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FDIC Enforcement Decisions and Orders

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   [12,092] In the Matter of The Bank and Trust of Puerto Rico, Hato Rey, Puerto Rico, Docket No. 03-075b (9-16-03).

   A cease and desist order was issued, based on findings by the FDIC that it had reason to believe that respondent was engaged in unsafe and unsound practices.

   [.1] Management—Qualifications Specified

   [.2] Capital—Tier 1 Capital Increase/Maintain

   [.3] Loan Loss Reserve—Establishment of or Increase in Required

   [.4] Profit Plan—Preparation of Plan Required

   [.5] Assets—Charge-off or Collection
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   [.6] Loans—Extensions of Credit—To Borrowers with Existing Adversely Classified Credits

   [.7] Loan Review and Grading System—Establishment of Required

   [.8] Violations of Law—Corrections of Violations Required

   [.9] Funds Management and Liquidity—Preparation or Revision of Funds Management Policy Required

   [.10] Bank Operations—Internal Routine and Control Procedures—Written Plan Required

   [.11] Reports of Condition and Income—Amendment Required

   [.12] Shareholders—Disclosure of Cease and Desist Order Required

   [.13] Progress Report—Written Report Required

In the Matter of
THE BANK AND TRUST OF PUERTO RICO
HATO REY, PUERTO RICO
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST

FDIC-03-075b

   THE BANK AND TRUST OF PUERTO RICO, HATO REY, PUERTO RICO ("Insured Institution"), 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/or regulations alleged to have been committed by the Insured Institution 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 September 16, 2003, whereby solely for the purpose of this proceeding and without admitting or denying the alleged charges of unsafe or unsound banking practices, the Insured Institution consented to the issuance of an ORDER TO CEASE AND DESIST ("ORDER") by the FDIC.

   The FDIC considered the matter and determined that it had reason to believe that the Insured Institution had operated in an unsafe and unsound condition. The FDIC, therefore, accepted the CONSENT AGREEMENT and issued the following:

ORDER TO CEASE AND DESIST

   IT IS HEREBY ORDERED that the Insured Institution, 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 the following unsafe or unsound banking practices:

       (a) operating with inadequate capital in relation to the kind and quality of assets held by the Insured Institution;

       (b) operating with a large volume of poor quality loans;

       (c) operating with an inadequate allowance for loan and lease losses;

       (d) operating with inadequate provisions for liquidity;

       (e) operating with inadequate internal routine and controls policies;

       (f) operating in such a manner as to produce operating losses;

       (g) operating in such a manner as to produce low earnings;

       (h) operating with management whose policies and practices are detrimental to the Insured Institution; and

       (i) operating with a board of directors which has failed to restore the Insured Institution to a safe and sound condition in a timely manner.

   IT IS FURTHER ORDERED that the Insured Institution, its institution-affiliated parties, and its successors and assigns, take affirmative action as follows:

   [.1]1. (a) During the life of this ORDER, the Insured Institution shall have management qualified to restore the Insured Institution to a sound condition. Such management shall include a chief executive officer and an experienced senior lending officer responsible
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   for supervising the Insured Institution's overall lending function.

   (b) Present management shall be assessed on its ability to:

       (i) Comply with the requirements of this ORDER;

       (ii) Improve and thereafter maintain the Insured Institution in a safe and sound condition, including asset quality, capital adequacy, liquidity adequacy, and earnings adequacy;

       (iii) Comply with all applicable State and Federal laws, regulations; and

       (iv) Restore all aspects of the Insured Institution to a safe and sound condition, including asset quality, capital adequacy, earnings, management effectiveness, and liquidity.

   (c) (i) During the life of this ORDER, the Insured Institution shall notify the Regional Director of the New York Regional Office ("Regional Director") and the Commissioner of Financial Institutions for the Commonwealth of Puerto Rico ("Commissioner") in writing of any resignation and/or terminations of any members of its board of directors and/or any of its officer(s) within 15 days of the event.

   (ii) The Insured Institution shall comply with section 32 of the Act, 12 U.S.C. §1831i.

   (d) (i) To ensure both compliance with this ORDER and qualified management for the Insured Institution, the board of directors, within 60 days from the effective date of this ORDER shall develop a written policy ("Management Policy") which shall incorporate an analysis of the Insured Institution's management and staffing requirements and shall, at a minimum address (1) both the number and type of positions needed to properly manage the Insured Institution, (2) a clear and concise description of the needed experience and pay for each job, (3) an evaluation of the present management, (4) a plan to recruit, hire or replace personnel with requisite ability and experience, (5) a periodic evaluation of each individual's job performance, and (6) the establishment of procedures to periodically review and update the Management Policy.

   (ii) The Management Policy and any subsequent modification thereto shall be submitted to the Regional Director and the Commissioner for review and comment. within 30 days from receipt of any comment, and after consideration of such comment, the board of directors shall approve the Management Policy, which approval shall be recorded in the minutes of the meeting of the board of directors. Thereafter, the Insured Institution and its directors, officers and employees shall implement and follow the Management Policy and any modification thereto.

