Strengthening Program for Cooperative Banks (SPCB) Plus

B.ANGKO SENTRAL NG PILIPINAS OFFICE OF THE DEPUTY GOVERNOR SUPERVISION AND EXAMINATION SECTOR CIRCULAR LETTER NO. Ct.2015. 029 To All Banks and Non-Bank Financiat Institutions Subject : Strengthening Program for Cooperative Banks (SpCB) plus The Bangko Sentral ng Pilipinas (BSP), Philippine Deposit Insurance Corporation (PDIC), and Land Bank of the Philippines (LBP) have mutually agreed to extend the availability period of the Strengthening Program for Cooperative Banks (SPCB) Plus, for another year to benefit more cooperative banks providing essential financial services in the local communities and supporting the growth of rural economies and communities. The extended SPCB Plus shall be available up to 17 September 2015. The SPCB Plus Framework (Annex A/ and the branching & other incentives granted thereunder (Annex 8/ shall continue to apply. Based on the arrangement agreed upon by the BSP, PDIC and LBp, the eligible STPIs and eligible cooperative banks shall submit to the SPCB Lane a joint letter, separately addressed to PDIC, BSP and LBP, indicating their intention to merge or consolidate, or enter into a purchase of assets and assumption of liabilities or acquisition of control under the SPCB Plus, and all the documentary requirements contained in Annex C. For guidance and implementation. r /l*t^ffi,f" Deputy Governor 06 vay zors Att.: A/S A. Mabini st., Malate 1004 Manila, Philippines r (632) 708-770I r www.bsp.sov.ph o [email protected]

Annex A SPCB PLUS FRAMEWORK Objectives To encouroge mergers, consolidolions ond ocquisilion of CBs 1o creote tstrong rurol bonking system vio gronf of finonciol ossistonce (FA) pursuont fo Sec. l Zd of RA359l, qs omended (the PDtC Chorter). ProErom Period Avoiloble from opprovol dole of lhe omendment up to one (l) yeqr Progrom Funding Acluol ovoilmenls to be sourced from the opproved P5Bn tund ottocotea lor tfre exisfing SPRB {now referred to os SpRB Module I ) Eligibility l. Ellgible bonks for SPCB Plus FA ore os follows: o) cooperolive bonks (CBs) with risk bosed copitol odequocy rotio (RBCAR) of less thon l0%; b) merging, consolidoting with or lo be ocquired vio P&A or ocquisition of shores of ol leosl 67%by on etigibte Strotegic Third porty tnvestor (STpt) 2. Bosic crllerio for Eliglble STPIs: For o CB to be on STPI: o) BSP CAMELS roting of of leost ,,3"; b) Nof under BSP's Prompt Corrective Aclion (pCA); ond c) No findings of U&U bonking proctice by the BSp or pDlC. For o commerciql Bonk (KB), Thrift Bonk tTB) or Rurol Bonk (RBl to be on sTpt: o) Lotest BSP CAMELS roting of ol leosi ,,3"; b) Nol under BSP's Prompf Corrective Action (pCA); ond c) No findings of U&U bonking proctice by the BSp or pDtC; For Non-bonk entitv i.e. Primorv Cooperotives/Cooperotive Feclerolion to be on STPI: o) certificofion or endorsement of good stonding from the cooperotive Developmenl Authority (CDA); b) with proven lrock record bosed on Audited finonciol slolemenrs. Mode of Entry Modes of Enfry: o) Merger or consolidolion; b) Purchose of oll ossets ond ossumption of oll liobilities (P&A) of eligible CB subject to complionce to the Bulk Soles Low; ond c) Subscription of shores of ot leosf 67% of ihe eligible CB. Provided, thot in oll of the qbgve modqlifies, the surviving entity musi hove o net worth of ot leost Pl00M ond RBCAR of ot leost l5%. Flnonciol Assisfonce FA willbe eilher: (FA) l) A combinolion of: o) Prefened Shores (P/S) - intgnded to provide 1007" of ihe odditionol copitot to bring eligible bonk's RBCAR from negolive to 0%; ond b) Direct Loon (DL) - to buitd qp sinking fund (SF) to provide on outomotic poymenl mechonism for the pS OR 2) Direct Loon only - infended lo provide income supporl lo the surviving bonk Provided however, thol pursuont to Sec. l7d of RA 3591, os omended, {the pDlc Chorler), the totol cost (in presenl volue terms) of providing the obove of FA (eiiher o combinotion of PS ond DL or DL only) should not exceed the cosl of closure of ihe eligible bonk. The combinolion of PS ond DL under FA#l will hove fhe following feolures: Terms of lhe PS o) Amounl - up io 100% of lhe required oddilionol cqpitol to pring the eligible bonk's

