492,406,326) (804,241,345) 93,807,104,792 81,863,526,830 93,803,668,301 81,851,898,566 Microfinance Loans 16,711,201,915 15,195,660,709 16,711,201,915 15,195,660,709 Allowance for credit losses (304,605,896) (162,299,417) (304,605,896) (162,299,417) 16,406,596,019 15,033,361,292 16,406,596,019 15,033,361,292 SME/MSE Loans 62,161,803,998 50,434,960,772 61,535,264,304 50,340,269,990 Allowance for credit losses (1,546,538,791) (1,265,855,622) (1,476,935,402) (1,264,527,250) 60,615,265,207 49,169,105,150 60,058,328,902 49,075,742,740 Contract to Sell 1,086,890,095 1,213,186,524 1,086,890,095 1,213,186,524 Allowance for credit losses (95,852,304) (67,094,207) (95,852,304) (67,094,207) 991,037,791 1,146,092,317 991,037,791 1,146,092,317 Loans to Private Corporation 287,616,688,319 221,228,865,584 286,699,962,153 219,809,378,837 Allowance for credit losses (1,502,014,465) (2,098,313,121) (1,413,436,875) (1,958,547,377) 286,114,673,854 219,130,552,463 285,286,525,278 217,850,831,460 Loans to Individuals for Housing Purposes 5,298,893,903 4,594,431,303 5,298,893,903 4,594,431,303 Allowance for credit losses (143,956,974) (113,440,784) (143,956,974) (113,440,784) 5,154,936,929 4,480,990,519 5,154,936,929 4,480,990,519 Loans to Individual for Consumption 23,590,846,852 20,927,918,069 23,590,846,852 20,927,918,069 Allowance for credit losses (664,885,163) (265,346,014) (664,885,163) (265,346,014) 22,925,961,689 20,662,572,055 22,925,961,689 20,662,572,055 Loans to Individual for Other Purposes 2,163,769,452 3,265,151,628 1,955,862,989 3,038,124,371 Allowance for credit losses (27,766,950) (30,993,589) (23,887,146) (26,974,555) 2,136,002,502 3,234,158,039 1,931,975,843 3,011,149,816 Loans & Receivable-Others- Non Residents-FCDU 0 42,617,143 0 42,617,143 595,983,482,633 483,643,165,718 595,998,137,016 483,997,999,985 Accrued interest receivable 4,317,342,367 3,682,585,380 4,312,242,942 3,679,060,625 Allowance for credit losses (207,661,804) (208,095,604) (207,661,804) (208,095,604) 4,109,680,563 3,474,489,776 4,104,581,138 3,470,965,021 Accounts receivable 1,577,848,430 1,880,863,405 1,386,156,007 1,777,505,545 Allowance for credit losses (837,140,413) (939,519,428) (800,117,462) (895,077,510) 740,708,017 941,343,977 586,038,545 882,428,035 Sales contract receivable 1,106,403,155 1,025,704,678 1,170,706,548 1,010,467,301 Allowance for credit losses (23,536,124) (65,928,195) (23,536,124) (65,928,195) 1,082,867,031 959,776,483 1,147,170,424 944,539,106 Due from ARF 107,546,452 44,812,459 107,546,452 44,812,459 Unquoted debt securities 11,489,212,785 11,343,693,075 11,489,212,785 11,343,693,075 35 Group Parent 2017 2016 2017 2016 Allowance for credit losses (717,276,758) (727,713,927) (717,276,758) (727,713,927) 10,771,936,027 10,615,979,148 10,771,936,027 10,615,979,148 Lease contract receivable 1,686,688,619 1,509,819,094 0 0 Allowance for credit losses (28,673,442) (28,546,015) 0 0 1,658,015,177 1,481,273,079 0 0 614,454,235,900 501,160,840,640 612,715,409,602 499,956,723,754 Interest rates on loans in 2017 range from 1.00 per cent to 15.00 per cent for peso denominated loans and from 1.038 per cent to 6.88 per cent for foreign currency denominated loans. Unquoted debt securities of the Parent classified as loans consist of government and private securities amounting to P189,586,384 and P10,582,349,643, respectively, as of December 31, 2017 and P134,033,530 and P10,481,945,618, respectively, as of December 31, 2016. The account includes Metro Rail Transit Corporation's (MRTC) Bonds with book value of $198,764,801 (P9,924,326,530) which form part of LBP's interests in the said company purchased in accordance with the approval of the Bank's Board of Directors in November 2008 and broken down as follows: Face Value Book Value USD USD PHP FX Regular 206,203,247 143,279,892 7,153,965,015 FCDU 82,390,198 55,484,909 2,770,361,515 288,593,445 198,764,801 9,924,326,530 Covered by Memorandum of Agreement (MOA) signed on August 22, 1988 between LBP and Bangko Sentral ng Pilipinas, the unpaid obligations of rural banks to BSP were converted into LBP equity investments to said rural banks. Accordingly, these became non-interest bearing obligations of LBP with BSP and all expenses or losses, if any, which LBP may suffer under the conversion scheme, shall be for the account of BSP. Outstanding equity investments on closed rural banks and its corresponding borrowings account from BSP have been excluded from Unquoted Debt Securities Classified as Loans account and from the Bills Payable account, respectively, provided that these accounts have already been written-off by BSP. Allowance for credit losses The details of allowance for credit losses on loans of the Parent are: 2017 2016 Balance, January 1 5,077,435,761 4,434,160,030 Provision 1,097,966,193 10,835,402 Write-offs (518,577,316) (260,717,891) Transfers and other adjustments (488,128,328) 893,158,220 Balance, December 31 5,168,696,310 5,077,435,761 36 As of December 31, 2017 and 2016, the breakdown of Gross Loans as to secured and unsecured follows: Parent 2017 2016 Amount % Amount Secured loans: Guarantee of the Republic of the Philippines 74,009,347,617 12.31 62,872,554,788 12.86 Various guarantees 171,630,612,724 28.55 140,926,345,944 28.81 Various mortgages 201,152,010,569 33.46 155,918,505,389 31.88 446,791,970,910 74.32 359,717,406,121 73.55 Unsecured loans 154,374,862,416 25.68 129,358,029,625 26.45 Gross loan at amortized cost 601,166,833,326 100.00 489,075,435,746 100.00 Non-performing loans (NPLs) included in the total loan portfolio of the Parent are presented below as net of specific allowance for credit losses on NPLs in compliance with BSP Circular No. 772 and 941, which amends regulations governing non- performing loans. 2017 2016 Total NPLs 6,599,423,133 7,173,190,276 Allowance for credit losses (4,409,334,072) (5,077,435,761) Net NPLs 2,190,089,061 2,095,754,515 13. Investment in Subsidiaries This account consists of the following investments in subsidiaries which are 100 per cent owned by the Parent and are accounted for at cost: Name Amount LBP Leasing and Finance Corporation (formerly LBP Leasing Corporation) 310,252,630 LBP Insurance Brokerage, Inc. 52,500,000 LBP Resources and Development Corporation 51,467,436 Masaganang Sakahan, Inc. 24,554,941 438,775,007 14. Investment Property This account consists of: Group 2017 2016 As restated Land Building Total Land Building Total At Cost At January 1 5,324,096,900 2,751,086,499 8,075,183,399 5,140,496,096 2,798,310,365 7,938,806,461 Additions/(Disposals) (671,694,313) (116,272,443) (787,966,756) 183,600,804 (47,223,866) 136,376,938 Transfers/Adjustment (6,735,000) (9,454,000) (16,189,000) 0 0 0 At December 31 4,645,667,587 2,625,360,056 7,271,027,643 5,324,096,900 2,751,086,499 8,075,183,399 Accumulated depreciation and impairment At January 1 719,348,362 1,067,699,132 1,787,047,494 381,363,319 1,151,415,498 1,532,778,817 37 Group 2017 2016 As restated Land Building Total Land Building Total Depreciation 0 125,027,255 125,027,255 0 113,958,857 113,958,857 Transfers/Adjustment 0 (213,147,246) (213.147.246) 335,034,811 (178,902,576) 156,132,235 Impairment (169.124,837) 57.225,410 (111,899,427) 2,950.232 (1.8,772.647) (15,822.415) At December 31 550,223,525 1.036;804,551 1,587.028.075 719,348,362 1,067,699.132 1.787.047.494 Net book value 4,095,444,062 1,588,555,505 5,683.999,557 4,604.748,538 1,683.387,367 6.288.135.905 Parent 2017 2016 As restated Land Building Total Land Building Total At Cost At January 1 5,227,972,998 2,667,188,503 7,895,161,501 5,061,545,050 2,714,412,369 7,775,957,419 Additiorns/(D1sposals) (666,609,681) (126,913,220) (793,522,901) 166,427,948 (47,223,866) 119,204,082 At December 31 4,561,363,317 2,540,275,283 7,101,638,600 5,227,972,998 2,667,188,503 7,895,161,501 Accumulated depreciation and impairment At January 1 713,010,845 1,022,242,560 1,735,253,405 377,976,034 1,107,592,295 1,485,568,329 Depreciation 0 123,455,943 123,455,943 0 112,325,488 112,325,488 Transfers/Adjustment 0 (212,367,291) (212,367,291) 335,034,811 (178,902,576) 156,132,235 Impairment (173,409,264) 57,094,804 (116,314,460) 0 (18.772.647) (18772.647) At December 31 539601,581 990,426,016 1,530,027,597 713,010,845 1,022,242,560 1,735,253,405 Net book value 4,021,761,736 1,549,849,267 5,571,611,003 4,514,962,153 1,644,945,943 6,159,908,096 Depreciation of the Group amounting to P125,027,255 and P113,958,857and of the Parent amounting to P123,455,943 and P112,325,488 in 2017 and 2016, respectively, are included in depreciation and amortization expense in the statement of comprehensive income. Investment properties acquired through foreclosure as of December 31, 2017 which are still within the redemption period by the borrowers and with on-going court case amounted to P148,455,156 and P1,297,840,959, respectively. Properties amounting to P44,392,431 are agricultural lands covered by the government's agrarian reform program. 15. Property and Equipment This account consists of: Group Leasehold Rights Transportation Transportarlon Total Building Under and and Furniture and Equipment Land Construction Buildings Improvements Equipment Office Equipmet Under Leae Om 2017 2016 At Cost At January 1 620,012,136 157,739,838 4,633,083,329 824,588,177 80,823,745 7,280,336,210 787,721,390 83,932,640 14,468,237,465 13.663,503,858 Addibons 7,543,074 95,763,429 113,572,330 170,582,525 4,841,060 1,129,298,647 52,631,890 38,013,167 1,612,246,122 1,416,220,224 Disposals (10,101,424) (110,000) (39,534) (20,382,223) (5,746,905) (397,033,402) (27,948,737) (6,390,264) (467,752,489) (276,648,426) Transfers (1,587,273) (75,062,955) 2,535,407 (24,887,043) (19,473,139) (97,031,284) 0 (15,937,597) (231.443,884) (334,838,191) At December 31 615866.513 178.330,312 4,749.151.532 949,901,436 60.444,761 7,915.570171 812.404.543 99,617.946 15.381.287.214 14.468,237.465 Accumulated Depreciation, Amortization & Impairment loss At January 1 0 0 2,006,908,411 354,170,535 54,343,428 4,564,581,530 300,513,171 78,554,954 7,299,072,029 6,870,003,779 Depreciation & amortizaton C 0 67,100,072 75,057,989 1,733,774 652,842,115 16,224,026 1,803,474 814,761,450 697,778,037 Disposals a 0 (140,877) (6,296,740) (5,600,052) (349,500,753) (7,299,900) (3,056,830) (371,895,152) (252,584,074) Transfers/Adjustments 0 0 (98,183,940) (37,204,714) (9,929,799) (9,432,914) 14,479,838 8,993,454 (131.278.075) (16.125.713) AtDecember31 0 0 1.975,83.666 385.727,070 40.547.351 4798489,978 323.917,135 6295.052 761.60.292 7.299.072,029 Allow for Losses 0 0 7,238,932 909,444 2,825,144 14,564,287 0 261,056 25.798,663 23,675,240 Netbookvalue 615.866,513 178.330.312 2,766.228.934 563,264,922 17,072,266 3,102.515,906 488.487.408 13.061.838 7.744,828,099 7.145.490.196 38 Parmt Transportation Building Under Leasehold Rights Transportation and Furniture and Equipment Total Land Construction Buildings and imapoummsl Equint Office Equipment Under Lease Others 2017 2016 At Cost At January 1 609,230,136 157,739,838 4,534,635,005 824,355,232 61,423,418 7,249,911,935 335,152,339 67,268,167 13,839,716,070 13,003,725,946 Additions 7,543,074 95,763,429 113,529,220 168,606,200 3,585,367 1,125,522,503 1,835,000 35,260,494 1,551,645,287 1,407,190,200 Disposals (10,101,424) (110,000) (39,534) (20,382,223) (5,746,905) (396,621,881) 0 (6,355,864) (439,357,831) (236,392,251) Transfers (1.587,273) (73,823,967) 2,478,708 (24.659.049) (19,044,046) (96,942,863) 0 (15.937.597) (229.516.087) (334,807.825) AtDecember31 605,084,513 179,569,300 4,650,603,399 947,920,160 40,217,834 7,881,869,694 336,987,330 80.235200 14,72,487,439 13,839)16,070 Accumulated Depreciation & Amortization AtJanuary 1 0 0 1,966,202,168 353,999,240 42,996,318 4,483,785,166 257,919,822 66,244,917 7,171,147,631 6,738,268,458 Depreciation & amortization 0 0 62,912,745 75,053,038 197,781 650,947,752 8,660,790 0 797,772,106 680,572,893 Disposals 0 0 (140,877) (6,296,740) (5,600.052) (349,500,753) 0 (3.056,830) (364.595,252) (231,580,008) TransfsOwAdjustments 0 6 (98:183,942) (37.033.419) (9AS.04B (9.06.248) 14.479.836 8,993,464 (130.268,3651 (16,13,712) At December 31 0 0 1,930,790,094 385,722,119 28,137,999 4,776,163,917 281,060,450 72,181,541 7,474,056,120 7,171,147,631 Allow for Losses 0 D 7,230.932 909.444 2,825,144 14,564,287 0 261,058 25,798.863 23,675.240 Net book value 605,084,613 179,569,300 2,712,574.a73 551.256.57 6.254,691 3.091,141,490 65,926,689 7,792,663 7,224632.456 5,644.893,199 Depreciation and amortization of the Group amounting to P814,761,450 and P697,778,037 and of the Parent amounting to P797,772,106 and P680,572,893 in 2017 and 2016, respectively, are included in depreciation and amortization expense in the statement of comprehensive income. Office equipment, furniture and vehicles with carrying amount of P125,586,902 and P18,917,775 in 2017 and 2016, respectively, are temporarily idle. The carrying amounts of properties which are held for disposal are P45,737,950 and P95,200,366 in 2017 and 2016, respectively. 