Exhibit 10.1
FEDERAL DEPOSIT INSURANCE CORPORATION
WASHINGTON, D.C.

                 
 
    )          
In the Matter of
    )          
 
    )          
WESTERNBANK PUERTO RICO
    )     ORDER TO CEASE AND DESIST    
MAYAGUEZ, PUERTO RICO
    )          
 
    )     FDIC-08-275b    
(INSURED STATE NONMEMBER BANK)
    )          
 
    )          
 
               

     Westernbank Puerto Rico, Mayaguez, Puerto Rico (“Bank”), having been
advised of its right to a Notice of Charges and of Hearing detailing the unsafe
or unsound banking practices and violations of law and regulation alleged to
have been committed by the Bank and of its right to a hearing on the alleged
charges under section 8(b)(1) of the Federal Deposit Insurance Act (“Act”), 12
U.S.C. § 1818(b)(1), and having waived those rights, entered into a STIPULATION
AND CONSENT TO THE ISSUANCE OF AN ORDER TO CEASE AND DESIST (“CONSENT
AGREEMENT”) with counsel for the Federal Deposit Insurance Corporation (“FDIC”),
dated April 16, 2009, whereby solely for the purpose of this proceeding and
without admitting or denying the alleged charges of unsafe or unsound banking
practices and violations of law and regulation, the Bank consented to the
issuance of an ORDER TO CEASE AND DESIST (“ORDER”) by the FDIC.
     The FDIC considered the matter and the results of the September 29, 2008
examination performed jointly by the FDIC and

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the Office of the Commissioner (“Commissioner”) of Financial Institutions of the
Commonwealth of Puerto Rico (“2008 Joint Examination”) and determined that it
had reason to believe that the Bank had engaged in unsafe or unsound banking
practices and had committed violations of law and regulation. The FDIC,
therefore, accepted the CONSENT AGREEMENT and issues the following:
ORDER TO CEASE AND DESIST
     IT IS HEREBY ORDERED that the Bank, its directors, officers, employees,
agents, and other institution-affiliated parties (as that term is defined in
Section 3(u) of the Act, 12 U.S.C. § 1813(u)), and its successors and assigns
cease and desist from engaging in the following unsafe or unsound banking
practices and violations of law and regulation:
          (a) Operating with inadequate management supervision and oversight by
the board of directors of the Bank (“Board”) to prevent unsafe or unsound
practices and violations of law and regulation;
          (b) Operating in violation of section 323.3(a)(7) of the FDIC’s Rules
and Regulations, 12 C.F.R. § 323.3(a)(7) and in contravention of the Interagency
Appraisal and Evaluation Guidelines (FIL-74-94, issued November 11, 1994);
          (c) Operating in violation of section 363.4(a) of the FDIC’s Rules and
Regulations, 12 C.F.R. § 363.4(a);

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          (d) Operating in violation of section 103.27(a) of the regulations
promulgated by the United States Treasury, 31 C.F.R. § 103.27(a);
          (e) Operating in violation of section 17 of the Banking Law of Puerto
Rico, Act No. 55, and chapter VIII of Regulation 5793, adopted pursuant to the
Puerto Rico Banking Act;
          (f) Operating in contravention of Appendix A of Part 365 of the FDIC’s
Rules and Regulations, 12 C.F.R. Part 365;
          (g) Operating in contravention of the Interagency Policy Statement on
the Allowance for Loan and Lease Losses, December 13, 2006, and the Policy
Statement on Allowance for Loan and Lease Losses Methodologies and Documentation
for Banks and Savings Associations (July 6, 2001);
          (h) Engaging in unsatisfactory lending and lax underwriting and credit
administration, including operating without an effective loan review system and
internal loan grading system;
          (i) Operating with an excessive level of adversely classified loans
and/or delinquent loans;
          (j) Operating with capital levels that are not commensurate with the
nature and extent of the risk to the Bank, given the volume of adversely
classified assets and high concentration in commercial real estate;
          (k) Operating in such a manner as to produce insufficient earnings;
and
          (l) Operating with excessive reliance on non-core funding.