RBCAR from negotive to O%: b) Dividend rote - equol to lhe role per onnum ol lhe prevoiling l0-yeor FXTN ovqiloble qt fhe lime of lhe releose of FA c) Non-voting, non-cumulolive. convertible to common shores of the end of 10 yeors; ond d) Perpetuol Terms of D[ o) Purpose - to purchose Government Securities (GS); b) Principol - equivolenl lo such smounl thot wilt provide o nel lnteresl spreod (NlS) over the tenor of the DL to such omount equol lo ihe pS; c) lnleresf Rote per onnum - equivolent lo such role thqi will provide ihe bonk with on onnuql NIS fhot will occumulole over the fenor of lhe Dt io such omount equol lo the PS; d) Tenor - 1O yeors; e) colloterol/Security - pledge of GS to be purchosed using proceeds of DL. The terms of the DL under FA#2 wilr hove fhe foilowing feorures: o) Purpose - to purchose Governmenf Securilies (GS); b) Principol - equivolent lo such omounl thqt wiil provide o nel inferest spreod (NlS) equollo the copitoldeficlency fo bring RBCAR to 0y"., c) Inlerest Role per onnum - equivolent lo such rqte thqt will provide the bonk with on onnuol NIS lhot will accumulole over the tenor of the DL io such omounl equol lo the copitol deficiency lo bring RBCAR lo OT": d)Tenor- lO yeors; e) colloterol/Security - pledge of GS io be purchosed using proceeds of DL. Mojor ferms ond Mojor terms of the conditions of the spcB plus FA wiitoe os rolrowr Conditions o) Quosi-reorgonizotion ond Copitol restructuring; b) complionce with the FA ogreemenl terms ond conditions os follows . Finonciol Covenonts - poymenl terms qnd conditions - ochievement of rehobilitotion plon performonce forgets r Non-finqnciol covenonls - submission of required reporis - improvement of bonk operolions ond governonce - conduct by PDIC of periodic on-site linspeclion ond review - oppointment of consuliont's ond,/or nominotion of representotive in the bonk,s boord of directors c) complionce with PDlc regulotory issuonces, cDA ond bonking rules ond regulotions; d) Conduct of speciol review of pperotions of eligible CB ond eligible STpt by pDtC; e) conduct of due diligence review by pDlc or on exiernol oudiior; f) lf the eligible STPI is o KB, TB or RB, the surviving entity should continue to ooerole in the some oreo/locoiion where the eligible CB originolly operoles; g) Entitlemenf to boord seql in the surviving entity, os necessory. Oiher Terms ond Conditions Applicotion of the SF for the poyment of lhe ps upon occurrence of the following events: o) in the event of ony defoult on lhe porl of the surviving entity to comply with its covenonts under the rehobilitotion plon;