16. Other Assets This account consists of: Group Parent 2017 2016 2017 2016 As restated As restated Accrued interest receivable 4,729,809,072 4,249,564,877 4,729,809,072 4,249,564,877 Sundry debits 3,300,224,422 1,132,214,119 3,300,224,422 1,132,214,119 Prepaid expenses 849,626,810 703,310,727 863,054,159 695,565,609 Other intangible assets 1,274,390,786 995,115,732 1,269,754,705 990,649,656 Documentary stamps 50,995,687 13,642,766 50,995,687 13,642,766 Stationery & supplies on hand 87,296,290 121,214,793 85,706,112 119,015,779 Accounts receivable 142,526,049 124,220,000 110,683,017 120,395,981 Inter-office float items 1,849,331 6,380,704 1,849,331 6,380,704 Others 2,541,645,426 1,894,380,216 2,472,228,495 1,832,872,893 Allowance for credit losses (36948,489) (37,078,489) (36,948,489) (37,078,489) 12,941,415,384 9,202,965,445 12,847,356,511 9,123,223,895 39 17. Allowance for Credit Losses Changes in the allowance for credit losses of the Parent are as follows: 2017 2016 Balance at beginning of year: Loan portfolio 5,077,435,761 4,434,160,030 Receivables from customers and Other assets 4,156,258,597 4,045,670,340 9,233,694,358 8,479,830,370 Provisions charged to operations 1,109,626,624 118,370,022 Accounts charged off and others (518,577,316) (130,652,996) Transfer/adjustments (540,724,100) 766,146,962 50,325,208 753,863,988 Balance December 31 9,284,019,566 9,233,694,358 Balance at end of year: Loan portfolio (Note 12) 5,168,696,310 5,077,435,761 Receivables from customers and other assets 4,115,323,256 4,156,258,597 9,284,019,566 9,233,694,358 With the foregoing level of allowance for credit losses, Management believes that the Parent has sufficient allowance to cover any losses that the Parent may incur from the non-collection or non-realization of its loans and receivables and other risk assets. The account includes provision for credit losses/impairment losses of the Parent as follows: 2017 2016 Loans and receivables 1,097,966,193 10,835,402 Other loans and receivables 3,939,242 4,125,283 Property and equipment 2,123,622 2,212,599 Others 5,597,567 101,196,738 1,109,626,624 118,370,022 18. Deposit Liabilities This account consists of: Group Parent 2017 2016 2017 2016 Domestic Demand deposits 709,255,131,727 558,433,859,126 709,508,966,307 558,645,451,456 Savings deposits 629,561,441,753 604,692,020,353 629,561,456,064 604,832,103,495 Time certificate of deposits 639,712,721 740,236,375 639,712,721 740,236,375 Long Term Negotiable Certifmcate of Deposits 11,000,000,000 11,000,000,000 11,000,000,000 11,000,000,000 1,350,456,286,201 1,174,866,115,854 1,350,710,135,092 1,175,217,791,326 Foreign Demand deposits -FCDU/EFCDU 0 0 0 0 Savings deposit -FCDU/EFCDU 16,209,512,264 16,660,725,911 16,209,512,264 16,661,180,162 Time certificate of deposit- FCDU/EFCDU 58,553,708,641 44,098,363,715 58,553,708,641 44,098,363,715 74,763,220,905 60,759,089,626 74,763,220,905 60,759,543,877 1,425,219,507,106 1,235,625,205,480 1,425,473,355,997 1,235,977,335,203 40 Domestic deposit liabilities earn annual fixed interest rates ranging from 0.25 to 3.75 per cent in 2017 and 2016. Foreign deposit rates range from 0.31 to 1.12 per cent and from 0.15 to 2.50 per cent in 2017 and 2016, respectively. In 2017 and 2016, P1,046,327,990,132 or 73 per cent and P830,665,634,534 or 67 per cent, respectively, of the Parent's deposit portfolio came from the government while the rest came from private depositors. 19. Bills Payable This account consists of: Group Parent 2017 2016 2017 2016 Bangko Sentral ng Pilipinas 62,381,800 64,110,213 62,381,800 64,110,213 Domestic borrowings 998,416,153 542,684,470 203,416,153 326,684,470 Foreign borrowings 24,314,309,706 22,951,863,236 24,314,309,706 22,951,863,236 Foreign interbank borrowings 0 3,480,400,000 0 3,480,400,000 Foreign repo borrowings 0 3,212,275,733 0 3,212,275,733 25,375,107,659 30,251,333,652 24,580,107,659 30,035,333,652 The breakdown of Bills payable (foreign borrowings) is as follows: Creditor/Funder 2017 2016 World Bank/IBRD 11,251,244,042 9,888,905,728 Asian Development Bank (ADB) 526,700,409 566,749,295 Japan International Cooperation Agency (JICA) 10,990,095,259 11,134,289,635 Kreditanstalt fur Wiederaufbau (KfW) 1,546,269,996 1,361,918,578 24,314,309,706 22,951,863,236 The total foreign borrowings of P24,314,309,706 is guaranteed by the National Government. Foreign borrowings relent in local currency amounting to P13,807,611,673 are provided with foreign exchange risk cover (FXRC) by the National Government. This has historical value of P13,387,892,033. The Bank's foreign borrowings from multilateral and bilateral agencies have maturities ranging from 15 to 40 years. Interest rates on foreign and domestic borrowings in 2017 range from 0.01 to 2.70 per cent and 0.75 to 4.75 per cent, respectively, while for 2016, the rates range from 0.53 to 2.70 per cent and 0.75 to 4.75 per cent, for foreign and domestic borrowings, respectively. 20. Other Liabilities This account consists of: Group Parent 2017 2016 2017 2016 Accrued interest, fringe benefits, taxes and other expense payable 5,456,637,031 3,789,817,883 5,981,003,923 3,694,835,040 Accounts payable 21,393,744,012 10,890,952,708 21,190,391,391 11,032,008,827 41 Group Parent 2017 2016 2017 2016 Due to Agrarian Reform Fund 200,709,929 206,742,900 200,709,929 206,742,900 Sundry credits 1,180,757,638 916,312,733 1,180,757,638 916,312,733 Unearned income 29,963,772 36,492,648 32,984,303 36,601,557 Withholding tax payable 237,128,397 276,535,509 234,805,308 274,195,133 Miscellaneous liabilities 4,766,310,850 3,429,780,765 4,735,230,233 3,724,218,339 Others 1,574,252,373 1,278,266,063 1,121,567,976 863,960,492 34,839,504,002 20,824,901,209 34,677,450,701 20,748,875,021 21. Income and Other Taxes Under Philippine tax laws, the Regular Banking Unit of the Parent is subject to percentage and other taxes (presented as Taxes and Licenses in the statement of comprehensive income) as well as income taxes. Percentage and other taxes paid consist principally of gross receipts tax and documentary stamp taxes. Income taxes include the corporate income tax and final withholding tax on gross interest income from government securities, deposits and other deposit substitutes. These income taxes and deferred tax benefits are presented in the statement of comprehensive income either Provision for or (Benefit from) Income Tax. Based on Republic Act No. 9337, which was passed into law in May 2005 and amended certain provisions of the National Internal Revenue Code of 1997, the normal corporate income tax rate is 30 per cent effective January 1, 2009. The interest allowed as deductible expense is reduced by an amount equivalent to 33 per cent of the interest income subjected to final tax. FCDU offshore income (income from non-residents) derived by depository banks under the expanded foreign currency deposit system is exempt from income tax while gross onshore income (income from residents) from other FCDUs and other depository banks under the Expanded Foreign Currency Deposit System, including interest income from foreign currency loans, is subject to 10 per cent final tax. Interest income derived by resident individual or corporation on deposits with other FCDUs and Offshore Banking Units (OBU) are subject to 7.5 per cent final tax. The provision for/(benefit from) income tax consists of: Group Parent 2017 2016 2017 2016 As restated As restated Current: Normal income tax (NIT) 906,519,486 477,709,852 805,019,191 380,141,248 Income tax-final 1,503,541 1,197,686 0 0 908,023,027 478,907,538 805,019,191 380,141,248 Deferred (490,870,100) (10,523,065) (485,406,737) (15,056,993) 417,152,927 468,384,473 319,612,454 365,084,255 42 The reconciliation of the provision for income tax computed at the statutory tax rate and actual provision is as follows: Group Parent 2017 2016 2017 2016 As restated As restated Statutory income tax 4,810,991,912 4,447,280,935 4,747,493,247 4,341,160,733 Additions to (reductions in) income taxes arising from: Non-deductible interest expense 2,178,034,747 1,828,135,265 2,178,021,352 1,828,120,028 Other deductible/Non-deductible expense 390,064,318 134,489,779 390,061,416 120,475,251 FCDU income (989,519,824) (839,624,870) (989,519,824) (839,624,870) Tax exempt & tax paid income (5,622,687,915) (5,071,480,249) (5,610,414,044) (5,061,398,161) Others (349,730,311) (30,416,387) (396,029,693) (23,648,726) 417,152,927 468,384,473 319,612,454 365,084,255 The net deferred income tax asset reported by the Parent for 2017 amounted to P2,808,807,997 and P2,270,589,542 for CY 2017 and 2016, respectively while the subsidiaries recognized deferred tax assets of P64,874,148 and P63,094,853 for CY 2017 and 2016, respectively. Below are the temporary differences for which deferred tax asset (net of deferred tax liabilities) recognized by the Parent because Management believes that it is probable that future taxable profits will be available against which the asset can be utilized. Parent 2017 2016 As restated Deferred tax asset: Allowance for credit losses 2,681,985,562 2,255,532,549 Accrued expenses 200,112,888 67,868,710 Unrealized loss on foreign exchange/financial assets & liabilities-held for trading 149,709,634 0 3,031,808,084 2,323,401,259 Deferred tax liability: Unrealized gain on financial assets and liabilities-held for trading 223,000,087 35,704,090 Unrealized gain on foreign exchange 0 17,107,627 223,000,087 52,811,717 2,808,807,997 2,270,589,542 Supplementary Information Required Under Revenue Regulations (RR) Nos. 19- 2011 and 15-2010 Supplementary information Under RR No. 19-2011 In addition to the required supplementary information under RR No. 15-2010, on December 9, 2011, the BIR issued RR No. 19-2011 (and as further amended by RR No. 