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     IT IS FURTHER ORDERED that the Bank, its institution- affiliated parties,
and its successors and assigns, shall take affirmative action, as follows:
BOARD OF DIRECTORS’ OVERSIGHT
     1. Upon the effective date of this ORDER, the Board shall assume full
responsibility for the approval of sound policies and objectives for compliance
with this ORDER and shall monitor the steps taken by the Bank to ensure that the
Bank eliminates and/or corrects the violations of laws, rules and regulations
identified in the 2008 Joint Examination or identified internally. The Board
shall record the status of the corrective actions taken by the Bank in the Board
minutes, which shall be retained for supervisory review.
     2. Within 60 days of the effective date of this ORDER, the Board shall
submit a plan to increase the number of independent, outside directors that is
acceptable to the Regional Director of the FDIC’s New York Regional Office
(“Regional Director”).
MANAGEMENT
     3. Within 60 days of the effective date of this ORDER, the Board shall
submit a written plan acceptable to the Regional Director that describes the
specific actions that the Board has taken and proposes to take to strengthen the
Bank’s management and ensure that the Bank eliminates and/or corrects the
violations of law and/or regulation identified in the Joint 2008

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Examination, and ensure that the Bank is operating with management that is
acceptable to the Regional Director.
CAPITAL ADEQUACY
     4. (a) Within 90 days of the effective date of this ORDER, the Bank shall
submit to the Regional Director an acceptable revised written plan to achieve
and maintain sufficient capital at the Bank. The revised plan shall, at a
minimum, address and consider:
               (i) the Bank’s current and future capital requirements;
               (ii) any planned growth in the Bank’s assets;
               (iii) the Bank’s level of concentrations of credit;
               (iv) the volume of the Bank’s adversely classified assets;
               (v) the Bank’s anticipated level of retained earnings; and
               (vi) the source and timing of additional funds to fulfill the
future capital needs of the Bank.
          (b) Beginning on the effective date of this ORDER, the Bank shall
maintain its Tier 1 leverage ratio at a level of no less than 5.5 percent.

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          (c) Beginning on September 30, 2009, the Bank shall maintain its Tier
1 leverage ratio at a level of no less than 5.75 percent.
          (d) Beginning on March 31, 2010, the Bank shall maintain its Tier 1
leverage ratio at a level of no less than 6 percent.
          (e) The Bank shall not declare or pay any dividends without the prior
written approval of the Regional Director. Requests for approval shall be
received at least 30 days prior to the proposed date for the declaration of
dividends and shall contain, but not be limited to, information on consolidated
earnings for the most recent annual period and the last quarter.
          (d) Within 90 days of the effective date of this ORDER, the Bank shall
develop and submit a written plan to the Regional Director for systematically
reducing and monitoring the Bank’s portfolio of loans, securities, or other
extensions of credit advanced or committed, directly or indirectly, to or for
the benefit of any borrowers in Commercial Real Estate and Acquisition,
Development and Construction, as identified in the 2008 Joint Examination and in
the FDIC’s Report of Examination dated September 29, 2008 (“2008 ROE”), to an
amount which is commensurate with the Bank’s business strategy, management
expertise, size, and location. At a minimum, the plan shall include: the dollar
levels and percent of capital to which the Bank shall reduce each concentration;
timeframes for achieving the reduction in dollar levels identified; and
provisions for the

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submission of monthly written progress reports to the Board for review and
notation in minutes of the meetings of the Board.
REDUCTION OF CLASSIFIED ASSETS
     5. (a) Within 30 days of the effective date of this ORDER, the Bank shall
eliminate from its books, by collection or charge-off, all items or portions of
items classified “Loss” as a result of the 2008 Joint Examination, which have
not previously been charged off or collected. In addition, the Bank shall,
within 30 days from the receipt of any subsequent report of examination from the
FDIC, eliminate from its books, by collection or charge-off, all items or
portions of items classified “Loss” in that report of examination. Elimination
of these items through the use of the proceeds of loans or other extensions of
credit made by the Bank will not constitute collection for purposes of this
paragraph.
          (b) Within 90 days from the effective date of this ORDER, the Bank
shall formulate a written plan to reduce the Bank’s risk exposure in each asset
classified “Substandard” or “Doubtful” in the 2008 ROE. For purposes of this
provision, “reduce” means to collect, charge off, or improve the quality of an
asset so as to warrant its removal from adverse classification by the FDIC. In
developing the plan mandated by this paragraph, the Bank shall, at a minimum,
and with respect to each adversely classified loan or lease, review, analyze and

