During a difficult economic environment, we continued to benefit from the investments we’ve made in this bank, positioning us well as the economy improves. We are stronger today than a year ago and we expect this momentum to continue. I am happy to inform you that the bank has been given a grade of 3 or acceptable in all aspects of its operations by the Bangko Sentral ng Pilipinas. This is a vast improvement from the previous years rating of 2 and has the effect of lifting us out of the prompt corrective action initiative. This means that the bank has been rated as acceptable in its financial, operational and managerial aspects.
I am thus honored to present to you the overall results of our operations for 2014, following the CAMELS format, as follows:
To be categorized as a well-capitalized bank, the BSP issued circular no. 854 in October of 2014 raising the minimum capital requirements for rural banks.
Several developments brought about by changes in BSP rules and regulations have impacted the rural banking industry in 2014. Last October 2014, BSP Circular 854 mandated minimum capital requirements for rural banks across all levels. Many rural banks, especially single unit banks, have been forced to re-assess their situation whether or not to increase their capital stock considering the intense competition and lowering margins plus increasing regulatory requirements.
Your bank however, due to previous increases in our capital was not in any way affected. For our bank, the minimum capital required is 30 million. We have more than triple that capital. Despite sufficient levels, we applied for an increase of 40 million in our capital stock. This was already approved by the BSP and is now pending at the SEC. Once that application is approved, we will not only be able to increase our capital but also receive our stock dividends which have been applied for with the BSP last January. At the end of the year, we expect to have a capital balance of 110 million pesos as a result of the 5% stock dividend and the initial payment of the additional capital stocks.Returning capital to shareholders in the form of dividends is of the utmost importance to our bank, and raising the dividend continues to be the top priority for me, our management team and our Board of Directors. Our strong basics, liquidity and ongoing profitability are key to our ability to return capital. But in order to fund future growth, it must be tempered with a hard to fail capital stock. In order to achieve this, we must rationalize our dividend declarations, keeping enough firepower to be able to reach our targets.
ASSET QUALITY AND CREDIT RISK
For the past three years, your bank has worked on improving our asset quality and credit risk management practices. Most of the rural banks that failed last 2014 suffered from poor quality loans and deficient credit risk management. A common denominator is the failure of these banks to conduct proper credit initiation, underwriting, investigation and administration and to manage risk taking in their portfolio. Most of their loans were unsecured salary loans granted to individuals who had little or no capacity to pay their loans. While we are not insulated from these kinds of borrowers, we have undertaken several prudential steps to limit our risks. Our grade of 3 in Asset quality and credit risk in the last BSP examination is a reflection of our strong practices.
Among the things that your board undertook for 2014 were:
- Continuing strict supervision, regular review and enhancement of our credit underwriting practices that would be both responsive to our regulators requirements and our growth targets.
- Our continued use of the Borrowers Risk Rating System.
- The adaption and use in 2014 of the Credit Information Profile which would give all decision makers in all levels a bird’s eye view of the factors which would affect the repayment of the loan. This is continually being pro-actively revised as new information and ground level experience is adapted into the profile.
- This year we will be adapting a repayment plan requirement for all loans to prevent the “evergreening” effect. For loans which will continue to be renewed at the same principal amount, we shall be charging an additional 1% provisioning fee which shall be credited to our Loan Loss Provisions in addition to a more scrutinized cash flow review of the borrower. Thus loan renewals shall only be granted upon a thorough review of the account and the capacity to pay of the borrower plus a 1% provisioning fee on top of the regular service and interest charges.
- Continued and pro-active review and improvement of our credit initiation and evaluation protocols through our weekly credit committee meetings.
- After a thorough review, re adjusting our secured to unsecured loan ratio to 70-30. Last year, we adopted the 65-35 ratio. This ratio is continually being reviewed and re-assessed taking into account other ratios and prevailing economic conditions and business opportunities.
- Our past due ratio stood at 14.89% percent at year end brought about by unpaid secured loans last December especially the Macias account in Sindangan which has already been renewed. In order to prevent the see-sawing of our past due ratio, we have required the Macias family to follow a repayment plan which would decrease the amount of their loan by at least 20 percent per year. For this year, we continue in our efforts to reduce this ratio with a target of 12%.
- We have reduced our Loanable values for secured property loans to 60% max from a previous 70%. As of the present, our standard ratio is 50% upgradable to 60% with Board approval.
- For 2015 we intend to adopt policies that are pro-active and would help the communities where we operate especially the small and medium entrepreneurs who are the recognized drivers of economic growth in a ground up setting. We shall implement a second look or review protocols that will assist our borrowers get the credit requirements they need on time.
The latest development in the rural banking industry is the issuance by the BSP of Circular 855 which sets the Guidelines on Sound Credit Risk Management Practices. This is a matter of concern for all banks since it establishes stricter guidelines in the granting of loans and how the loans are treated on our balance sheets. This circular will take effect within two years and all banks are required to prepare a Gap Analysis to compare its present credit risk management practices to the requirements under 855. Rest assured, we have taken all the necessary steps to comply with this directive.
