The Philippine economy was hobbled by political turmoil and a global slowdown, particularly in the US and Japan, the country’s major trading partners. The year was marked by the toppling of the incumbent president by People Power and the assumption of the then Vice President as the new president of the Republic.

The Philippine economy recorded modest gains as GDP, after slowing down to 2.5% in the first quarter from 4% in 2000, rebounded to 3.4% by yearend. Inflation rate went down from 5.8% in 2000 to 3.9% at year-end. The year started with the value of the Peso against the US dollar at P50.97, then settled at P51.79 at year-end. The unemployment rate at the start of 2001 was 11.3% and the underemployment rate, 16.9%. While the labor force increased by 5.6% from January to October 2001, unemployment and underemployment rates fell to 9.8% and 16.6%, respectively, in October 2001.

Lending activity remained sluggish, with the Thrift Banking System’s loan portfolio as of September 2001 increasing by a mere 4.6% year-on-year but declining by 1.7% compared to June levels. Deposit liabilities as of the same period increased by 13.3% year-on-year but decreased by 1.6% compared to June.

This is the backdrop against which your Bank’s performance during the past year will be viewed. It was difficult enough that your bank is still undergoing restoration from the damages caused by its illegal closure. The task has become doubly difficult as we had to cope with the adverse economic conditions that affected the banking industry as a whole.

In 2001, your bank’s resources grew by 7%. By mid-year, your bank had fully recovered the P1.514 billion decrease in resources in 1999 due to your Bank’s settlement of its obligations with the Bangko Sentral ng Pilipinas. By year-end, total resources reached P10.543 billion. The condensed financial condition of your Bank is shown hereunder:

RESOURCES

Actually, the positive impact on your bank’s financial position once the damage claims which the Supreme Court ruled are due Banco Filipino are finally settled is not up to now realized. While the Courts have been consistently ruling in our favor, the defendants CB-BoL and heirs of Jose B. Fernandez have managed to delay the proceedings by resorting to technicalities.

Operating Results

In 2001, your Bank registered a gross income of P2.932 billion, an increase of 37% over the previous year. Interest income decreased by 33%, mainly due to the decrease in volume of investments in government securities as well as decrease in the money market rates. This decrease, however, was compensated by a 27% increase in service charges and other fees and a 143% increase in income realized from the sale of acquired assets.

The cost of doing business increased in 2001. Expenses increased by 48%, from P1.836 billion to P2.717 billion. Interest expense, which is a function of deposit liabilities, increased by P145.721 million due to a P1.127 billion increase in deposits. The streamlining of branch operations resulted in the reduction in the branch manpower complement and overtime; despite this, compensation and fringe benefits increased by 27%, mainly due to salary increases mandated by the CBA. Occupancy costs increased by 45%, taxes and licenses increased by 135% and litigation costs on acquired assets, by 289%.

Up to now, your bank’s operation continues to be supported by disposals of acquired assets.

Your Bank registered a net income of P216.017 million, a decrease of P89.924 million compared to the previous year’s net income of P305.940 million.

Capital accounts increased by P203 million from P3.441 billion in 2000 to P3.644 billion as of year-end.

Loans and Investments

With the rates on government securities declining, your Bank continued its program of shifting investments in government securities to loans in order to attain better yields and increase shareholder value. Consequently, investments in government securities declined by 52% to P1.190 billion by year-end. The loan portfolio, on the other hand, increased by 18.28%, from P3.493 billion the previous year to P4.132 billion in 2001.

In September, your Bank launched the home equity loan, a multi-purpose loan for a maximum amount of P2 million for homeowners who want to tap the values locked in their homes. Product features such as competitive loan value, reduced interest rates, simplified documentation, fast response and approval time made the product very attractive to homeowners of the target communities. Furthermore, efforts to market the product also opened new opportunities for pushing the other products and services of the bank.

Deposits

Despite the less than ideal economic climate, the Thrift Banking System achieved a deposit growth rate of 13.3% as of the third quarter of 2001. Your Bank, on the other hand grew by 14.7% as of the same period, or better than the Industry. By the end of the year, your Bank’s deposits reached P5.692 billion, increasing by 25% over the 2000 level.

Happy Savers Club

The Happy Savers Club has successfully evolved from being a mere thrift program for the youth to a premiere organization of children up to 18 years old, engaged in activities that develop and nurture the value of thrift, nationalism, environmental responsibility and social consciousness. Through these activities, your Bank aims to develop the talents of its members, harness their potential and mold them into responsible Christian leaders of the future.