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document the financial position of the borrower, including source of repayment,
repayment ability and alternative repayment sources, as well as the value and
accessibility of any pledged or assigned collateral and any possible actions to
improve the Bank’s collateral position.
          (c) The plan mandated by this provision shall also include, but not be
limited to, provisions which:
               (i) prohibit the extension of credit for the payment of interest
or fees;
               (ii) include a schedule for reducing the outstanding dollar
amount of each adversely classified asset, including timeframes for achieving
the reduced dollar amounts (at a minimum, the schedule for each adversely
classified asset must show its expected dollar balance on a quarterly basis);
               (iii) include specific action plans intended to reduce the Bank’s
risk exposure in each classified asset;
               (iv) provide for the Bank’s submission of monthly written
progress reports to the Board; and
               (v) provide for mandating Board review of the progress reports,
with a notation of the review recorded in the minutes of the meeting of the
Board.
          (d) The Bank shall submit the plan to the Regional Director for review
and comment. Within 30 days from receipt of any comment from the Regional
Director, and after due

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consideration of any recommended changes, the Bank shall approve the plan, which
approval shall be recorded in the minutes of the meeting of the Board.
Thereafter, the Bank shall implement and fully comply with the plan.
RESTRICTIONS ON ADVANCES TO ADVERSELY CLASSIFIED BORROWERS
     6. (a) While this ORDER is in effect, the Bank shall not extend, directly
or indirectly, any additional credit to, or for the benefit of, any borrower who
has a loan or other extension of credit or obligation with the Bank that has
been, in whole or in part, charged off or classified “Loss” and is uncollected.
          (b) While this ORDER is in effect, the Bank shall not extend, directly
or indirectly, any additional credit to, or for the benefit of, any borrower who
has a loan or other extension of credit or obligation with the Bank that has
been, in whole or in part, classified “Substandard”, “Doubtful” or is listed as
Special Mention and is uncollected, unless the Board has adopted, prior to such
extensions of credit, a detailed written statement giving the reasons why such
extensions of credit are in the best interests of the Bank. A copy of the
statement shall be placed in the appropriate loan file and shall be incorporated
in the minutes of the applicable Board meeting. The requirements of this
sub-paragraph shall not prohibit the Bank from renewing, after collecting in
cash all interest and fees due from a borrower, any credit already extended to
the borrower.

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LOAN POLICIES AND PROCEDURES
     7. Within 90 days of the effective date of this ORDER, the Bank shall
submit to the Regional Director written loan policies and procedures that have
been approved by the Board, which shall, at a minimum, address, consider, and
include the following:
          (a) underwriting standards for loans;
          (b) the monitoring and reporting of past due loans; and
          (c) controlling and monitoring concentrations of credit, including:
(i) establishing concentrations of credit limits by industries and types of
loans; and (ii) managing the risk associated with asset concentrations.
LENDING AND CREDIT ADMINISTRATION
     8. The Bank shall not grant, extend, renew, alter, or restructure any loan
or other extension of credit without first obtaining and analyzing all relevant
credit information, as well as taking all necessary steps to properly value and
perfect its interest in collateral, where applicable, and the Bank shall also
take the following measures:
          (a) Adequate and effective loan review procedures shall be designed to
identify and categorize problem credits and to assess the overall quality of the
Bank’s loan portfolio. These reviews shall be performed periodically to identify
problem assets and shall be reported to the Board along with the action taken by
management to improve the Bank’s position on each loan adversely graded. Within
60 days of the effective date of this

 