2-2014 dated January 24, 2014) which prescribes the new annual income tax forms that will be used for filing effective taxable year 2011. Specifically, companies are required to disclose certain tax information in their respective notes to financial statements. For the taxable year December 31, 2017, the Parent Company reported the following revenues and expenses for income tax purposes: 43 Revenues Services/operations 27,133,663,390 Non-operating and taxable other income: Trading and securities gain (loss) 964,069,418 Service charges, fees and commissions 1,752,531,358 Profit from assets sold 536,127,315 Income from trust operations 165,133,215 Others 811,164,690 Total Revenues 31,362,689,386 Expenses Cost of services: Compensation and fringe benefits 6,883,811,430 Others 7,674,667,356 14,558,478,786 Itemized deductions: Compensation and fringe benefits 4,055,406,810 Taxes and licenses 3,030,589,138 Documentary stamps used 2,145,955,870 Security, messengerial and janitorial 734,312,410 Bad debts 517,171,215 Information technology expenses 480,178,811 Communications, light and water 416,303,911 Depreciation and amortization 369,644,076 Management and professional fees 311,486,826 Fees and commission 284,196,620 Advertising 260,999,157 Transportation and travel 213,214,024 Rent 150,246,226 Trainings and seminars 144,785,982 Representation and entertainment 137,565,109 Insurance 107,018,006 Repairs and maintenance 98,374,384 Others 663,364,722 14,120,813,297 Total Expenses 28,679,292,083 Supplementary information Under RR No. 15-2010 On November 25, 2010, the BIR issued RR No. 15-2010 to amend certain provisions of RR No. 21-2002 which provides that starting 2010 the notes to financial statements shall include information on taxes, duties and license fees paid or accrued during the taxable year. I. The documentary stamp tax (DST) on loan instruments and other transactions subject thereto for the tax period 2017 are as follows: Documents I transactions DST Paid Debt instruments, bonds, certificate of time deposits 3,262,390,154 Mortgages, pledges, deed of assignments/trust 41,149,920 Foreign bills of exchange, letters of credit 68,415,101 44 Documents I transactions DST Paid Acceptance of bills of exchange payable in the Philippines 23,274,633 Bank, checks, drafts and telegraphic transfer/others 24,550,747 3,419,780,555 II. All other taxes, local and national, paid for 2017: National Percentage taxes (GRT) 2,935,727,525 Fringe benefits tax 9,502,607 National taxes 1,244,717 2,946,474,849 Local Real estate tax 50,074,368 Local business tax 36,379,278 Mayor's Permit/Municipal License/Other Regulatory Fees/License Permit 84,498,120 Other local taxes 12,087,257 183,039,023 3,129,513,872 Ill. The amount of withholding taxes paid/accrued for the year amounted to: Tax on Compensation and benefits 935,860,783 Creditable withholding taxes 141,329,350 Final withholding taxes 1,685,178,786 2,762,368,919 IV. Taxes withheld by client on their income payments to the Bank were claimed as tax credits: Tax Credits against income Tax 2,391,615,008 Tax Credits against Gross Receipts Tax 337,392,062 2,729,007,070 22. Retirement Cost The Parent has separate funded contributory defined contribution retirement plans covering all its officers and regular employees. Under the retirement plans, all concerned officers and employees are entitled to cash benefit after satisfying certain age and service requirements. Total expenses charged against operations in 2017 and 2016 amounted to P595,744,261 and P592,211,966, respectively. 45 23. Lease Contracts Operating lease commitments - as lessee Future minimum rentals payable under non-cancellable operating leases as at December 31 are as follows: Parent 2017 2016 Within one year 432,634,240 376,950,983 After one year but not more than five years 1,030,923,809 903,105,446 More than five years 583,407,886 348,199,927 2,046,965,935 1,628,256,356 Operating lease commitments - as lessor Future minimum rentals receivable under non-cancellable operating leases as at December 31 are as follows: Parent 2017 2016 Within one year 7,403,215 17,232,221 After one year but not more than five years 10,135,869 11,598,817 More than five years 0 3,522,472 17,539,084 32,353,510 24. Related Party Transactions In the ordinary course of business, the Parent has loan transactions with certain directors, officers, stockholders and related interests (DOSRI). Existing banking regulations limit the amount of individual loans to DOSRI, 70 per cent of which must be secured by their respective deposits and book value of their respective investments in the Parent. In the aggregate, loans to DOSRI generally should not exceed the respective total unimpaired capital or 15 per cent of total loan portfolio, whichever is lower, of the Parent. BSP Circular No. 547 dated September 21, 2006 prescribed the DOSRI rules for government borrowings in government-owned or controlled banks. Said circular considered as indirect borrowings of the Republic of the Philippines (ROP), loans, other credit accommodations and guarantees to: (a) Government-Owned and Controlled Corporations (GOCCs); and (b) Corporations where the ROP, its agencies/departments/ bureaus, and/or GOCCs own at least 20 per cent of the subscribed capital stocks. Total outstanding DOSRI loans of the Parent as of December 31, 2017 amounted to P77,827,579,966 of which P77,550,124,180 are government borrowings covered by BSP Circular No. 547. 46 The following are the significant transactions of the Parent with related parties: 2017 2016 Key Others (GOCCs, Key Others (GOCCs, Management Provident Fund Management Provident Fund Personnel Subsidiaries and Rural Banks) Total Personnel Subsidiaries and Rural Banks) Total Receivables from customers 21,617,258 1,736,964,454 77,805,962,709 79,564,544,421 14,240,547 2,056,762,078 67,420,239,682 69,491,242,307 Depositliabilities 253,848,891 0 253,848,891 0 352,129,723 0 352,129,723 Otherliabilities 791,071,980 0 791,071,980 0 664,282,958 0 664,282,958 21,617,258 2,781,885,325 77,805,962,709 80,609.465,292 14,240,547 3,073,174,759 67,420,239,682 70,507,654,988 The following are the percentage of DOSRI loans: 2017 2016 DOSRI to Total Loans 12.95% 13.79% Unsecured DOSRI to Total DOSRI 1.64% 3.29% Past due DOSRI to Total DOSRI 0 0 Non-performing DOSRI to Total DOSRI 0 0 The following are the significant transactions with subsidiaries: 2017 2016 Sales/(Purchases) (56,764,955) (50,089,161) Interest income 58,169,133 62,729,684 Interest expense (114,685,640) (120,560,858) Lease expense (50,932,708) (46,140,175) Other income 10,249,108 17,826,349 Other expenses (180,283,148) (342,779,942) Transactions with other related parties: Compensation of key management personnel: Group Parent 2017 2016 2017 2016 Short-term employee benefits 111,340,791 99,042,860 92,988,227 81,219,717 Post-employment benefits 26,442,267 20,994,781 25,372,307 20,667,833 Other long-term benefits 38,992,197 31,750,375 38,992,197 31,750,375 176,775,255 151,788,016 157,352,731 133,637,925 Terms and conditions of transactions with related parties: The sales to and purchases from related parties are made at normal market prices and settlement is made in cash. There have been no guarantees provided or received for any related party receivables or payables. For the years ended December 31, 2017 and 2016, the Group has not made any provision for doubtful accounts relating to amounts owed by related parties. This assessment is undertaken each financial year through examination of the financial position of the related party and the market in which the related party operates. 47 25. Trust Operations The Parent is authorized under its Charter to offer trust services and administer trust funds through its Trust Banking Group. The Parent accepts funds entrusted by clients and undertakes as trustee to invest such funds in acceptable securities or other investment outlets. Trust funds or assets under Management of the Parent under its trust operations amounted to P232,391,242,067 and P101,607,181,197 as at December 31, 2017 and 2016, respectively. Summary of Assets under Management is as follows: 2017 2016 (Unaudited) (Unaudited) Special Purpose Trust 470,422,546 772,214,891 Other Fiduciary Accounts 187,518,284,717 58,178,627,791 Agency 33,600,066,906 32,993,894,750 Trust 10,802,467,898 9,662,443,765 232,391,242,067 101,607,181,197 In compliance with the requirements of the General Banking Law, government securities with total face value of P850,000,000 in 2017 and 2016 are deposited with BSP as security for the Parent's faithful performance of its fiduciary obligation. 26. Derivative Financial Instruments For Derivative instruments, fair values are estimated based on quoted market prices, prices provided by independent parties or values determined using accepted valuation models with observable inputs. Freestandinq Derivatives Currency Forwards As of December 31, 2017, the outstanding notional amount of the currency sell forward/swap agreements with maturity of less than six months amounted to P24,267,554,492 with market value of P23,741,802,527. Over the Counter Interest Rate Option Contract Bought As of December 31, 2017, the outstanding notional amount of the debt warrants bought to mature on November 29, 2032 amounted to P76,942,217 with market value of P93,046,402. Foreign Exchange (FX) Risk Cover The foreign exchange risk cover on foreign borrowings is a derivative financial instrument per BSP Monetary Board Resolution No. 1063 dated August 14, 2008 and its fair value changes are reported in the statement of comprehensive income. As of 48 December 31, 2017, the outstanding notional amount of the FX risk cover amounted to JPY7,047,442,607 and EUR6,932,914. Embedded Derivatives Embedded Credit Derivatives This includes credit default swaps embedded in host debt instruments and with credit linkages to reference entities. Embedded Optionalities in Debt Investments This includes call, put, extension, and conversion options in debt securities and loan receivables. The embedded call, put and extension options are deemed to be closely related to their host contracts, while the put option embedded in a debt investment is not deemed to be significant. Embedded Currency Derivatives The Group has currency derivatives embedded in host non-financial contracts such as lease agreements and purchase orders. 