b) SF is equollo the omount of pS Monilorlng Acllvllies o) PDIC sholl monitor the performonce of the surviving entity onO tneir cornptiorrce with ollthe conditions of the FA Agreement. b) The surviving enfity sholl comply with the regulor reporting requiremenls including lhe submission of quorterly stotements of condition, ond income ono expenses ond the onnuol oudited finonciol stofements. c) PDIC, pursuonl lo these Guidelines ond lhe FA Agreement, sholl be outhorized to conduct o speciol review of operotions of the surviving entity onytime, os it moy deem necessory, to check complionce wilh finonciol lorgets, business plon ond relevont FA terms. Other lncenllves The proponent bonks moy request for: 1) BSP regulolory relief, brcnching ond other incenlives under lhe omended SpCB plus fromework os moy be opproved by lhe Monelory Boord (MB). 2) tBP Assislqnce in occordonce with the "LBP Guidelines on Gront of Assislonce under SPRB-Module ll os follows: o) Equity investment. b) Additionol credit focility; ond c) Porlicipotion in the copocify building progrom.

Annex B BSP GUIDELINES ON THE GRANT OF REGUTATORY REIIEF UNDER THE STRENGTHENING PROGRAM FOR COOPERATIVE BANKS (SPCB) PIUS Consistent with the objective to promote mergers and consolidations with and acquisitions of cooperative banks by stronger partners as a means to strengthen the cooperative banking system, constituent banks may, subject to prior BSp approval, avail themselves of the following regulatory reliefs: 1. Conversion of the existing head offices, branches and/or extension offices of the merging or consolidating CBs into head office, branches or extension offices of the surviving or new bank; 2. Relocation/opening of existing/approved but unopened branches, extension offices and/or other banking offices of the surviving or new bank within two (2) years from date of merger/consolidation/acquisition subject to applicable requirements on relocation of branches, extension offices and/or other banking offices; 3. Condonation of liquidated damages on past due rediscounting/emergency loans and/or monetary penalties f or violation of BSp issuances on rediscounting/emergency loans of the eligible cBs as of the end of the month immediately preceding the date of request for loan restructuring; 4. Restructuring of past due rediscounting/emergency loans of the eligible CBs with the BSP, subject to compliance with the following guidelines: a. Amount to be Restructured The amount to be restructured shall consist of the following: the month immediately preceding the date of request for loan restructuring obligation as of the end of the month immediately preceding the date of request for loan restructuring. b. lnterest Rate Only the restructured principal obligation shall be charged interest at the rate equal to the prevailing 364-day Treasury Bill rate of the last auction immediately preceding the date of request for loan restructuring. No interest shall be charged on the restructured accrued interest. c. Terms of Repayment The amount to be restructur.ed shall be paid by the surviving or new bank in monthly amortizations over a period not exceeding ten (10) years.

d. Collateralization A surety agreement shall be executed by the stockholders owning at least sixty seven percent (67%) of the shares of stock of the surviving or new bank. e. Default Clause i. Event of Default - failure to pay two (2) amortizations shall constitute an event of default and shall render the entire obligation due and demandable. ii. consequence of default - the amount of liquidated damages on past due rediscounting/emergency loans waived shall be restored and the payments already made shall be re-applied, first to liquidated damages, and the balance, if any, to interest, then to the principal loan. Monetary penalties for violation of BSp issuances on rediscounting, if any, shall also be restored and payment thereof in full shall be demanded against the defaulting surviving or new bank. iii. Legal Action - the BSP may institute appropriate legal action without further need for demand or notice to the defaulting surviving or new bank. f. Documentary Requirement The surviving or new bank shall execute a Letter of Understanding with the BSP covering the terms and conditions of the approved restructured loan/s together with the authority for the BSp to debit the surviving or new bank,s demand deposit account with the BSp for the amortizations due. 5. Preferred Shares for Staggered Redemption The shares for staggered redemption shall be the LBP preferred shares of stock of the eligible CBs, representing the redi5counting arrearages with BSP converted into LBP equity. Repayment arrangement should be made by the surviving or new bank directly with the LBp. a. Dividend Rate The dividend rate shall be four percent (4%) b. Redemption Term The staggered redemption shall be effected by the surviving or new bank in monthly installments over a period not exceeding ten (10) years. c. Waiver of Dividends Dividends due on the LBP preferred shares of stock of the eligible CBs as of date of merger or consolidation shall be waived.