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ORDER, the Bank shall ensure that the internal audit department’s risk
assessment program is expanded to include the assessment of the Bank’s loan
review function.
          (b) Management shall enhance loan documentation procedures and correct
any deficiencies identified either internally, by auditors or consultants, or
during an examination process, including, but not limited to, technical
exceptions related to obtaining accurate and current income and cash flow
information, financial statements, and appraisals.
          (c) Reduce the level of classified and delinquent loans through
aggressive workout of problem credits, and maintain strict adherence to prudent
underwriting standards for new extensions of credit.
          (d) Refrain from capitalizing loan interest to bring delinquent loans
current without the benefit of repayment from the borrower, thereby distorting
the borrower’s ability to repay the loan, and distorting the bank’s delinquency
ratios.
ALLOWANCE FOR LOAN AND LEASE LOSSES
     9. The Bank shall maintain, through charges to current operating income, an
adequate allowance for loan and lease losses. The adequacy of the allowance for
loan and lease losses shall be determined in light of the volume of criticized
loans, the current level of past due and nonperforming loans, past loan loss
experience, evaluation of the potential for loan losses in the Bank’s portfolio,
current economic conditions, and any criticisms as contained in the Bank’s most
recent report of

 

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examination. The Bank shall conduct, at a minimum, a quarterly assessment of its
allowance for loan and lease losses and shall maintain a written record, for
supervisory review, indicating the methodology used in determining the amount of
the allowance needed. The Bank shall ensure that the methodology utilized to
determine the appropriateness of the ALLL has been periodically evaluated by an
independent party.
FUNDS MANAGEMENT AND LIQUIDITY
     10. Within 60 days of the effective date of this Order, the Bank shall
submit in writing to the Regional Director an acceptable, comprehensive
liquidity contingency plan. The plan shall address the means by which the Bank
will seek to reduce its reliance on non-core funding and high cost
rate-sensitive deposits. The plan shall also assess possible liquidity events
that the Bank may encounter and identify responses to the potential impact of
such events on the Bank’s short-term, intermediate-term and long-term liquidity
profile.
APPRAISAL COMPLIANCE PROGRAM
     11. Within 30 days of the effective date of this ORDER, the Bank shall
establish an adequate and effective appraisal compliance program, including
enhancing the Bank’s appraisal policy to capture risk management and internal
controls that ensure that appraisals are obtained in a timely manner when
required by law or regulation and that appraisals contain appropriate valuation
approaches to support assigned values. Within 90 days of the effective date of
this ORDER, the Bank shall ensure that adequate training is provided to account

 

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managers who are responsible for obtaining and reviewing appraisals to ensure
that they include all necessary information, employ correct methodology, include
reasonable assumptions and adequately support assigned values.
PROFIT AND BUDGET PLAN
     12. Within 30 days from the end of each calendar month following the
effective date of this ORDER, the Board shall evaluate the Bank’s performance in
relation to the Profit Plan and record the results of the evaluation, and any
actions taken by the Bank, in the minutes of the Board meeting during which such
evaluation is undertaken. The Board shall ensure that the Bank is in compliance
with specific goals set by the Board to improve and sustain earnings, given the
level of adversely classified assets, the Bank’s financial condition and
economic and other factors and shall revise the Profit Plan, as necessary, to
accomplish these goals. In the event the Board determines that the Profit Plan
should be revised in any manner, the Profit Plan shall be revised and submitted
to the Regional Director for review and comment within 25 days after such
revisions have been approved by the Board. Within 30 days of receipt of any
comments from the Regional Director, and after consideration of all such
comments, the Board shall approve the revised Profit Plan, which approval shall
be recorded in the minutes of the Board meeting in which it is approved.
COMPLIANCE WITH LAWS AND REGULATIONS
     13. (a) Within 60 days from the effective date of this ORDER, the Bank
shall take steps necessary, consistent with

 