Consistent with these objectives, Happy Savers Club members in Metro Manila donated old toys, clothes and books at their Christmas party in Italia Country Club. These were later given to the children of the Holy Family Parish in Kamias, Quezon City and the orphans at Mother Teresa’s Missionaries of Charities in Tayuman, Manila. Down South, the HSC Metro Cebu Chapter shared the joy of Christmas with orphans at the City Sports Club, Ayala Center. There, they capped the festivities with the usual gift-giving activity.

HSC members displayed their unusual talents by participating in the youth art competition on the theme “Savings for Business and Progress for the Country”, which was sponsored by the Bank Administration Institute of the Philippines (BAIPhil). Happy Savers Club members won first and second prize for category A (ages 7 to 11 years old) and first, second and third prize for category B (12 to 16 years old).

Remittance Servicing

In order to serve better the needs of clients, your Bank tied-up with e-Business, Inc., Philippine agent of Western Union. The tie-up involved the peso payment of Western Union inward remittances in all Banco Filipino branches.

Success of the tie-up exceeded expectations. Since its launching in late September, your Bank has serviced 1,263 money transfers amounting to P21.608 million. These results are so encouraging that plans are underway to expand the service to include outbound remittances and dollar-denominated transactions.

With the location of new branches sites becoming more difficult, your Bank was able to open only two branches in 2001-- in Angeles, Pampanga and Baliuag, Bulacan.

Your Bank converted all stand-alone provincial branches to online and installed automated teller machines (ATMs) in these branches. Conversion was completed in August, enabling all BF depositors to deposit-withdraw in any of its branches, nationwide. Your Bank also installed ATMs in these branches, thereby allowing depositors to transact even beyond regular banking hours.

As of year-end, your Bank’s ATM network consisted of 70 ATMs, 7 of which are installed outside bank premises. This network of ATMs enables your Bank to service clients not only through its own service centers but also through the BancNet and Megalink ATM networks.

BF Visa Card

Year 2001 was a very challenging year for BF Visa Card. On the one hand, competition became keener, with other credit card companies implementing very aggressive marketing strategies - waiver of annual fees, presence in malls, giving out pre-approved cards. On the other hand, due to the economic difficulties, consumers shifted their financial priorities, at times deferring settlement of their credit obligations in order to provide for basic necessities.

BF Visa, opting for quality rather than quantity, continued its more conservative marketing and approval policies. By focusing its marketing efforts on valued clients of the branches, BF Visa increased its cardholders base by 11%.

Your Board has approved plans to issue American Express cards. The addition of American Express to your bank’s credit card products will give clients a wider selection to choose from, allowing them to pick the product which best suits their specific needs.

Trust Operations

Since the bank resumed its Trust business, resources registered a modest but steady growth. In 2001, trust resources increased by 8% over the previous year’s level, to P299.2 million. These resources were composed of Pre-Need (72%), Investment Management Account (22%), Living Trust (2%), Employee Benefit (2%), Escrow Account (1%) and others (1%). These funds are invested in Government Securities (61%), Deposits in Banks (25%), Equities (10%), Loans Receivable (1%) and other assets (3%).

Manpower Resources

Training and staff development has continued to be a major focus of your Bank’s human resource program to enable it to sustain the CRM service and efficiency that has since become a by-word in the industry. Seminars on bank operations and services, customer relations and personal growth are conducted regularly, hand in hand with programs on specialized areas of knowledge and technology to enable bank personnel to adapt to the ever changing business landscape that is increasingly becoming technology based and competition driven.

Cost effectiveness was likewise a major concern. Automation of branch accounting processes has resulted in the reduction of branch personnel requirements. Total manpower decreased further to 933 despite the opening of additional branches in Angeles, Pampanga and Baliuag, Bulacan.

Risk Management

The risk management structure remained the same, with the exercise of risk management lodged in various units.

Your Bank’s risk management system consists of a risk identification and measurement system; a continuous discovery process to identify loss or risk exposures in resources and operations; measures to control or prevent the probability and/or the adversity of an adverse event to within acceptable limits; and a management information system for monitoring, reporting and controlling present and foreseeable risks to enable management to take immediate corrective measures to prevent or minimize losses.

