TABLE OF CONTENTS

Executive Summary
Problem (Issue) Statement

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Data Analysis
Key Decision Criteria Alternative Analysis Recommendations Action and Implementation Plan Exhibits Conclusions References

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I.

Executive summary Rural Bank XYZ Inc., (XYZ) is a newly incorporated rural bank which started operations on 14 February 2010. It has seven branches located in the province of Pampanga and Bulacan. Majority stockholder is the Arroyo Family Group owning 99.7 percent of the voting stock. The Bankis classified as “Very High Risk” considering its extremely unsound financial condition and the various unsafe and unsound banking practices noted in the previous and latest general examination. Conservatorship under Section 29 of R.A. No. 7653 (The New Central Bank Act) can no longer be considered an option for XYZ, since its liabilities exceeded its realizable assets and the Bank’s continuance in business would involve probable losses to its depositors and creditors.

II.

Problem (Issue) statement XYZ, with head office located at San Fernando, Pampanga, is a newly incorporated rural bank which started operations on 14 February 2010 following the consolidation of the Rural Bank of ABC, Inc. and Rural Bank of DEF, Inc. It has seven branches, five of which are located in the province of Pampanga (Mexico, Masantol, Bacolor, San Simon and San Luis) while the other two are in the Province of Bulacan (Pandi and Marilao). Majority stockholder is the Arroyo Family Group owning 99.7 percent of the voting stock. The Bank is classified as “Very High Risk” considering its extremely unsound financial condition with capital adequacy ratio (CAR) as of 31 October 2012 (latest available data) of negative 24.7 percent and adjusted capital of negative P66.4 million, net losses for 2011 and 2012 averaging P26.9 million, and unsafe and unsound banking practices cited in the first general examination (GE) as of 30 November 2012 and noted to have persistently engaged in by the Bank in the last GE with reference date of 31 July 2012. The Bank was initiated into the Prompt Corrective Action (PCA) framework pursuant to Monetary Board (MB) Resolution No. 143 dated 15 December 2010 based on result of the 30 November 2010 GE which noted, among others, the Bank’s CAR of negative 16.5 percent, CAMELS composite and Management ratings of both “1” and the prevalent findings of unsafe and unsound banking activities accruing to the benefit of the Bank’s DOSRI. Subsequently, the MB in its Resolution No. 111 dated 27 January 2011 approved the Bank’s Memorandum of Understanding (MOU). On 15 May 2011, the Bank’s PCA Plan was approved by the Managing Director, Supervision and Examination Sector.

In various correspondences), the Bank’s attention was repeatedly called for its noncompliance with the provisions of the approved MOU and PCA Plan, specifically its noncompliance with the minimum capital requirement. It is evident from the foregoing that continuance in business would involve probable losses to its depositors and creditors, thus we proposed to place Bank XYZ under receivership. III. Data analysis The last GE which closed on 14 August 2012 and jointly conducted with the Philippine Deposit Insurance Corporation (PDIC) disclosed among others, that Bank’s capital is critically deficient, asset quality is poor and continues to deteriorate, liquidity position is weak, operating performance is unsatisfactory, and unsafe and unsound activities persist. CAR stood at negative 60.5 percent translating to a capital deficiency of P207.1 million, while adjusted capital of negative P141.6 million is deficient by P148.1 million to comply with the P6.5 million minimum capital requirement. Despite BSP directives, the capital deficiency has not been addressed as stockholders are not capable of putting in the required additional capital. There were no reported negotiations with prospective investors. Earnings are critically deficient to support current operations and cannot be relied upon to provide for capital accretion. Operations for the year ended 31 December 2011 and for the seven-month period ended 31 July 2012 resulted in net losses of P12.7 million (as reported) and P76.6 million (as adjusted), respectively. Poor risk management practices resulted in deteriorating asset quality. Further, considering the gravity and persistence of unsafe and unsound banking practices, the Bank is expected to accumulate further losses, leading to further dissipation of its assets.

Moreover, estimated realizable value of the Bank’s assets of P393.8 million is P34.5 million short of the total liabilities to be paid of P428.3 million. This deficiency further increased to P44.4 million as of 31 October 2012.
As of 31 July 2012 , of the reported deposit liabilities of P340.9 million, 79.8 percent are insured with the PDIC. Reported deposit liabilities as

of

31 October 2012 stood at P356.1 million (14,013 accounts), of which P287.8 million (80.8 percent) are insured with the PDIC. The root causes of XYZ’s problems can be attributed to the weak Board of Directors and management oversight, inadequate and ineffective risk management practices, and unsafe and unsound banking practices, which include among others, engaging in operating practices which are detrimental to the Bank and failure to keep accurate and updated books and records. The Board and Bank management have been given ample time to address the Bank’s financial problems. The need for infusion of additional fresh capital and compliance with the commitments in the MOU/PCA Plan within the approved timelines were issues discussed with Bank management on several occasions and communicated in various letters/correspondences. While a review of the Bank’s submitted financial reports as of 31 October 2012 subsequent to the last GE, revealed a capital infusion of P2.5 million (still subject to verification) recorded as part of Bank’s common stock (P61.5 million balance as of 31 October 2012 less P59.0 million balance as of 31 July 2012 GE), the same is insufficient to rectify the capital deficiency of P207.1 million noted in the last GE. On the overall, the proposed receivership of NEWRT will not cause a significant impact on the communities it serves as well as the country’s financial system. It may, however, affect the following: a) banking offices in the areas where the Bank operates, particularly, San Fernando, Masantol and Mexico, all in Pampanga Province; and b) Bank GHI, Inc. (located in Pampanga Province) and Bank JKL, Inc. (located in Bulacan Province, Inc. which are identified as affiliate and related interest of Bank XYZ, respectively. In a letter dated 15 October 2012 , the Bank’s President, requested extension of time to comply with the BSP directive contained BSP letter dated 05 October 2012 for Bank XYZ to book the deficiency in the BSP’s recommended valuation reserves against the Bank’s booked valuation reserves which as of 31September 2012 amounted to P26.5 million. Considering that grounds for receivership already exist, the Bank’s subject request has been rendered moot and academic, warranting its denial.