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sound banking practices, to eliminate and/or correct the violations of laws,
rules and regulations identified in the 2008 Joint Examination or identified
internally. In addition, the Bank shall take all steps necessary to ensure
future compliance with all applicable laws, rules, and regulations.
          (b) The Bank shall immediately initiate an affirmative compliance
program in order to ensure compliance with the provisions of all applicable
laws, rules, and regulations.
PLANS, POLICIES, PROCEDURE, AND PROGRAMS
     14. (a) Acceptable plans, policies, procedures, and programs shall be
submitted to the Regional Director within the time periods set forth in this
ORDER. Where applicable, the Bank shall adopt all Board approved plans,
policies, procedures, and programs, and then shall fully comply with them.
During the term of this ORDER, the Bank shall not amend or rescind any plans,
policies, procedures, and programs submitted pursuant to this ORDER without the
prior written approval of the Regional Director.
          (b) The Board shall review all plans, policies, procedures, and
programs annually.
EXTENSIONS
     15. Notwithstanding any provision of this ORDER to the contrary, at the
Regional Director’s discretion, the Regional Director may grant a written
extension of time to the Bank to comply with any provision of this ORDER.

 

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SHAREHOLDERS
     16. Following the effective date of this ORDER, the Bank shall send to its
parent holding company the ORDER or otherwise furnish a description of the ORDER
in conjunction with the Bank’s next communication with such parent holding
company. The description shall fully describe the ORDER in all material aspects.
OTHER ACTIONS
     17. It is expressly and clearly understood that if, at any time, the
Regional Director shall deem it appropriate in fulfilling the responsibilities
placed upon him under applicable law to undertake any further action affecting
the Bank, nothing in this ORDER shall in any way inhibit, estop, bar, or
otherwise prevent him from doing so.
     18. It is expressly and clearly understood that nothing herein shall
preclude any proceedings brought by the Regional Director to enforce the terms
of this ORDER, and that nothing herein constitutes, nor shall the Bank contend
that it constitutes, a waiver of any right, power, or authority of any other
representatives of the United States, departments or agencies thereof,
Department of Justice, or any other representatives of the Commonwealth of
Puerto Rico or any other departments or agencies thereof, including any
prosecutorial agency, to bring other actions deemed appropriate.

 

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ORDER EFFECTIVE
     19. The effective date of this ORDER shall be the date of issuance.
     20. The provisions of this ORDER shall be binding upon the Bank, its
directors, officers, employees, agents, successors, assigns, and other
institution-affiliated parties of the Bank.
     21. The provisions of this ORDER shall remain effective and enforceable
except to the extent that, and until such time as, any provisions of this ORDER
have been modified, terminated, suspended or set aside by the FDIC.
     Pursuant to delegated authority
     Dated:      , 2009.

         
 
 
 
James C. Watkins    
 
  Deputy Regional Director    

 

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ADOPTION AND APPROVAL BY THE COMMISSIONER
OF FINANCIAL INSTITUTIONS
     The Commissioner of Financial Institutions for the Commonwealth of Puerto
Rico (the “Commissioner”), in the exercise of his powers under the Puerto Rico
Banking Act and under the Financial Institutions Commissioner’s Office Act,
hereby adopts and approves the foregoing ORDER.
     The Commissioner and Westernbank Puerto Rico, Mayaguez, Puerto Rico (the
“Bank”), agree that upon issuance of the said ORDER by the Federal Deposit
Insurance Corporation such ORDER shall be binding as between the Bank and the
Commissioner with the same legal effect and to the same degree that such ORDER
would be binding on the Bank if the Commissioner had issued a separate ORDER,
pursuant to the provisions of Section 28 of the Banking Act, Title 7 of the Laws
of Puerto Rico Annotated Section 151, that included and incorporated all of the
provisions of the foregoing ORDER.
     The Commissioner and the Bank further agree that the provisions of this
ORDER shall remain effective and enforceable by the Commissioner against the
Bank except to the extent that, and until such time as, any provisions of this
ORDER shall have been modified, terminated, suspended, or set aside by the
Commissioner.

 

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          In San Juan, Puerto Rico, on      , 2009.

     
 
Alfredo Padilla
   
Commissioner of Financial Institutions
   
 
   
Acknowledged:
   
Westernbank Puerto Rico
   

         
By:
       
 
 
 
Title