The Board of Directors is responsible for adopting policies to govern the safe and prudent functioning of your Bank to the end that risks are effectively managed. It serves as the primary oversight body for your Bank’s risk taking activities. The Risk Management Committee, which reports to the Board, has the function of the overall supervision and control over your Bank’s risk taking activities, with the end of protecting your Bank’s scarce capital from losses arising from such activities. Specific committees vested with appropriate authorities formulate policies for each type of risk and monitors adherence thereto. The Internal Audit provides support to these committees, including in its audit program a risk exposure assessment, monitoring and reporting system.

Settlement of BSP Claims

In September 2001, your bank fully settled the P4.132 billion claims of the Bangko Sentral ng Pilipinas. Pursuant to the terms of the Memorandum of Agreement signed in 1999, your Bank delivered to the Bangko Sentral ng Pilipinas properties valued at P4.145 billion, exceeding the claims by P13.073 million.

With this matter behind us, your Bank can now concentrate on the task of resto-ring it to its previous position in the Thrift Banking industry.

Claim for Damages

The petition for Certiorari which the Central Bank - Board of Liquidators (CB-BoL) and the individual defendants have instituted before the Court of Appeals to annul and set aside the orders of the RTC of Makati in Civil Case Nos. 8108, 9675 and 10183, refusing to dismiss the damage suit of your Bank, was dismissed on January 9, 2002.

The CB-BoL and the individual defendants filed their respective motions for Reconsideration of the dismissal and after your Bank filed its comment thereto, the matter is now submitted for resolution of the Appellate Court.

BF Shares in the PSE

In 1998, your Bank declared a 20% common stock dividend which has an equivalent value of P288.93 million. This was approved by the BSP on April 6, 2000.

The documents required in the listing application of the 2,889,207 shares that came from the said stock dividend declaration were completed and submitted to the Philippine Stock Exchange last year. The PSE asked your bank to submit additional information, which your Bank has already complied with.

To date, approval of your Bank’s application for listing these shares is still pending with the PSE’s Board of Governors.

Capital Build-up

On September 23, 1999, your Board passed a resolution increasing the Bank’s authorized capital from P5 billion to P8 billion. Your Board likewise approved a stock rights offering to enable your Bank to meet the required capital for a universal bank. These resolutions were both ratified during the Stockholders’ Meeting on April 8, 2000.

Under the stock rights offering, stockholders may exercise their pre-emptive rights by subscribing to the Bank’s unissued shares from its authorized capital stock of P5 billion at a ratio of two shares per one share held. However, such exercise of pre-emptive rights by the Bank’s stockholders will be offered only after the shares to be subscribed in the said stock rights offering have been listed in the Philippine Stock Exchange.

Stock Dividends

On April 10, 2001, your Bank declared an 11% stock dividend, which was ratified by the stockholders on the same date. This was approved by the BSP on May 18, 2001.

The stock dividend, which has an equivalent value of P190.68 million, will be used to pay the required paid-in capital of the P3 billion increase in the authorized capital of the Bank.

The pertinent documents which include the Amended Articles of Incorporation reflecting the P3 billion increase in capital, were submitted to the BSP for its approval. To date, the documents are still being reviewed by the BSP.

The documents pertinent to the 11% stock dividend will be submitted to the PSE for listing application after the P3 billion increase in capital has been approved by the BSP.

Looking Forward

Early indications promise a brighter outlook for 2002. While economic activity is expected to remain subdued in the near term, recovery is expected to begin as early as the second quarter and conditions are expected to strengthen throughout the second half of 2002 and into 2003.

Analysts point to the urban youth, which is expected to reach 4.3 million in the next 10 years, and urban professionals, which is growing by 400,000 annually, as the promising market segments. This proves your Bank to be on the right track -- it has identified these sectors as its target market and developed products and services which are responsive to their needs. We shall continue to address the needs of this sector even as we look at the specific needs of other segments of the market, positioning ourselves for the opportunities and the challenges that a revitalized economy will bring.

We would like to take this opportunity to express our appreciation and gratitude to all our stakeholders -- staff members, supervisors, officers, members of the Board and stockholders -- for their continued cooperation and support as we work towards the realization of our founder, Mr. Tomas B. Aguirre’s dream “to build an institution that will continue to grow and serve the Filipino people beyond our own lifetimes.”

SINCERELY YOURS,

TEODORO O. ARCENAS, JR.
Chairman of the Board & President