d. Documentary Requirement Upon approval, the surviving or new bank shall execute a written agreement with the LBP for the staggered redemption of LBP preferred shares of stock of the Eligible CBs, copy furnished the BSp. 5' Rediscount ceiling of a least one hundred fifty percent (ls)yol of the adjusted capital accounts of the surviving or new bank for a period of one (1) year reckoned from the date of merger or consolidation, subject to compliance with the existing eligibility requirements of the BSP as provided under Subsection x268.3 of the Manual of Regulations for Banks (MORB), as amended by circular No. 584 dated i.5 March 2010. 7. Waiver of monetary penalties imposed on the Eligible CBs for violations of existing laws and BSP rules and regulations, except penalties accruing to the other parties, €.g., Micro, small and Medium Enterprises Development (MsMED) council Fund as provided under Section 19 of R.A. No. 6977 (Magna carta for Micro, small and Medium Enterprises), as amended, and Agricultural Guarantee Fund Pool (ACFP) and Philippine Crop Insurance Corporation (PCIC) as provided under section 10 of R.A. No. 10000 (The Agri-Agra Reform credit Act of 2009), as of date of merger/consolidation. 8. Exclusion of the loan to be provided by LBP to qualified surviving banks from ceilings on loans, other credit accommodations and guarantees granted to subsidiaries and/or affiliates as provided r:nder Subsection X328.S of the MORB even if the government ownership in the borrower-surviving bank exceeds 20 percent of the bank's subscribed capital stock. The loan being referred herein pertains to the loan granted under the credit facility that LBP will make available under the SPCB Plus. 9. The perpetual, non-voting and non-cumulative preferred shares, convertible to common shares after ten (10) years which will be issued to PDIC and LBp for their respective equity investments under the SPCB Plus shall be considered Tier 1 Capital. 10. Additional branchingl and other incentives as follows: For eligible Strategic Third party Investgr (STpt) UKBs and TBs a. The special branch licensing fees2 to be waived by the BSp shall be equivalent to the amount of capital contribution of the STpls to bring the eligible bank's RBCAR to 10 percept. Under circular No. 729 dated 23 June 2071, a bank applying for a branch license in restricted areas shall be charged a licensing fee of P20 ntillion for UKBs and P15 million for TBs. Hence, if an STPI's capital contribution in a TB is p50 million, said STpl bank is qualified to establish 3 branches (P50 million/P15 million= 3.33 branches) in restricted areas for free. Branching incentives for non-bank STPIs will depend on the type of banks they will acquire. t This is different ^^ from the branch processing fees under Section 6 of Circutar No. 72g. Branch processing fees will still be charged from the STpl UKBs ad TBs.

In case the capital contribution of the srpl in the acquired bank is less than the amount of branch licensing fees under circular 72g, that is, p20 million for uKBs and P15 million for TBs, the srpl can avail of one branch license in restricted area for free. b. The srPl banks may be allowed, subject to BSp approval, to convert the status of the acquired bank from RB to TB, consistent with the srpl,s over-all business plan and strategy. For Eligible STPI RBs a. In the case of RBs which are not eligible to establish branches in Metro Manila, they can establish branches outside Metro Manila equivalent to the number of branches of the acquired bank/s. Branch processing fee applicable to RBs of P25,000 shall be waived and the following theoretical capital requirement under Circular No. 73g shall not be imposed: Theoretical Location of Branch Date of lmplementation Capital (ln P Mil) Metro Manila Up to 30 June 2012 5.0 Cebu and Davao From 18 January 2006 5.0 1." to 3'o Class Cities Up to 30 June 2012 2.5 4'n to 6'n Class Cities Up to 30 June 2012 1.5 1" to 3'o Class Municipalities From 18 Januarv 2006 1.0 4th Class Municipalities Up to 30 June 2012 0.5 5'' to 6"'Class Municipalities From 18 January 2005 0.5 Note: Please refer to Circulor No. 728 for applicable theoretical capitat requirement after 30 June 2012. b. For srPl RBs which will acquire single/one unit RBs, they are still entitled to establish one branch outside Metro Manila. For srPl RBs which have availed under Module 1 of the spRB, the above proposed branching incentives for RBs under SpRB plus may be granted subject to the same conditions. For All Eligible STPIs a. As additional premium, STpl uKB5 and TBs shall be granted one acditional branching license in restricted areas while srpl RBs shall be granted one additional branching license in areas outside Metro Manila for every 3 eligible banks resolved under the program.

