exv10w1






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:
	 	 	 	 
	 

	 	 

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