27. Commitments and Contingent Liabilities In the normal course of business, the Group makes various commitments and incurs certain contingent liabilities which are not presented in the financial statements. The Group does not anticipate material losses from these commitments and contingent liabilities. The Group is contingently liable for lawsuits or claims filed by third parties which are either pending decision by the courts or under negotiation, the outcome of which is not presently determinable. In the opinion of Management and its legal counsel, the eventual liability under these lawsuits or claims, if any, will not have a material effect on the Group's financial statements. The following is a summary of various commitments and contingencies at their equivalent peso revalued amounts arising from off-balance sheet items which the Parent has contracted: Parent 2017 2016 Trust Department accounts 232,391,242,067 101,607,181,197 Commitments 92,695,411,258 68,006,353,434 Standby/commercial letters of credit 31,880,361,020 31,005,280,619 Derivatives 27,574,406,990 37,467,182,586 Outstanding guarantees 805,133,223 727,783,209 Spot exchange contracts 1,497,900,000 198,880,000 Late deposits received 529,930,060 612,047,865 Outward bills for collection 98,516,034 113,060,539 Liability Indemnity Fund 43,481,662 38,746,232 Others 132,685,499 591,970.101 387,649,067,813 240,368,485,782 49 28. Financial Performance The following basic ratios measure the financial performance of the Parent: 2017 2016 As restated Net interest margin ratio 3.31% 3.05% Return on average assets 1.07% 1.08% Return on average equity 15.90% 15.97% 29. Equity As of December 31, 2017, the Parent's authorized capital stock consisted of 2 billion common shares with par value of P1 00.0 per share totaling P200 billion. As of December 31, 2017, the Parent's Paid-up capital increased to P20.98 billion equivalent to 209,810,000 shares with par value of P100.0 per share due to the capital infusion of P3.181 billion in 2017 and P5.829 billion in 2016 by the National Government. In accordance with Section 3 of Malacanang Executive Order No. 198, series of 2016, the Parent's authorized capital was increased to P200 billion divided into 2 billion common shares with par value of P100.0 per share. With the increase in par value per share from P10.0 to P100.0, the number of shares issued decreased from 1,197,100,000 to 119,710,000. The Parent complies with the provision of RA No. 7656 on dividend declaration to the National Government (NG) and with the loan and guarantee agreements between the World Bank, the Parent and the Department of Finance (DOF). However, the Parent has requested for exemption from declaring cash dividends to the National Government on its net income for 2016 and 2017. The Retained Earnings- reserves of the Group and the Parent consist of: Group Parent 2017 2016 2017 2016 (Amounts in Millions) Reserve for trust business 5,000.00 5,000.00 5,000.00 5,000.00 Reserve for contingencies 2,532.50 32.50 2,502.50 2.50 Reserve for PPE and software acquisition 294.00 263.00 0 0 Reserve for retirement fund and insurance 98.00 98.00 0 0 Reserve for business expansion 600.00 600.00 0 0 Reserve for others 33,786.95 24,800.95 33,768.95 24,768.95 42,311.45 30,794.45 41,271.45 29,771.45 50 The following table shows the components of Other Comprehensive Income of the Group: Group Re-measurement of Net Unrealized Total retirement benefit Gainl(loss) on AFS obligation securities Balances, as of January 1, 2016 (6,734,606) 10,952,121,839 10,945,387,233 Increase/(decrease) in CY 2016 6,623,082 (7,416,088,695) (7.409,465,613) Balances, as of December 31, 2016 (111,524) 3,536,033,144 3,535,921,620 Increase/decrease in CY 2017 (309,460) 1,875,908,234 1,875,598,774 Balance, as of December 31, 2017 (420,984) 5,411,941,378 5,411,520,394 Capital Manaqement The overall capital management objective of the Group is to create a more efficient capital structure while ensuring compliance with externally imposed capital requirements. The Group manages its capital by maintaining strong credit ratings and healthy capital ratios to support its business and sustain its mandate. Adjustments to the Group's capital structure are made in the light of changes in economic conditions and the risk characteristics of its activities. In order to maintain or adjust the capital structure, the Group may issue capital securities. No changes were made in the objectives, policies and processes from the previous years. Regulatory Qualifying Capital Under existing BSP regulations, the Parent's compliance with regulatory requirements and ratios is determined based on the amount of the Parent's unimpaired capital (regulatory net worth) as reported to the BSP. In addition, the risk-based capital ratio of a bank, expressed as a percentage of qualifying capital to risk-weighted assets, should not be less than 10 per cent for both stand-alone basis (head office and branches) and consolidated basis (Parent and subsidiaries engaged in financial allied undertakings but excluding insurance companies). Qualifying capital and risk-weighted assets are computed based on BSP regulations. Risk-weighted assets consist of total assets less cash on hand, due from BSP, loans covered by hold-out on or assignment of deposits, loans or acceptances under letters of credit to the extent covered by margin deposits and other non-risk items determined by the Monetary Board (MB) of the BSP. The Bank adopted BASEL 3 CAR computation pursuant to BSP Circular No. 781 effective January 31, 2014. INMES and AFS Equity were included as regulatory adjustments/deduction to Tier 1 capital. 51 Group Parent 2017 2016 2017 2016 (Amounts in Millions) Tier 1 Capital 104,397 85,486 104,596 85,486 Tier 2 Capital 5,807 4,970 5,790 4,950 Gross Qualifying Capital 110,204 90,456 110,386 90,436 Less: Required Deductions 28,285 25,219 28,999 26,524 Total Qualifying Capital 81,919 65,237 81,387 63,912 Risk Weighted Assets 696,236 572,060 693,497 569,219 Adjusted Tier 1 Capital ratio 10.93% 10.54% 10.90% 10.36% Total Capital Adequacy Ratio (CAR) 11.77% 11.40% 11.74% 11.23% The regulatory qualifying capital of the Parent consists of Tier 1 (core) capital, which comprises paid-up common stock, retained earnings, current year profit less required deductions such as unsecured credit accommodations to DOSRI, deferred income tax, other intangible assets, equity investments and investment in non-marketable securities. The other component of regulatory capital is Tier 2 (supplementary) capital, which includes unsecured subordinated debt and general loan loss provision. LBP Group has fully complied with the CAR requirement of the BSP. 30. Prior Period Adjustments In 2017 the Land Bank of the Philippines Group and Parent Bank made adjustments to its financial statements as of and for the year ended December 31, 2016 as a result of the recognition of Investment Property on RAMAWIL Realty Sales and Development Enterprises and Deferred Income Tax (DITA) by the Parent. The effects of these restatements in the financial statements as of and for the year ended December 31, 2016 are summarized below: As Previously Effects of As Restated Reported Restatement Group Changes in the Statement of Financial Position Assets Investment Property 6,128,097,587 160,038,318 6,288,135,905 Other assets-net 8,667,364,571 535,600,874 9,202,965,445 Deferred Income Tax 63,094,853 2,270,589,542 2,333,684,395 2,966,228,734 Equity Retained Earnings-Free 26,719,129,410 2,424,473,221 29,143,602,631 Undivided Profit 13,814,129,796 541,755,513 14,355,885,309 2,966,228,734 52 As Previously Effects of As Restated Reported Restatement Changes in the Statement of Comprehensive Income Miscellaneous income 1,399,202,772 160,038,318 1,559,241,090 Provision for Income Tax 850,101,668 (381,717,195) 468,384,473 541,755,513 Parent Changes in the Statement of Financial Position Assets Investment Property 5,999,869,778 160,038,318 6,159,908,096 Other assets-net 8,587,623,021 535,600,874 9,123,223,895 Deferred Income Tax 0 2,270,589,542 2,270,589,542 2,966,228,734 Equity Retained Earnings-Free 25,446,844,724 2,424,473,221 27,871,317,945 Undivided Profit 13,563,696,007 541,755,513 14,105,451,520 2,966,228,734 Changes in the Statement of Comprehensive Income Miscellaneous income 1,341,448,848 160,038,318 1,501,487,166 Provision for Income Tax 746,801,450 (381,717,195) 365,084,255 541,755,513 31. Miscellaneous Income, net This account is composed of: Group Parent 2017 2016 2017 2016 Gain from sale/derecognition of 678,729,147 628,117,478 666,394,383 624,701,953 non-financial assets Rent income 89,901,851 92,306,493 21,562,277 28,088,764 Miscellaneous income 478,329,419 800,451,378 361,329,446 810,380,708 Recovery on charged-off assets 73,489,717 38,365,741 73,489,717 38,315,741 1,320,450,134 1,559,241,090 1,122,775,823 1,501,487,166 53 32. Miscellaneous Expenses This account is composed of: Group Parent 2017 2016 2017 2016 Management and other professional fees 322,051,029 181,639,529 319,669,363 179,879,301 Supervision fees 407,083,016 358,665,505 406,633,016 358,665,505 Fines, penalties and other charges 8,157,911 99,681 8,150,157 94,015 Insurance 2,989,640,362 2,265,586,074 2,980,602,579 2,262,162,033 Fees and commission expense 298,229,270 276,762,661 298,229,270 276,626,758 Litigation/asset acquired expenses 110,563,820 91,354,333 108,361,349 87,829,805 Bad debts written-off 193,140 39,000 193,140 0 Other Expenses 6,514,038,772 5,643,483,451 6,237,041,139 5,634,163,119 10,649,957,320 8,817,630,234 10,358,880,013 8,799,420,536 33. Events After the End of Reporting Period * On November 14, 2016, the GCG confirmed the abolition of the People's Credit and Finance Corporation (PCFC) as approved under Memorandum dated September 3, 2015 of then Malacanang Executive Secretary wherein its assets and liabilities shall be transferred to the Parent. Accordingly, PCFC started the necessary procedures in winding up its operation until June 30, 2017. Based on audited financial statements issued on February 6, 2018, its net worth is P1.182 billion as of June 30, 2017. Part of which is National Livelihood Development (NLDC)'s capital contribution to PCFC in the amount of P820 million. * On October 13, 2017, the Executive Secretary issued a Memorandum, directing the Governance Commission for GOCCs (GCG) to continue the abolition of National Livelihood Development Corporation (NLDC) in accordance with Malacanang Memorandum Order No. 85, series of 2015. Accordingly, the NLDC's assets and liabilities shall be transferred to the Parent in which its net worth shall represent additional capital infusion by the National Government to the Parent. From the audited financial statements issued on May 30, 2018, the net worth of NLDC is P4.948 billion as of December 31, 2017. * On September 28, 2017, the President of the Philippines issued Executive Order No. 44 directing the Parent to acquire Philippine Postal Savings Bank, Inc. (PPSBI) and its subsequent conversion into an Overseas Filipino Bank (OFB) through transfer of shares of the Philippine Postal Corporation and Bureau of Treasury at zero value. Likewise, the Parent shall infuse the necessary capital of the OFB which is nil as of June 30, 2018. 34. Financial Risk Management CREDIT RISK MANAGEMENT Credit risk arises from the failure of a counterparty to meet the terms of any contract with the Bank. Credit risk is not limited to the loan portfolio but is found in all the Bank's activities where success depends on counterparty, issuer, or borrower performance. It 54 arises any time the Bank's funds are extended, committed, invested, or otherwise exposed through actual or implied contractual agreements, whether reflected on or off the balance sheet. The Bank considers its loan portfolio as the major source of credit risk. However, other sources of credit risk exist throughout the activities of the Bank, including the banking and trading books and On- and Off-Balance Sheet transactions. Maximum Credit Risk Exposure The table below shows the Group's maximum exposure to credit risk, before and after considering eligible collateral held or other credit enhancements. 