Annex C STRENGTHENING PROGRAM FOR COOPERATIVE BANKS (SPCB} PIUS Documentary Requirements FOR PDIC FA A. For merger or consolidation: 1. Plan of Merger or Consolidation duly approved by at least three-fourth (3/41 votes of all the members with voting rights, present and constituting a quorum of each of the constituent institutions 2' Notarized Secretary's Certificate on the Resolution of the Board of Directors of the respective constituent cooperatives approving the plan of Merger or Consolidation 3. Notarized Secretary's Certificate attesting approval of at least three-fourths F/al of all members of the constituent cooperatives with voting rights on the Merger or Consolidation or the General/Representative Assembly resolutions of both constituent cooperatives approving the plan of Merger or Consolidation duly certified by the Secretaries and attested by the respective Chairpersons 4. Proof of Posting/Publication of the Announcement of Merger or Consolidation in a newspaper of general circulation 5. Notarized Secretary's Certificate attesting to the following facts: a) That creditors and investors are informed by mail of the merger or consolidation; and b) That no objection/opposition has been filed, or if any, the same has been resolved 6. Additionalrequirements a. For merger i. Articles of Merger duly attested to by the Incumbent Directors of the Su rviving Cooperative ii. Certificate of Merger/Registration of the Surviving Cooperative b. For consolidation i. Articles of Consolidation duly attested to by the Cooperating Directors ii. New Certificate of Consolidated Cooperative B. For Purchase of Assets and Assumption of Liabilities 1. Sale and Purchase Agreement 2. The General/Representative Assembly resolution approving the sale of a1 assets and assumption of all liabilities (P&A) of the Eligible CB by an Eligible srPl duly certified by the secretaries and attested by the President/chairperson of the Eligible cB. The p&A must be approved by at least 3/4 of all members with voting right, present and constituting a quorum of the Eligible CB at general/representative assembly 3. Proof of Notice to Creditors of the Eligible CB 4' Joint Certification from Eligible CB and Eligible STPI signed by their respective authorized signatories that all requirements under the Bulk Sales Law and all laws relevant have been complied with

c. For Acquisition of Control through Purchase of Shares of the Eligible CB subject to the applicable laws and rules 1. Stock Purchase Agreement duly signed by the authorized signatory of the Eligible STPI and Eligible CB and certified to by their respective board secretary 2' Notarized Secretary's Certificate on the Board Resolution of the Eligible STpl approving the acquisition of control/purchase of majority shares of the Eligible CB D. Financial Statements: n Latest financial statements as of month immediately preceding the date of application and latest 3-year audited financial statements of the constituent institutions; and a!. 5-year financial projections with valid assumptions of the surviving institution's balance sheet and income statement E. List of regulatory relief the constituent institutions will avail from BSp; F. Letter to BSP requesting restructuring of past due rediscounting/emergency loan; G. List of members/shareholders with their share capital/shareholdings of each of the constituent cooperatives/institutions duly certified by the respective Board Secretaries and attested to by the respective Board Chairpersons before and after the transaction; H. List of directors and officers of each of the constituent institutions; t. List of proposed officers and directors of the surviving bank and the summary of their qualifications; J. Organizational chart of the surviving bank including the number of offices and locations thereof; K. Inter-company transactions relative to the submitted financial statements; L. Computation of Risk Based Capital Adequacy Ratio on the submitted financial statements; M. schedule of unbooked valuation reserves based on ratest BSp-RoE; N. Viable Operational Plan with the following components: o Marketing Strategies o Proposed Target Market o Proposed Loan Portfolio Diversification . Deposit Generation