   (e) Within 30 days from the effective date of this ORDER, the board of directors shall establish a committee of the board of directors with the responsibility to ensure that the Insured Institution complies with the provisions of this ORDER. At least two-thirds of the members of such committee shall be independent, outside directors as defined herein. The committee shall report monthly to the entire board of directors, and a copy of the report and any discussion relating to the report or the ORDER shall be included in the minutes of the board of directors. Nothing contained herein shall diminish the responsibility of the entire board of directors to ensure compliance with the provisions of this ORDER.

   (f) For the purposes of this ORDER, an "outside director" shall be an individual:

       (i) Who shall not be employed, in any capacity, by the Insured Institution or its affiliates other than as a director of the Insured Institution or an affiliate;

       (ii) Who shall not own or control more than 5 percent of the voting stock of the Insured Institution or its holding company;

       (iii) Who shall not be indebted to the Insured Institution or any of its affiliates in an amount greater than 5 percent of the Insured Institution's equity capital and reserves;

       (iv) Who shall not be related to any directors, principal shareholders of the Insured Institution or affiliates of the Insured Institution; and

       (v) Who shall be a resident of, or engage in business in, the Insured Institution's trade area.

   [.2]2. (a) On or before October 31, 2003, the Insured Institution shall have Tier I capital equal to or greater than five and one-half (5-1/2) percent of the Insured Institution's adjusted Part 325 total assets. On or before December 31, 2003, the Insured Institution shall have Tier I capital equal to or greater than six
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   (6) percent of adjusted Part 325 total assets. Thereafter, during the life of this ORDER, the Insured Institution shall maintain Tier 1 capital equal to or greater than six (6) percent of the Insured Institution's adjusted Part 325 total assets.

   (b) Any increase in Tier 1 capital necessary to meet the ratio required by Paragraph 2(a) of this ORDER may be accomplished by the following:

       (i) The sale of new securities in the form of common stock; or

       (ii) The direct contribution of cash by the directors, shareholders, or parent Insured Institution holding company of the Insured Institution; or

       (iii) Any other method acceptable to the FDIC.

   (c) If all or part of the increase in Tier 1 capital required by Paragraph 2(a) of this ORDER is accomplished by the sale of new securities, the board of directors of the Insured Institution shall adopt and implement a plan for the sale of such additional securities, including the voting of any shares owned or proxies held by them in favor of the plan. Should the implementation of the plan involve a public distribution of the Insured Institution's securities (including a distribution limited only to the Insured Institution's existing shareholders), the Insured Institution shall prepare offering materials fully describing the securities being offered, including an accurate description of the financial condition of the Insured Institution and the circumstances giving rise to the offering, and any other material disclosures necessary to comply with the Federal securities laws. Prior to the implementation of the plan and, in any event, not less than 20 days prior to the dissemination of such materials, the plan and any materials used in the sale of the securities shall be submitted to the FDIC, Division of Supervision and Consumer Protection, Accounting and Securities Disclosure Section, 550 17th Street, N.W., Room F-6053, Washington, D.C. 20429 for review. Any changes requested to be made in the plan or materials by the FDIC shall be made prior to their dissemination. If the Regional Director allows any part of the increase in Tier 1 capital to be provided by the sale of the noncumulative perpetual preferred stock, then all terms and conditions of the issue, including, but not limited to, those terms and conditions relative to the interest rate and any convertibility factor, shall be presented to the Regional Director for prior approval.

   (d) For purposes of this ORDER, the terms "Tier 1 capital", and "Part 325 total assets" shall have the meanings ascribed to them in Part 325 of the FDIC's Rules and Regulations, respectively subsections 325.2(g), and 325.2(v), 12 C.F.R. §§ 325.2(t) and (v). The "Capital Calculations" schedule on page 37 of the Report of Examination of the Insured Institution as of September 30, 2002, provides the method for determining the ratio of Tier 1 capital to adjusted Part 325 total assets as required by this ORDER.

   [.3]3. (a) Within 30 days from the effective date of this ORDER, the Insured Institution shall establish and shall thereafter maintain, through charges to current operating income, an adequate allowance for loan and lease losses. In determining the adequacy of the allowance for loan and lease losses, the board of directors of the Insured Institution shall at a minimum consider the following:

       (i) Prevailing instructions contained in the Federal Financial Institutions Examination Council booklet entitled "Instructions-Consolidated Reports of Condition and Income";

       (ii) The volume and mix of the existing loan portfolio, including the volume and severity of nonperforming loans and adversely classified credits, as well as an analysis of net charge-offs experienced on previously adversely classified loans;

       (iii) The extent to which loan renewals and extensions are used to maintain loans on a current basis and the degree of the risk associated with such loans;

       (iv) The trend in loan growth, including any rapid increase in loan volume within a relatively short time period;

       (v) General and local economic conditions affecting the collectibility of the Insured Institution's loans;

       (vi) Previous loan loss experience by loan type, including the trend of net charge-offs as a percent of average loans over the past several years;

       (vii) Off balance sheet credit risks;

       (viii) The overall risk associated with each concentration of credit together with the degree of risk associated with each related individual borrower; and

       (ix) Any other factors appropriate in determining future valuation reserves.