IV. Key Decision Criteria

It is evident from the foregoing that the Rural Bank XYZ, Inc:
a. Has insufficient realizable assets to meet its liabilities; and b. Cannot continue in business without involving probable losses to its depositors and creditors. V. Alternatives analysis

Conservatorship under Section 29 of R.A. No. 7653 (The New Central Bank Act) can no longer be considered an option for Bank XYZ since its liabilities exceeded its realizable assets. Moreover, the Bank’s continuance in business would involve probable losses to its depositors and creditors.
VI. Recommendations In view of the foregoing and considering that the Board of Directors/ Management/stockholders failed to address the Bank’s financial and operational problems despite considerable time given and that it had been accorded due process, we recommend: 1. To deny the Bank’s request for extension of time to book P26.5 million deficiency in the BSP’s recommended valuation reserves against the Bank’s booked valuation reserves as of 30 September 2012; the

2. To (a) prohibit the Bank XYZ , Inc. from doing business in the Philippines and to place its assets and affairs under receivership, and (b) designate the Philippine Deposit Insurance Corporation (PDIC) as Receiver, in accordance with Section 30 of Republic Act (R.A.) No. 7653 (The New Central Bank Act); and Section 53 of R.A. No. 8791 (The General Banking Law of 2000); 3. To authorize the Examination Department pursuant to Section 27 (c) of R.A. No. 7653, to release (a) a copy of the Report of Examination (ROE) of the Bank as of 31 July 2012 to the PDIC; and (b) a copy of said ROE and other relevant documents to the Office of Special Investigation (OSI)/Office of the General Counsel and Legal Services (OGCLS) and to authorize the OSI to file the appropriate cases, if warranted, against the Bank’s directors, officers, and other individuals who may be found liable for violation of banking laws and Bangko Sentral ng Pilipinas rules and regulations; and

VII. Action and Implementation Plan Upon implementation of the receivership by the PDIC and determination by the OSI that there is a need to conduct investigation, to authorize the OSI to request from the PDIC documents pertinent to the investigation of the Bank’s directors and/or officers referred to above and to furnish the PDIC a copy of the Monetary Board resolution(s) showing OSI’s authority to conduct investigation of the Bank. VIII. Exhibits PERTINENT PROVISIONS OF LAW/REGULATION Section 30 of R. A. No. 7653 (The New Central Bank Act) provides:

“Proceedings in Receivership and Liquidation - Whenever, upon report of the head of the supervising or examining department, the Monetary Board finds that a bank or quasi-bank:
“(a) is unable to pay its liabilities as they become due in the ordinary course of business: Provided, That this shall not include inability to pay caused by extraordinary demands induced by financial panic in the banking community; “(b) has insufficient realizable assets, as determined by the Bangko Sentral, to meet its liabilities; or “(c) cannot continue in business without involving probable losses to its depositors or creditors; or “(d) x x x; in which cases, the Monetary Board may summarily and without need for prior hearing forbid the institution from doing business in the Philippines and designate the Philippine Deposit Insurance Corporation as receiver of the banking institution.

“x x x
IX. Conclusion

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Only the BSP, though the Monetary Board has the authority to decide whether or not a Bank should be closed pursuant to Section 30 of R.A. No. 7653 (The New Central Bank Act) upon the recommendation of the Examination Department in the Report of Examination. The BOD and Bank management of Rural Bank of XYZ, Inc., have been given ample time to address the Bank’s financial problems. The need for infusion of

additional fresh capital and compliance with the commitments in the MOU/PCA Plan within the approved timelines were issues discussed with the BOD and Bank management on several occasions and communicated in various letters/correspondences. However, despite the considerable time given to Bank’s BOD/Management to improve the Bank’s capital position and enhance the business operations, capital remains critically deficient, asset quality is poor and continues to deteriorate, liquidity position is weak, operating performance is still unsatisfactory, and unsafe and unsound activities persist. These deficiencies and weaknesses threaten the Bank’s viability and unless there is an immediate capital infusion from existing stockholders or new investors, failure is a distinct possibility, thus the BSP may have to consider taking drastic action against the Bank. The Bank has to be placed under receivership to: Prevent further dissipation of its assets and assure maximum benefits to its depositors and other creditors; 2. Prevent its problem from spreading or developing into serious situations that may undermine the people’s trust and confidence in the banking system; and 3. Protect the deposit insurance fund by averting any further increase in insured deposit liabilities.
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References a. b. c. The New Central Bank Act. The General Banking Law of 2000 The Manual of Regulation for Banks