Notes to Financial Statements - BDO

Notes to Financial StatementsDECEMBER 31, 2008, 2007 AND 2006(Amounts in Millions Except Per Share Data)25. TRUST OPERATIONSThe following securities and other properties held by the Group in fiduciary or agency capacity (for a fee) for its customers are not included inthe accompanying Group statements of condition since these are not properties of the Group (see Note 31).GroupParent Bank2008 2007 2008 2007Investments P 188,553 P 183,694 P 188,554 P 182,115Others 149,620 90,414 122,488 73,384P 338,173 P 274,108 P 311,042 P 255,499In compliance with the requirements of the General Banking Act relative to the Bank’s trust functions:(a) Investment in government securities (shown as part of Held-to-maturity Investments) with a total face value of P3,057, as ofDecember 31, 2008 and P2,263 as of December 31, 2007 are deposited with BSP as security for the Bank’s faithful compliance with itsfiduciary obligations (see Note 9); and,(b) A certain percentage of the Bank’s trust income is transferred to surplus reserve. This yearly transfer is required until the surplus reservefor trust function is equivalent to 20% of the Bank’s authorized capital stock. As of December 31, 2008, the reserve for trust functionsamounted to P627 and is included as part of Surplus Reserves in the Group statements of changes in equity.Income from trust operations is reported gross of the related expenses and amounted to P1,153, P852, and P600, for the year ended December31, 2008, 2007 and 2006, respectively, and shown as Trust Fees under Other Operating Income in the Group income statements.26. MERGERS AND ACQUISITIONS26.1 Merger with Equitable PCI Bank, Inc.On August 29, 2006, BDO Unibank, together with SMIC, a major stockholder and other members of the SM Group, filed a Tender Offer with theSEC to acquire up to around 401.1 million shares representing 55.2% of the total outstanding shares of common stock of the then EPCIB atP92 per share. The payment terms of the offer were as follows: 10% on October 2, 2006; 10% on June 2, 2007; 10% on February 2, 2008; andthe remaining balance to be paid on October 2, 2008. On October 2, 2006, a total of 377.7 million shares equivalent to 52% of the EPCIB’s totalshares outstanding were purchased by SMIC for a total consideration of P34.8 billion.Consequently, on November 6, 2006, the respective Boards of Directors of BDO Unibank and EPCIB approved a Plan of Merger of BDOUnibank and EPCIB with BDO Unibank as the surviving entity. The Plan of Merger was subsequently approved by BDO Unibank and EPCIBshareholders in separate meetings on December 27, 2006. The Plan of Merger and Articles of Merger were approved by the BSP and theSecurities and Exchange Commission (SEC) on March 29, 2007 and May 25, 2007, respectively, with May 31, 2007 as the effectivity date of themerger.Since the merger is between two entities which are both under common control by SMIC, the Group has decided to account for the mergerunder the pooling-of-interests method of accounting. In applying the pooling-of-interests method, the financial statement items of BDOUnibank and EPCIB were combined at the beginning of the period in which the merger occurred, that is, January 1, 2007. The comparativefinancial data presented for 2006 have been restated to include the accounts of EPCIB from October 2, 2006, the date the two merging entitiesbecame under common control by SMIC.Simultaneous and pursuant to the merger, BDO Unibank increased its authorized capital stock from P15 billion to P65 billion to provide for theissuance of the BDO Unibank common shares necessary to effect the exchange ratio (see Note 19).The use of the pooling-of-interests method requires the restatement of all comparative financial data to be presented from the beginning of theearliest period presented, or if later, the date the two merging entities became under common control, which is October 2, 2006. BDO Unibankopted for the latter. Accordingly, the statement of condition as of December 31, 2006 have been restated to include all the resources, liabilitiesand equity accounts of both BDO Unibank and EPCIB as of December 31, 2006, and the income statement, statement of changes in equity andcash flow statement, for the year ended December 31, 2006 has been restated from the previously reported amounts to include all profit andloss accounts, changes in equity and cash flows of the former BDO Unibank for the whole year of 2006 and those of the former EPCIB fromOctober 2, 2006 (the date both BDO Unibank and EPCIB became under common control by SMIC) to December 31, 2006.70Thinking Ahead To Get You Ahead • Annual Report 2008