2017 (In Millions) On-Balance Sheet (BS) Items Net Credit 0% 20% 50% 75% 100% 150% Exposures RWA Cash on Hand 31,203 31,203 0 0 0 0 0 0 Checks and Other Cash Items (COCI) 104 0 104 0 0 0 0 21 Due from Bangko Sentral ng Pilipinas (BSP) 305,350 305,350 0 0 0 0 0 0 Due from Other Banks 5,119 48 5,031 40 2,565 Available-for-Sale (AFS) Financial Assets 215,270 179,393 0 30,785 0 5,092 0 20,484 Held-to-Maturity (HTM) Financial Assets 319,974 310,331 0 4,372 0 5,271 0 7,457 Unquoted Debt Secunties Classified as Loans 10,554 0 0 0 0 10,554 0 10,554 Loans and Receivables 538,951 0 4,131 22,139 75,683 434,946 2,052 506,682 1. Interbank Loans Receivables 43,897 0 3,796 17,185 0 22,893 23 32,279 2. Loans & Receivables - Others a. LGUs & Public Sector Entities 30,683 0 0 0 0 30,683 0 30,683 b. Govemment Corporation 1,943 0 0 0 0 1,943 0 1,943 c. Corporates 349,998 0 0 0 0 349,998 0 349,998 d. Micro/Small & Medium Enterprise 76,018 0 335 0 75,683 0 0 56,829 e. Loans to individuals 34,160 0 0 4,954 0 29,206 0 31,683 3. Defaulted Exposures 2,252 0 0 0 0 223 2,029 3,267 Other Loans and Receivables I1 52,233 50,400 0 0 0 1,833 0 1,833 Sales Contract Receivable (SCR) 1,156 0 0 0 0 594 562 1,437 Real and Other Properties Acquired 4,211 0 0 0 0 0 4,211 6,317 Total Exposures Excluding Other Assets 1,484,125 876,677 4,283 62,327 75,683 458,330 6,825 557,350 OtherAssets 16,819 0 0 0 0 16,819 0 16,819 Total On-BS RWA not covered by CRM 0 0 0 0 0 0 0 60 Total On-Balance Sheet Exposures 1,500,944 876,677 4,283 62,327 75,683 475,149 6,825 574,229 11 Arising from Repurchase Agreements, Certificates of Assignment/Participation with Recourse, and Securities Lending and Borrowing Transactions Credit Off-BS Items Equivalent 0% 20% 50% 75% 100% 150% RWA Amount A. Direct credit substitutes 5,818 0 0 134 0 5,684 0 5,751 B. Transaction-related contingencies 46,141 0 0 0 0 46,141 0 46,141 C. Trade-related contingencies 2,363 0 0 1,600 0 763 0 1,563 D. Other commitments 0 0 0 0 0 0 0 0 Total Off-Balance Sheet Exposures 54,322 0 0 1,734 0 52,588 0 53,455 Credit Credit Counterparty RWA In The Trading Book Equivalent 0% 20% 50% 75% 100% 150% RWA Amount Derivative Exposures 726 0 0 99 0 627 0 677 Total Exposures 1,555,992 876,677 4,283 64,160 75,683 528,364 6,825 628,361 55 Credit Exposures and Credit-Related Commitments As of 31 December 2017, the Group's Gross Loans & Receivables amounted to P538,951 million, net of credit risk mitigation which consists mainly of prime collaterals such as deposit holdout, government securities (GS) and sovereign guarantees. Net Loans & Receivables stood at Corporates at P349,998 million (64.94%), followed by Micro/Small & Medium Enterprise (MSMEs) at P76,018 million (14.10%), Loans to Individuals at P34,160 million (6.34%), and Government Entities at P32,626 million (6.05%). The Group also holds substantial receivables arising from Repurchase Agreements aggregating P52,233 million. The P53,455 million credit risk weight of net Off-balance Sheet exposures of P54,322 million is computed based on respective Credit Conversion Factors (CCFs). These accounts are composed mainly of general guarantees of indebtedness (e.g., financial standby letters of credit - domestic and foreign), performance bonds and warranties related to particular transactions, and contingencies arising from movement of goods and trust transactions. Outstanding derivative exposures are mainly over-the-counter (OTC) foreign exchange (FX) option contracts. The Group's Total Gross Loans & Receivables reflected a Credit Risk Weighted Assets (RWA) of P506,682 million following the Standardized Approach. This represents 80.64% of the Total Credit RWA of P628,361 million. However, the Total Credit RWA increased by P114,823 million or 22.36%, from P513,538 million in 2016 to P628,361 million in 2017. The Total Credit RWA represents 90.25% of the Group's Aggregate RWA of P696,236 million. Management of Credit Risk Credit Risk Management aims to adequately manage the risk of financial loss arising from the failure of borrowers or counterparties to settle their obligations in accordance with the terms and conditions of the duly approved contractual agreement. This involves the identification, measurement and monitoring of actual or potential losses and the implementation of appropriate measures, including the setting-up of applicable limits to keep credit risk exposures within the Bank's risk appetite or the acceptable level of credit risk that it is willing to accept in pursuit of its lending plans and programs. The Bank also manages the credit risk inherent in the entire portfolio as well as the risk in individual credits or transactions and the correlation of credit risk with other risks. The effective management of credit risk is a critical component of a comprehensive approach to RM and essential to the long-term success of the Bank. The Bank manages credit risk through a structured framework duly approved by the LANDBANK Board that sets out policies and procedures covering the identification, measurement, control, and monitoring of credit risk. Accordingly, approval of credit application goes through prescribed loan approving levels which, depending on the transaction or amount of loan applied, could be elevated to the Credit Committee (CRECOM) a Management-level Committee, the Investment and Loan Committee (ILC), a Board-level Committee and up to the LANDBANK Board, whenever applicable. The approval process also covers proposed remedial actions aimed at helping problem accounts regain normal operations. The Bank has put in place comprehensive set of credit policies through the issuance of Credit Manual, Credit Policy Issuances (CPIs) and 56 Credit Bulletins (CBs). As the Bank's middle office for credit risk, the Credit Risk Management Department (CRMD) handles credit risk oversight, risk measurement and risk rating of borrowers. To effectively monitor and maintain the quality of its loan portfolio, the Bank conducts annual qualitative and impairment review to assure proper loan classification and setting-up of valuation reserves. As of 31 December 2017, the Parent's net Non- Performing Loan (NPL) stood at P2,190 million or 0.325% of the total loan portfolio. Credit Risk Rating LANBANK's Credit Risk Engine System (CRES) serves as the main platform for the generation of automated credit ratings of borrowers to help determine their credit worthiness. The Bank undertakes continuing development and implementation of the automated CRES scoring facility to provide support to its ongoing initiatives for the adoption of applicable banking regulations and global best practices and approaches in Credit Risk Management. The generated credit ratings form part of the risk components required to calculate the Expected Credit Loss (ECL) under the ECL Estimation Approach Methodology in accordance with the provisions of Bangko Sentral ng Pilipinas (BSP) Circular No. 855, series of 2014 (Guidelines on Sound Credit Risk Management) as well as the Philippine Financial Reporting Standards 9 (PFRS 9) which is slated for implementation in 2018. The said credit ratings are also needed for the eventual adoption of the advance approaches in credit risk management under the Basel Committee on Banking Supervision (BCBS) principles on sound credit risk management. Toward this end, the Bank approved in 2017 the enhancement of the following automated credit scoring models and their corresponding rating guidelines: * Application Scoring Model for Individual Home Buyers * Application Scoring Model for Salary Loan Availers * Behavioral Scoring Model for Existing Salary Loan Availers* * Behavioral Scoring Model for LGUs * Behavioral Scoring Model for SMEs * Behavioral Scoring Model for Corporates * Behavioral Scoring Model for Cooperatives * Application Scoring Model for Credit Card* * Application Scoring Model for Livelihood Mobile Loan Saver *Credit Scoring Models Only Nonetheless, the Bank shall continue to use the expert-based credit rating system for Universal Banks, Commercial Banks and Offshore Banks. Further, consistent with good corporate governance, LANDBANK manages credit risk by setting limits for individual borrowers and group of borrowers and industry segments. The Bank also monitors credit exposures, and continually assesses the credit quality of counterparties. Assessment of credit quality considers credit ratings of counterparties given by BSP recognized Credit Rating Agencies such as Moody's, Fitch and Standard & Poor's. 57 Credit Risk Monitoring LANDBANK has continuously adopted a formal reporting system for the Board of Directors and Senior Management to be able to monitor the credit quality of individual and loan portfolio using asset quality indicators such as past due ratio, NPL ratio, level of non-performing assets, coverage ratio, concentration risk. Clean large exposures, breaches in regulatory and internal limits, potential credit risk, Directors, Officers, Stockholder and their Related Interests (DOSRI) loans, Related Party Transactions (RPTs) and compliance with Real Estate Stress Test (REST) are intensively monitored by the ILC and the Risk Oversight Committee (RISKCOM). The recovery of written-off accounts is also within the radar of the LANDBANK Board and Senior Management. Collateral and Other Credit Enhancements Collateral is not the ultimate and primary factor in granting credit. The required amount and type of collateral and other credit enhancements to mitigate credit exposures depend primarily on the results of the holistic and prudent credit assessment. When needed, the Bank diligently evaluates the enforceability, realizable value and marketability of offered collaterals. The Bank's Credit Manual and CPIs provide the guidelines on the acceptability of loan collateral and maximum valuation for each type of collateral. The primary collaterals accepted are Holdout on Deposits, GS, Real Estate Mortgage (REM) and Chattel Mortgage (CM). The Bank also accepts government guarantees, cross suretyship from corporations and such other eligible guarantees. In the case of agricultural and agriculture-related loans that are vulnerable to the effects of climate and weather disturbances, borrowers are encouraged to avail of crop insurance guarantees and other insurance mechanisms to shield them from these risks. Credit Stress Test LANDBANK regularly conducts stress testing of individual large exposure and its loan portfolio taking into account plausible risk events with high probability of occurrence. Utilizing such scenarios with documented assumptions, tests are done to determine the magnitude of impact on the Parent's loan portfolio, on the Credit RWA, and finally on the Capital Adequacy Ratio (CAR). The stress testing also includes prescribed regulatory tests such as uniform stress test and REST stress test. Results of the stress testing, together with the contingency plans, are escalated to the ILC and RISKCOM. Risk concentrations of the maximum exposure to credit risk Concentrations arise when a number of counterparties are engaged in similar business activities, or activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic, political or other conditions. The Bank has established concrete guidelines and procedures relative to managing, monitoring and reporting large exposures and credit risk concentrations in accordance with the rules and regulations issued by the BSP. As of 31 December 2017, the Parent's qualifying capital covering credit risk is P81.39 billion. 