o Proposed lmprovements in Accounting System o Operations Control o Computerization plan o Communication System o. The appraiser's report of reappraisal of bank premises, if any, done by an independent and licensed appraiser; P. Proposed Increase of Capital Stock of surviving bank; a. Proposed Amendments in the Articles of Incorporation of surviving bank; R. Director's Certificate (surviving bank) on the proposed amendment of the Articles of Incorporation increasing the authorized capital stock; S. Any other reasonable requirement deemed material in the proper evaluation of the transaction as many subsequently be requested by the pDlC, BSp or LBp. FOR LBP FA 1.. Pre-approval Requirements a' Board Resolution authorizing the surviving bank (SB) to apply for LANDBANK equity investment, submit documents and designating officers authorized to sign all pertinent documents with specimen signatures; b. List of major stockholders of SB and their major stockholdings with bio-data; c. List of Director and Key officers of the sB with bio-data; d. Participating weak CBs and STPI's latest interim financial statements (per entity, and as consolidated); e. Three (3)-year business plan and capital build-up program; f. Other documents as may be required by LANDBANK. 2. Pre-release Requirements a. Latest consolidated financial statements; b. Memo-request from the servicing lending center (LC) addressed to the Treasury Operations Department (TOD) for the release of LBp equity investment to SB and certifying that the designated signatories to the documents submitted by the SB to LBP have been verified and authenticated;

c. Letter-request from the sB for the release of the proceeds of equity investment indicating also the account number with LBP Branch where the proceeds shall be credited; d. Copy of the approved Investment Proposal/Credit Facilities Proposal (CFp) for the Equity Investment; e. Duly notarized Board Resolution or Secretary's Certificate for the following; ri' Designation of SB's authorized signatories in all documents relative the sB's approved equity investment with LBp and authorizing them to open a Trust Account for the sB with the LBp rrust Banking Group for the setting-up of sinking fund {' Authorization for LBP for the automatic application of the sinking fund maintained with LBP Trust Banking Group upon maturity or retirement of the LBP's equity investment (subject to BSp approval) f. Secretary's Certificate stating the SB's incumbent officers g. Certified true copy of the SB's Amended Articles of lncorporation to include, among others the a) features of LBp equity investments (i.e., non-cumulative. Dividend rates; full redemption upon maturity, etc.) h. Certified true copy of the SB's Amended By-Laws 1. Duly notarized Memorandum of Agreement (MoA) on the equity investment between LBP and the SB, incorporating therein, among others, that: * The SB shall automatically declare dividends of at least fifty percenr (50%l of its annual net income to be placed at the LBP Trust Department as sinking fund (SF) intended for the retirement of LBP preferred shares after 10 years; * The stockholders of the SB shall infuse fresh capital equivalent to the amount required to bring the cAR of the sB to bring cAR to at least 15% after the capital infusion of BSp, pDlc and LANDBANK and maintain the same for a period of at least ten (10) years; and bring the networth of the 58 to at least P100 M. i. Duly notarized Escrow Agreement between the SB and the LBP Trust Banking Group, incorporating therein that in case the SF set aside is not sufficient to buy-out LANDBANK shares at the end of 10 years, the stockholders shall top up the required fund in order to fully redeem the said LBP preferred shares, and the corresponding dividends thereon.