Our target for this year is an increase in our portfolio of at least 50 million pesos from 280 million to 330 million pesos.
Your board and senior management continues to manage your bank to the best of its ability. This effort has been rewarded this year by a grade of 3 in the Management component of the CAMELS rating by the BSP during its last inspection. This is an upgrade from a previous rating of 2.
This year we have reorganized our Assistant Vice Presidents by reassigning AVP Francisco Montano to two branches, Rizal and Calamba and AVP Dug Christopher Mah to Sindangan and Polanco. AVP Richard Concha has been reassign to Branch expansion and directed to focus on the opening of two MBO’s which we are planning to open in Fatima, Liloy and in the Municipality of Roxas. These two areas have been visited by the President, senior management and by the BOD and the opportunities for growth in these two areas are solid. In Fatima, our MBO will be located in front of the new public market and there are no other banks operating in that particular area. In Roxas, we will be taking advantage of the gap left behind by the closure of RB Roxas. Large tracts of land are also being developed in that municipality to accommodate a cement factory which will open this year and a possible power plant which means better economic opportunities opening up in that area.
Two of our directors have also been assigned to monitor our jewelry loan portfolio which is a good source of profits. This frequent monitoring through regular branch inspections shall be conducted to lessen the risks to the bank in over appraisals or the acceptance of fake jewelry.
Our Audit and Risk Committees continues to function effectively and works closely with our compliance and audit teams showing the BODs commitment in maintaining high standards of internal control over all aspects of our operations.
This year we have also restructured our salary scale to track our inflation rate. We have not made any changes in our salary scale since 2012 and we are now behind other banks in what we pay our employees. However, in order to lessen the impact of such a move on our balance sheet, it was decided by the Board to spread out the increase over a period of two years. This move will address the deficiencies and imbalances in our old system.
Our newly created Treasury department has helped greatly in controlling and tracking our finances. The banks liquidity position is regularly monitored so that we can get the least cost from our borrowings and maximize our cash positions.
Management and the Board of Directors continually evaluate ways to deploy the banks strong capital base in order to enhance shareholder value. We have revised the way to create our targets to make it more realistic. Bonuses will not be given until targets are achieved and this new policy has taken effect and communicated down the line. Last June, the Board and Senior Management had its first ever joint strategic planning seminar where several changes were made on our mission, vision and short, medium and long term plans. I am happy to announce that your bank aims to be a 50 branch bank by 2024 or ten years from now.
Employees and Customers
As of year end 2014, we had 111 employees, 7,597 savings account clients, 233 time deposit account clients, and 6,103 borrowers.
Earnings for 2014 have taken a dip. As reported the previous year, our bank actually suffered a net operating loss due to our provisioning of accounts receivables and valuation reserves. This was mitigated by a 10M extraordinary income from sales of ROPA and other fixed assets. Thus, from a high of 9.3 million for 2013, our earnings went down to 2.9 million for 2014. However, despite the lower earnings, we have applied for a 5% stock dividend declaration which we shall be able to distribute as soon as we receive the approval of the BSP of our application last January.
What the Board has realized at this point in time is that we cannot continue our existing business on the same expense margin. Income goes up and goes down while our expenses remain the same. That is why our only way to improve profitability is to expand our operations. Our two pronged approach shall be to target a higher loan portfolio for all branches and establishing our presence in areas with growing markets. This would benefit the bank because our expansion will entail minimal additional expense as the corporate expenses remain practically the same. In other words, our banks earnings will be driven primarily by increasing operating income and efficiently managing expenditures. While we appreciate additional income brought about by sales of Real and Other Properties, this is not sustainable or stable that is why there is a need to increase our loan portfolio.
For this banking year we will address issues brought about by the recent examination which includes regular review of our interest rates and pricing decisions, refining our succession plan in the areas of identification of critical positions and training identified personnel who will assume it. We likewise will continue our efforts to regularly conduct employee performance evaluation in the light of our new salary structure.
Our target income for this year is 7 million pesos. This is a more realistic target supported by an achievable target loan portfolio. While it is too early to tell, income from the month of January has been on the higher end of the target.
With the flexibility brought about by the lifting of BSP sanctions and our new camels rating, our rediscount facility with the LBP has been upgraded with less onerous conditions. Our line has been increased to 30M from 20M. This line can even be increased to 100M due to the positive review of our banks management and operation by LBP officials. Nevertheless, we shall continue to consider opening rediscounting lines with other financial institutions and looking at other creative funding sources.
It is noteworthy to repeat our previous year’s position that our prospects for growth continue to be dependent upon our ability to attract and retain low cost deposits. Emphasis is placed on increasing our savings deposit base and maintaining stability in our time deposit balances. Numerous factors, both internal and external, may impact our access to, and the costs associated with our sources of funding. Our Treasury department continues to monitor these factors and make changes in our targets so that our interest rates on borrowed funds will be competitively aligned with prevailing market rates.