58 On the other hand, the Parent's Single Borrower's Limit (SBL) is pegged at P25.720 billion for direct lending and P36.008 billion for wholesale lending. Overall credit risk management oversight is a function of the Board of Directors (BOD)- level Risk Management (RM) Committee. In general, mitigation measures on credit risks are implemented at various levels. However, oversight on credit risk management is vested on the Risk Management Group which is independent from the business function. This is critical in ensuring the integrity and objectivity of the credit risk assessment, pricing, and management process. The Bank ensures that the credit risks undertaken are commensurate with the risk appetite and the Bank's capacity to manage such risks. Thus, regular monitoring of both the level of risk and equity capital is undertaken to ensure that even in instances of major credit surprises, the Bank could sustain its operations in spite of the losses incurred and continue to be an efficient financial intermediary for development and institutional financing. The BSP considers that credit concentration exists when total loan exposure to a particular industry exceeds 30 per cent of total loan portfolio. As of 31 December 2017 and 2016, the Bank does not have credit concentration in any particular industry. As of December 31, 2017 and 2016, information on the concentration of credit as to industry based on carrying amount is shown below: Parent 2017 2016 Amount % Amount % Financial intermediation 71,713,093,339 12 41,499,841,256 8 Agriculture, hunting and forestry 51,536,263,324 8 82,848,337,774 17 Real estate, renting and business activities 58,048,731,998 10 51,448,278,099 11 Public administration and defense 76,784,032,439 13 43,684,643,149 9 Manufacturing 51,985,570,951 9 35,062,538,415 7 Community, social and personal services 13,346,062,576 2 12,480,366,557 3 Electricity, gas and water 93,537,592,974 15 77,787,367,744 16 Wholesale & retail trade, repair of motor vehicles, motorcycles & personal and household goods 57,639,838,178 10 41,239,331,755 8 Transport, storage and communication 43,994,810,674 7 39,356,260,435 8 Construction 37,899,953,536 6 28,760,843,760 6 Private households 23,646,244,827 4 20,989,139,302 4 Hotel and restaurant 4,637,321,925 1 3,241,279,187 1 Others 16,397,316,585 3 10,677,208,313 2 601,166,833,326 100 489,075,435,746 100 Allowance for losses (5,168,696,310) (5,077,435,761) 595,998,137,016 483,997,999,985 59 MARKET RISK MANAGEMENT Market Risk Management Framework LANDBANK is exposed to market risks in both its trading and non-trading banking activities. The Bank assumes market risk in market making and position taking in government securities and other debt instruments, equity, FX and other securities, as well as, in derivatives or financial instruments that derive their values from price, price fluctuations and price expectations of an underlying instrument (e.g., share, bond, FX or index). The Bank's exposure on derivatives is currently limited to currency swaps and currency forwards to manage FX exposure. The Bank is also exposed to derivatives that are embedded in some financial contracts, although, these are relatively insignificant in volume. The Bank uses a combination of risk sensitivities, Value-at-Risk (VaR), stress testing, CAR and capital metrics to manage market risks and establish limits. The LANDBANK Board, RISKCOM and the Asset and Liability Committee (ALCO), a Management-level Committee, define and set the various market risk limits for each trading portfolio. The Treasury and Investment Banking Sector (TIBS), particularly the Financial Markets Group (FMG) which manages the Bank's trading units as well as the Asset and Liability Management Group (ALMG) which manages the liquidity and reserve positions, conducts risk-taking activities within limits at all times and ensures that breaches are escalated to the Senior Management for appropriate action. A management alert is activated whenever losses during a specified period equal or exceed specified management alert level. The Bank controls and minimizes the losses that may be incurred in daily trading activities through the VaR, Management Action Triggers (MATs) and Stop Loss. Positions are monitored on a daily basis to ensure that these are maintained within established position limits to control losses. Position limits are subordinated to MATs, VaR and Stop Loss limits. Macaulay and Modified Duration are used to identify the interest rate sensitivity of the Bond Portfolio of the Bank. In the same way, certain subsidiaries of the Bank independently quantify and manage their respective market risk exposures by maintaining their respective RM system and processes in place. Market Risk Weighted Assets (RWA) As of 31 December 2017, the Group's Total Market RWA stood at P6,722 million, broken down as follows: Interest Rate Exposure 2,860 Equity Exposure 0 FX Exposure 239 0ptions 3,623 The Total Market RWA represents 0.97% of the Group's Aggregate RWA of P696,236 million. 60 Managing Market Risk Components Market Risk is associated to earnings arising from changes in interest rate, FX rates, equity and in their implied volatilities. Market risk arises in trading as well as non-trading portfolios. The Bank manages the following key market risk components using its internal risk mitigation techniques: 1. Interest Rate Risk in the Trading Book Interest Rate Risk represents exposures to instruments whose values vary with the level or volatility of interest rates as a result of market making and portfolio taking. The Parent continues to manage interest rate risk in trading activities through factor sensitivities and the use of an effective and independently validated VaR methodology and stress testing. Government and Foreign Securities are subject to daily mark-to-market and controlled through risk limits such as position, VaR, MATs and Stop Loss. Government P20,000.00 P1 50.00 . P200.00 Securities YTD Gain Erosion Foreign Group Target Seurtis$20.00 $0.20 Grop.64ge Securities YTD: Year-to-Date The Foreign Exchange Risk in Foreign Securities are accounted under Foreign Exchange Risk Management. 2. Equity Price Risk Management The Parent is exposed to equity price risk resulting from changes in the levels of volatility of equity prices, which in turn affect the value of equity securities and impacts on profit and loss of the Parent. Equities are subject to daily mark-to-market and controlled through risk limits such as position, VaR, MATs and Stop Loss. Equity 1,000.00 15.00 YTD Gain Erosion 90.00 Group Target 3. Foreign Exchange Risk Management Currency risk is the risk that the value of a financial instrument will fluctuate due to changes in FX rates. Using the Philippine Peso as the functional currency, the Parent monitors daily the currency positions to ensure that these are within established limits. 61 The following limits are set for foreign-currency related transactions: Fx Trading 50.00 0.36 YTD Gain Erosion 1.15 FS 20.00 0.20 Group Target 0.64 FS: Foreign Securities The Parent had the following significant exposures denominated in foreign currencies as of 31 December 2017: In $ Thousands ASSETS Fx Currency Notes & Coins on Hand 23,149 72 50 6 34 23,311 (FCNCH)/ Cash and Other Cash Items (COCI) Due from banks 84,952 687 15,155 263 689 101,746 Held for Trading 1,864 0 0 0 0 1,864 Available For Sale Investment 787,732 0 1 0 0 787,733 Investments in Bonds and Other Debt 505,729 0 0 0 0 505,729 Instruments (IBODI) Interbank Loans Receivable 420,000 0 0 0 0 420,000 Loans & Receivables 377,092 56,350 0 0 0 433,442 Other Assets 15,929 887 1,862 246 525 19,449 LIABILITIES Deposit Liabilities 1,488,178 514 7,996 0 7 1,496,695 Bills Payable 168,155 287,654 30,969 0 0 486,778 Others 180,146 1,229 7,110 246 525 189,256 Market Risk Measurement and Validation Tools 1. Value-at-Risk Analysis VaR is a statistical approach for measuring the potential variability of trading revenue. It is used to measure market risk in the trading book under normal conditions, estimating the potential range of loss in the market value of the trading portfolio, over a one-day period, at 99.0% confidence level, assuming a static portfolio. The Bank uses internally developed Historical Simulation Model in computing VaR of Equities, Foreign Securities (FS), GS and FX trading portfolios as well as FX Net Open Position which is acceptable to BSP. Moreover, the Bank continuously pursues initiatives to improve processes in preparation for the migration towards an Internal Model Approach for capital charging. The VaR disclosure is intended for external disclosure and for regulatory purposes. The VaR both at portfolio and across portfolio level are monitored. Daily VaR calculations are compared against VaR limits which is the monetary amount of risk deemed tolerable by Management. The over-all VaR limit for the Treasury trading activities was set at P193 million throughout 2017. The Bank also determines 62 Diversified VaR that takes into account the diversification effect in which all losses in all securities in a portfolio are imperfectly correlated. 2. Stress Test Risk Management (RM) models have recently become the main focus of RM efforts in the banking industry where banking activities are exposed to changes in fair value of financial instruments. However, the Bank believes that the statistical models alone do not provide reliable method of monitoring and controlling risk because these models (while relatively sophisticated) have several known limitations, at the same time, do not incorporate the potential loss caused by very unusual market events. Thus, the VaR process is complemented by Stress Testing to measure this potential risk. Stress Test is a RM tool used to determine the impact on earnings and capital of market movements considered "extreme", i.e., beyond "normal" occurrence. The Bank utilizes Stress Tests to estimate possible losses which the VaR does not capture. The Bank's Portfolio Scenario Analysis (PSA) analyzes the impact of major risks that emerge out of the different scenarios, considering adverse and probable risk events, on activities related to Treasury's trading and investment portfolios. This seeks to establish how far the Bank can absorb certain levels of stress, to explore the events that could cause a significant impact to the Bank and to assess its vulnerabilities and capability to deal with shocks such as price risk, interest rate risk, FX risk and eventually, liquidity risk. Reverse Stress Tests are conducted to identify and simulate the events that can lead the Bank to a particular tail event. Results of the PSA are also simulated in the CAR computation to be able to assess its impact on the CAR compliance set at 10% and the Common Equity Tier (CET) 1 ratio of at least 8.5% set by BSP with conservation buffers. 3. Back-Test The Parent adopts back-testing as the basic technique in verifying the quality of risk measures used by comparing actual trading results with model-generated risk measures. Under the back-testing process, exception occurs if mark-to-market and trading loss exceeds the result of the model-generated risk measure. The number of exceptions is noted and the model is classified into one of the three zones as follows: safe/green zone 0-4 exceptions non-conclusive/yellow zone 5-9 exceptions problematic/red zone 10 or more exceptions Back-testing results are presented to the ALCO and the RiskCom which examine the actual performance of portfolios against VaR measures to assess model accuracy and to enhance the risk estimation process in general. 63 4. Model Validation Risk models used in managing market risk are subjected to independent model validation. The Internal Audit Group (IAG) is tasked to do model validation of RM models. The Parent has also engaged the services of a third party who conducted an independent model validation. Interest Rate Risk Management Interest Rate Risk in the banking book For interest rate risk in the banking book, a key component of LANDBANK's asset and liability policy is the management of interest rate sensitivity. Interest rate sensitivity is the relationship between market interest rates and net interest income due to the maturity or re-pricing characteristics of rate sensitive assets and liabilities. The Bank establishes the lending rates for its loans based on a spread over its internal base rate, reflecting the average cost of funds that is generally reset at the beginning of every two weeks. Interest rates on floating rate loans are typically reset every 30 to 90 days. For deposits, regular savings and time deposit account rates are set by reference to prevailing market rates. The Bank manages interest risk based on approved policies and guidelines, established limit setting procedures and interest rate risk limits, application of interest rate risk measurement models and reporting standards such as Re-pricing Gap/Earning-at-Risk (EaR), Economic Value of Equity (EVE)-at-Risk, Bond Duration Report and Balance Sheet Duration Report. The two interest rate risk perspectives adopted by the Bank in measuring interest rate risk in the banking book are as follows: a. Earnings Perspective: The Bank uses the Earnings-at-Risk (EaR) Model to estimate changes in net interest income under a variety of rate scenarios over a 12 month horizon. EaR is a simulation method that analyzes the interest rate risk in the Banking Book in terms of earnings (accrual basis). To determine the actual behavior of Non-Maturing Deposits (NMDs) and capture the Bank's actual interest rate risk exposure, the Bank analyzed its deposit base to estimate the proportion of core and non-core deposits and determine how actual maturity or re-pricing behavior may vary from the contractual terms. Core Deposits are NMDs which are unlikely to re-price even under significant changes in interest rate environment while Non-Core (Volatile) Deposits are NMDs that are characterized by 'activity' as manifested by the behavior based on withdrawal patterns, computed through statistical analysis of net withdrawal levels. Non-Core NMDs are re-bucketed based on net withdrawal pattern for the past five years and Core NMDs are allocated in the 'more than five years'. Excluded in the analysis of actual maturity or re-pricing are behavioral models for the determination of Re-pricing Gap for fixed rate loans subject to prepayment risk and term deposits subject to early redemption risk. Prepayment of loans and early 64 withdrawal of maturing deposits are considered isolated cases which will have minimal effect on the Bank's interest rate risk estimation. The following table sets the Re-pricing Gap position of the Parent as of 31 December 2017 and the increase/decline in earnings for upward and downward interest rate shocks in the banking book: In Millions Financial Assets Liquid Assets 43,000 0 0 0 Total Investments 0 16 349 3,159 Total Loans 152,382 187,480 82,037 30,938 Other Assets 64 5 7 5 Financial Liabilities Deposits 319,754 156,260 30,557 15,138 Bills Payable 0 527 11,251 0 Others 0 0 0 0 Off-Balance Sheet Commitments 0 0 0 (44,730) Change in Interest Rates - in basis points (bps) In Millions 2,38 1,492 746 373 (33 (76 (142(,38 b. Economic Value Perspective: The Parent uses the EVE-at-Risk Model to assess the potential long-term effects of changes in interest rates over the remaining life of its holdings. This model also measures the change in the Parent's EVE for specified changes in interest rates. The table below shows the increase (decline) in economic value for upward and downward rate shocks using the EVE-at-Risk Model to measure interest rate risk in the banking book. Change in Interest Rates - in bps In Millions +300 +300 68,695 +267 +200 61,538 +255 +71 57,761 +180 +50 42,480 +100 +125 25,896 +50 +75 13,498 -50 -75 (14,385) -100 -125 (29,337) -180 -50 (52,897) -255 -71 (78,876) 65 Change in Interest Rates - in bps In Millions -267 -200 (85,313) -300 -300 (99,574) Both viewpoints are assessed to determine the full scope of the Parent's interest rate risk exposure (especially if the Parent has significant long-term or complex interest rate risk positions). Moreover, interest risk in the Parent is not managed in isolation. Interest risk measurement systems are integrated into the Parent's general risk measurement system and results from models are interpreted in coordination with other risk exposures. The interest rate risk exposures of the Parent are measured and reported to the ALCO and RiskCom at least on a monthly basis under the Earnings Perspective through EaR Model and quarterly for the Economic Value Perspective using EVE-at- Risk Model. LIQUIDITY RISK MANAGEMENT Liquidity Risk Management Framework The Parent's liquidity RM process is consistent with its general RM framework covering risk identification, measurement and analysis, monitoring and control. The policies and procedures that govern liquidity RM are reviewed and endorsed on a regular basis by ALCO and RiskCom for approval of the Board of Directors. The basic liquidity policy of the Parent is to maintain fund availability at all times and hence, to be in a position to meet all of its obligations, in the normal course of business. The Parent considers liquidity risk based on market and funding liquidity risk perspectives. Trading or market liquidity risk refers to the inability to unwind positions created from market, exchanges and counterparties due to temporary or permanent factors. It is the risk that the Parent cannot easily offset or eliminate a position at the market price because of inadequate market depth or through market disruption. Market liquidity risk is also associated with the probability that large transactions may have a significant effect on market prices in markets that lack sufficient depth. This liquidity risk perspective is captured through stress testing or scenario analysis. Funding liquidity risk is the risk that the Parent will not be able to meet efficiently both expected and unexpected current and future cash flow and collateral needs without affecting either daily operations or the financial condition of the Parent. It occurs from the mismatch of asset, liability, exchange contract and contingent commitment maturities. Funding liquidity risk is being monitored and controlled through the classification of maturities of assets and liabilities over time bands and across functional currencies as reflected in the Liquidity Gap Report (LGR). 66 The Parent Board exercises oversight through RiskCom and has delegated the responsibility of managing the overall liquidity of the Parent to the ALCO. The ALCO and the TIBS are responsible for the daily implementation and monitoring of relevant variables affecting Parent's liquidity position. The ALCO reviews the assets and liabilities position on a regular basis and, in coordination with the TIBS, recommend measures to promote diversification of its liabilities according to source, instrument and currency to minimize liquidity risks resulting from concentration in funding sources. The ALCO meets twice a month or more frequently as required by prevailing situations. The RMG, through the Treasury Risk Management Department (TRMD) is responsible for the oversight monitoring of the Parent's liquidity risk positions and ensures that reports on the Parent's current risk are prepared and provided to ALCO and RiskCom in a timely manner. The Parent performs a comprehensive liquidity risk measurement and control using as tool the Consolidated LGR covering the bank-wide balance sheet. Risk models used in liquidity RM are subjected to independent model validation as conducted by the IAG and by a Third party. Liquidity Risk Measurement Models The Parent manages the liquidity risk using the following tools: 1. Liquidity Gap Report The Parent performs liquidity gap analysis using the LGR which is a risk measurement tool used in identifying the current liquidity position and the Parent's ability to meet future funding needs. It categorizes balance sheet items according to estimated maturities of assets and liabilities in order to determine any future mismatch such as long-term assets growing faster than long term liabilities. The RMG, through TRMD, assists ALCO in its function by preparing the LGR based on the Peso, FX Regular, FCDU, RBU and Consolidated Books. The table presents the assets and liabilities based on the contractual maturity, settlement and expected recovery dates: ASSETS Cash & Other Cash 31,384,485 0 31,384,485 28,250,784 0 28,250,784 Items Due from BSP 305,343,193 0 305,343,193 355,405,020 0 355,405,020 Due from Other Banks 5,104,789 1,698 5,106,487 11,620,068 1,692 11,621,760 Interbank Loan 20,970,600 0 20,970,600 15,562,360 0 15,562,360 Receivable Security Purchased 52,222,764 0 52,222,764 14,803,584 0 14,803,584 Under Agreement to Resell Loans & Receivables 266,386,189 346,329,221 612,715,410 175,805,122 324,151,602 499,956,724 67 Investments 31,881,973 535,440,215 567,322,188 41,770,353 410,897,766 452,668,119 Other Assets 4,537,445 24,234,943 28,772,388 1,747,689 22,709,586 24,457,275 LIABILITIES Deposits Demand 709,508,966 0 709,508,966 558,645,451 0 558,645,451 Savings 645,770,968 0 645,770,968 621,493,284 0 621,493,284 Time 57,114,142 2,079,279 59,193,421 43,741,305 1,097,295 44,838,600 LTNCD 11,000,000 11,000,000 11,000,000 11,000,000 Bills Payable 1,998,296 22,581,812 24,580,108 8,678,194 21,357,140 30,035,334 Unsecure 0 0 0 0 0 0 Subordinated Debt Due to BTr, BSP, & 1,650,798 299,984 1,950,782 1,626,972 165,894 1,792,866 MCs/PCIC Due to Local Banks 0 0 0 1,723 0 1,723 Other Liabilities & 258,523 57,550,820 57,809,343 300,931 41,432,087 41,733,018 Payable The Bank also prepares on a quarterly basis the Consolidated LGR (Parent and Subsidiaries). * Core Deposit: Core Deposit is calculated based on Net Withdrawal Pattern. It serves as a buffer that protects the Bank's assets, which are subject to interest rate risks. Core Deposit level is computed to determine the lowest deposit level that is expected to be retained under normal operating conditions. The computation involves determining the deposit mix comprising of volatile and non-volatile or Core Deposits. * Non-Maturing Deposits: Regular savings (Total savings less High Yield Savings Accounts and Easy Savings Plus) and demand deposits are Non- Maturing Deposits (NMDs). An analysis made to proximate scenario is to simulate behavioral withdrawal pattern. This is done by observing the pattern of deposit decays of the total end-of-day data for demand deposit account based on a five-year historical demand deposit data. The highest withdrawal percentage change is determined for each tenor bucket. The percentages are used as basis for slotting the NMD amount under the different tenors. The following table sets forth the asset-liability gap position over the detailed time period for the Parent at carrying amounts as of 31 December 2017 based on contractual repayment arrangements which take into account the effective maturities as indicated by the deposit retention history. 