Our deposit base has increased slightly from 249.2M in year-end 2013 to 256.8M in year-end 2014. While savings deposits have decreased, there was an increase in our time deposits as we have received the trust of several large depositors who are not members of the board or a stockholder. This is just as well because the movement in the holdings of some of our stockholders was from our deposit base to capital stock. This trust and confidence however is not without cost as we are paying high interest rates. And we do not want to be dependent on any single depositor. In order to discourage big time deposits, last December, your board after reviewing the rates of other banks and the banks own financial capacity, decided to further decrease our interest rate ceiling from 7 percent to 6 percent. This is the third decrease undertaken by the bank since I became a President and is a sign of our resiliency and strength. Other banks who decrease their rates would immediately suffer a huge decrease in its deposits. This ceiling is also lower than current rediscounting rates offered by the Land Bank. As other cheaper sources of funds become available, we shall consider further rate cuts.
Our savings and time deposit accounts are monitored by our Treasury Department in line with the liquidity and funding requirements of the bank. Liquidity management under the Treasury Department and the BOD continues to strictly monitor our Maturity Gap and Stress Testing of our liquidity contingency plan. Although there is a negative net cumulative funding gap, the continued support of our stockholders and directors has ensured that the bank will not experience in liquidity problems since more than 150% of the negative net cumulative funding gap is covered by deposits of directors and stockholders.
SENSITIVITY TO RISK
Our business and earnings are affected by general business, economic and market conditions in the Philippines and abroad. Given our concentration of business activities in the province, we are particularly exposed to any turmoil in the economy, downturns, high unemployment, tighter credit conditions and reduced economic growth.
While the Philippine economy continued to slowly improve during 2014, growth has remained muted. In a challenging economic environment, more of our customers are likely to, or have in fact, become delinquent on their loans or other obligations as compared with historical periods as many of our customers experience reductions in cash flow available to service their debt. These delinquencies, in turn, will adversely affect our earnings.
I would also like to point out that the decline in oil prices would have two separate and maybe conflicting effects on our bank. The positive impact would be the lower costs of doing business for our borrowers brought about by lower pump prices. A negative impact would be the amount of foreign money that comes from the OFWs to our country. While our OFW loans are a small percentage of our portfolio, there might a negative effect on our borrowers brought about by a decrease in spending power of those who depend on OFW money.
Overall, your bank remains stable and profitable. After the sale of Banco Dipolog Inc., we are now the second largest rural bank in our province after RB Katipunan. We shall maintain that position but we hope to be able to catch up within the next ten years.
2015 will be a year of challenges and opportunities. For RB Rizal, while 2014 was a year of consolidation, 2015 shall be a year of growth for your bank. The byword in today’s banking industry is financial inclusion and for us that means reaching out to the portions of our population which are unbanked. You would be interested to know that despite the developments in technology, there are still a big number of municipalities throughout our country that are unbanked – meaning there is no single banking office operating in these municipalities. That is where our opportunity lies and that is where we will be exploring.
We invite you to attend the opening of our two new MBOs sometime in the second quarter of this year. We are also exploring opening a fourth MBO within Dipolog City to increase our catchment area and to take advantage of some barangays which are just as big as a small municipality in terms of economic growth and opportunities.
Last year we also unveiled the first ATM machine in Mapang with our partnership with the Devt Bank of the Phils. We will continue this partnership so that we can offer more value added services to our clients in the different municipalities where we operate.
As we grow bigger we are training our senior branch officers to handle positions of greater responsibility. For this year, we have two new branch managers, Merbeth Suarez for Polanco (she used to be Dipolog branch cashier), and Jyn Lagorra for Rizal (she used to be Calamba branch cashier). They will be replacing Mark Uycoco who is moving up to Operations Manager, and Eric Saguin who will be leaving on April. We have two new cashiers, Angeli Hamoy for Dipolog and Doris Calago for Calamba and two new personnel to be assigned to Compliance and Internal Audit departments.
We are continually hiring new and talented staff to man our new MBOs in Liloy and Roxas and training our department heads to handle branches as we continue to expand. We would appreciate suggestions from our stockholders on areas where opportunities abound.
I thank my Board of Directors, Vice President Dug Christopher Mah, Assistant Vice President Francisco Montaño and Richard Concha, our Independent Director Arlene Ang and our very active directors Diane Concha, Maricar Concha, Joseph Lim, Filomena Concha and Cristina Mah. I assure you of their top notch participation and whole hearted dedication in running the affairs of your bank.
I would likewise acknowledge our senior management officers led by Mrs. Lucille Lawagon, our COO, our Treasury Head Romena Galeza, our Chief Compliance Officer Roderick Baes, our Chief Accountant Shylene Elma, our Chief Internal Auditor, Hansard Labisig, and our branch managers Donabel Santander, Roy Mark Uycoco, Jasper Cuevas, Eric Saguin and Marlene Sapalo. Their loyalty, commitment and support have propelled the bank to greater heights.
Lastly, I thank my fellow stockholders for your commitment, support and trust. Banking is a business of trust and we shall continue to hold that trust as our primary concern.
Thank you for your attention and good morning.Atty. Alberto P. Concha | Chairman of the Board