68 In Millions Financial Assets Cash & Due from Banks 276,249 0 65,583 0 2 341,834 Total Loans 196,247 99,366 43,967 151,349 194,981 685,910 Total Investments 12,759 349 18,774 196,904 338,536 567,322 Other Assets 3,304 0 1,233 44 24,191 28,772 Financial Liabilities Deposits 32,240 1,271 2,125 631 1,389,207 1,425,474 Borrowings 2,073 556 1,020 7,137 15,745 26,531 Other Liabilities & Unsecured 0 0 258 0 57,551 57,809 Subordinated Debt Total Capital 0 0 0 0 114,024 114,024 As of 31 December 2017, the Parent has in its possession a comfortable level of highly liquid assets to cover for liquidity risk that may arise in the earlier tenor buckets. Most assets (particularly loans and investments) have long term maturities. Cumulative gap after contingent accounts is positive in all buckets except in the 'more than 5 years' bucket. Maximum Cumulative Outflow (MCO) limit was not breached in the entire time bucket within the one year horizon. The Parent has established guidelines for liquidity risk limit setting to enable it to properly and prudently manage and control liquidity risk, consistent with the nature and complexity of its business activities, overall level of risk and its risk appetite. The MCO limit set by the Parent Board is one of the tools used to manage and control the liquidity risk in the Parent's gap report. It is a measure of the liquidity gap between maturing assets and liabilities. MCO limits put a cap on the total amount of negative gaps in the '1 day to 1 year' time buckets. 2. Financial Ratio Analysis Financial Ratio Analysis is another liquidity risk measurement tool that calculates and compares liquidity and leverage ratios derived from information on the Parent's financial statements against set liquidity/leverage limits. The following table sets out the Parent's liquidity ratios as of the dates indicated: In Million exce t when ex ressed in ercenta e Liquid Assets () P967,553 P867,250 P722,850 P625,897 Financial Ratios: Liquid Assets to Total Assets 59.58% 61.83% 60.08% 50.23% Liquid Assets to Total Deposits 67.88% 70.17% 69.09% 68.55% 69 *Note: Liquid Assets include the following: 1.Cash and other Cash Items 2.Interbank Loans 3.Government Securities 4.Tradable non-Government securities and commercial paper 3. Liquidity Stress Test The Parent conducts regular stress testing and scenario analysis to further assess the Parent's vulnerability to liquidity risk. This activity supplements the risk models used by the Parent which simulates various probable to worst-case scenarios happening in the industry that would affect LBP. The following are the stress testing that are conducted by the Parent: * Liquidity Stress Test/Scenario Analysis * Fund Source Stress Test * FX Regular Stress Test * FCDU Stress Test 4. Liquidity Coverage Ratio The Liquidity Coverage Ratio (LCR) is reported every quarter to ensure that the Parent maintains an adequate level of unencumbered High Quality Liquid Assets (HQLA) to meet liquidity needs for a 30 calendar-day liquidity stress scenario The Parent computes the LCR using the BSP prescribed formula: LCR = Stock of HQLA Total Net Cash Outflow over the next 30 calendar days Where: High Quality Liquid Assets - Comprised of cash or assets that can be converted into cash at little or no loss of value in private markets, to offset the net cash outflows it could encounter under a liquidity stress scenario Total Net Cash Outflows - the total expected cash outflows minus total expected cash inflows, in the specified stress scenario for the subsequent 30 calendar days As of 31 December 2017, the Parent's LCR is higher than the 90% minimum requirement for the CY 2018 and maximum LCR trigger alert of 100% targeted for the CY 2019. 5. Liquidity Contingency Plan (LCP) The Parent formulated the Liquidity Contingency Plan (LCP) using extreme scenarios of adverse conditions under different time horizons to evaluate the Parent's ability to withstand and address these scenarios. The contingency plan focuses on the Parent's strategy for coordinating managerial action and communication plan during a crisis and includes triggering events that will activate the plan, contingency funding measures and procedures for making up cash flow shortfalls in adverse situations. 70 The plan details the amount of funds the Parent can access and the scenarios under which it could use them. It also provides guidance for managing liquidity risks in the following market scenarios: * Ordinary Course of Business - The Parent manages its liquidity risk by: a) requesting depositors to roll-over their deposit by offering competitive deposit rates, b) drawing from its interbank credit lines, and/or c) the early termination of Government Securities Purchased under Reverse Repurchase Agreements (GSPURRA). * Seasonal/Intermediation Duration - The Parent manages its liquidity risk in the longer-term through: a) the liquidation of marketable AFS category securities, b) the solicitation of government deposits, and c) the use of derivative instruments in the swap market. * Acute/Institution Specific - In acute or institution specific circumstances, the Bank will seek to manage its liquidity risk by: a) the proportional liquidation of AFS and Held-to-Matuirty (HTM) government securities, b) the non-renewal of maturing short-term loans, and c) borrowings from the BSP and the Philippine Deposit Insurance Corporation (PDIC) using eligible securities as collateral and generating cash infusions through large deposits. The LCP likewise contains guidelines on Business Resumption Plan towards a transition to normal liquidity condition. This plan defines expectations from various sectors during the transition period from crisis to normal condition. OPERATIONAL RISK MANAGEMENT The Bank continued to take steps to strengthen the functions (ORMF) to fully adhere with BSP Circular 900 (Guidelines on Operational Risk Management). Among the major initiatives to strengthen the ORMF is the revision of the Guidelines on Reporting and Monitoring of Operational Risk Events. The amendment aims to reinforce compliance of the Bank on the proper and effective reporting and monitoring of all operational risk events. This will capture internal loss data to assess the Bank's operational risk exposure and effectiveness of internal controls. Another improvement introduced to adhere with BSP Circular 900 is the continued enhancement of the following ORM frameworks: * Business Process Risk Management Framework (BPRMF) * People Risk Management Framework (PRMF) * Business Continuity Management Framework (BCMF) * Legal Risk Management Framework (LRMF) * Risk Management Framework on Trust Banking Operations The frameworks aim to establish and implement RM strategies and best practices to effectively address and manage operational risk that are embedded in the day-to-day operations. 71 On 20 March 2017, BSP issued Circular 951 or Guidelines on Business Continuity Management (BCM). The Bank conducted gap assessment to determine the Parent's level of compliance with the requirements and formulate action plans necessary to close the gaps that were identified. Results of the gap assessment showed that the Parent is generally compliant with the requirements of BSP. To further strengthen the Bank's compliance with BSP Circular 951, the Bank's BCM Framework and General Policy were enhanced and approved by the Management Committee and Risk Oversight Committee in 2017. The BCM Framework and General Policy is composed of the BCM governance structure and the BCM process as follows: * Board and Senior Management Oversight * Business Impact Analysis and Risk Assessment * Business Resumption and Recovery Strategy Formulation * Plan Development * Plan Testing and Exercising * Personnel Training and Plan Maintenance As part of the Bank's BCM process, the Business Continuity Plan (BCP) components are being reviewed, updated and tested annually. The BCP was reinforced with the establishment of back-up/alternate sites for critical and vital operations of the Bank. The new back-up site for Trust and Treasury Operations was established and tested in 2017 with successful results in October 2017. The IT Systems Prioritization List was likewise reviewed and revised based on results of Business Impact Analysis conducted among Bank units. The Bank has also supported the continuing education of officers and staff of Risk Management Group (RMG) through the certification program of the American Academy of Financial and Management (AAFM), where five employees were duly admitted and licensed as a Certified Risk Analyst (CRA) and Asian Institute of Chartered Banks (AICB) where the BRMD Head passed the Bank Risk Management - Module 1 certification exam. Also, the Parent's Business Continuity Officer (BCO) was certified by ICOR based in Illinois, USA. Embedding of ORM across the institution is manifested with the BUs becoming aware of the specific operational risks they are confronted with. Taking a proactive stance in managing and escalating breaches as soon as they occur strengthens governance and enhances the oversight of these risks. BUs conduct self-assessment using various RM tools such as RCSA, Business Impact Assessment (BIA), BCQ, heat maps, and hazard maps to quantify potential operational losses which serve as their dashboard in monitoring operational risk. RMG regularly monitors and escalate to RISKCOM and Management Committee (MANCOM) the 2017 actual losses versus estimated losses. Operational Risk Exposure LANDBANK uses the Basic Indicator Approach for calculating the capital charge for operational risk under Pillar 1. The average Gross Revenue of the Parent for the last three years is used to calculate the Operational RWA. Thus, with the Gross Revenue of the Parent consistently increasing with business expansion, the Operational RWA has 72 also been increasing annually. As of 31 December 2017, the Group's Total Operational RWA using the Basic Indicator Approach was P61,152 million or 8.78% of the Group's Aggregate RWA of P696,236 million. Cognizant that Gross Revenues (BSP proxy data) is but a shadow indicator of operational risks in the Basic Indicator Approach, LANDBANK conducts a simulation of the computation of the estimated losses using the Bank's actual historical losses and estimated probability of occurrence to determine the variance from the Basic Indicator Approach model. Self-risk assessment of the five sub-risks of operational risk (people, process, systems/IT, event and legal risks) shows that the total estimated loss is way below the Total Operational RWA under the Basic Indicator Approach. Among the five components of operational risk, systems/IT risk registered the highest estimated loss. However, numerous controls are being implemented to mitigate systems/IT risk. The Bank has an established IT Governance Structure, frameworks and policies on the development of IT systems aligned with best practices on IT standards. The Bank is confident that substantial loss on operational risk can be mitigated because the existing controls and preparedness measures are in place. 73