   (b) Prior to the submission of any Report of Condition or Report of Income, the board of directors of the Insured Institution shall
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   review the adequacy of the Insured Institution's allowance for loan and lease losses. The minutes of the board meetings at which each review is undertaken shall indicate the results of the review, the amount of any increase to the reserve, and the basis for the amount of the reserve. The criteria for the review shall be as set forth in paragraph 3(a).

   (c) Notwithstanding the provisions of Paragraphs 3(a) and 3(b) above, the Insured Institution shall achieve, within 30 days of the effective date of this ORDER, an adequate allowance for loan and lease losses, after charge off of loans classified "Loss", and shall thereafter maintain, through charges to current operating income, an adequate allowance for loan and lease losses.

   (d) In the event that the Regional Director and/or the Commissioner determine, at subsequent examinations and/or visitations, that the Insured Institution's allowance for loan and lease losses is inadequate, the Insured Institution shall amend its Consolidated Reports of Condition and Income in accordance with Paragraph 11.

   [.4]4. (a) Within 30 days from the effective date of this ORDER, and within the first 30 days of each calendar year thereafter, the board of directors shall develop a written profit plan consisting of goals and strategies for improving the earnings of the Insured Institution for each calendar year. The written profit plan shall include, at a minimum:

       (i) Identification of the major areas in, and means by, which the board of directors will seek to improve the Insured Institution's operating performance;

       (ii) Realistic and comprehensive budgets;

       (iii) A budget review process to monitor the income and expenses of the Insured Institution to compare the actual figures with budgetary projections on not less than a quarterly basis; and

       (iv) A description of the operating assumptions that form the basis for, and adequately support, major projected income and expense components.

   (b) Such written profit plan and any subsequent modification thereto shall be submitted to the Regional Director and the Commissioner for review and comment. No more than 30 days after the receipt of any comment from the Regional Director and/or the Commissioner the board of directors shall approve the written profit plan which approval shall be recorded in the minutes of the board of directors. Thereafter, the Insured Institution, its directors, officers, and employees shall follow the written profit plan and/or any subsequent modification.

   [.5]5. (a) Within 60 days from the effective date of this ORDER, the Insured Institution shall have reduced the assets classified "substandard" as of September 30, 2002 and those assets classified "doubtful" that have not previously been charged off pursuant to this ORDER to not more than fifty (50) percent of capital.

   (b) The requirements of Paragraph 5(a) are not to be construed as standards for future operations and, in addition to the foregoing, the Insured Institution shall eventually reduce the total of all adversely classified assets. As used in Paragraph 5(a), the word "reduce" means (i) to collect, (ii) to charge-off, or (iii) to sufficiently improve the quality of assets adversely classified to warrant removing any adverse classification, as determined by the FDIC.

   [.6]6. Beginning with the effective date of this ORDER, the Insured Institution 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 with the Insured Institution that has been charged off or classified, in whole or part, "Loss" or "Doubtful" and is uncollected. The requirements of this paragraph shall not prohibit the Insured Institution from renewing (after collection in cash of interest due from the borrower) any credit already extended to any borrower.

   [.7]7. (a) Within 30 days of the effective date of this ORDER, the board shall establish an effective internal loan review and grading system ("System") to periodically review the Insured Institution's loan portfolio and identify and categorize problem credits. At a minimum the System shall provide for:

       (i) The identification of the overall quality of the loan portfolio;

       (ii) The identification and amount of each delinquent loan;

       (iii) An identification or grouping of loans that warrant the special attention of management;

       (iv) For each loan identified, a statement of the amount and an indication of the degree of risk that the loan will not be fully repaid according to its terms and the


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       reason(s) why the particular loan merits special attention;

       (v) An identification of credit and collateral documentation exceptions;

       (vi) The identification and status of each violation of law, rule or regulation;

       (vii) An identification of loans not in conformance with the Insured Institution's lending policy, and exceptions to the Insured Institution's lending policy;

       (viii) An identification of insider loan transactions; and

       (ix) A mechanism for reporting periodically, no less than quarterly, to the board of directors on the status of each loan identified and the action(s) taken by management.

   (b) A copy of the reports submitted to the board, as well as documentation of the action taken by the Insured Institution to collect or strengthen assets identified as problem credits, shall be kept with the minutes of the board of directors.

   [.8]8. Within 60 days from the effective date of this ORDER, the Insured Institution shall eliminate an/or correct all violations of law and contraventions of FDIC guidelines which are set out on pages 14 through 16 of the Report of Examination of the Insured Institution as of September 30, 2002. In addition, the Insured Institution shall henceforth comply with all applicable laws and regulations.

   [.9]9. Within 90 days from the effective date of this ORDER, the Insured Institution shall formulate and adopt a written liquidity and funds management policy. Such policy shall include the establishment of acceptable ranges of ratios in the following areas: volatile liability dependence, total loans to total deposits and temporary investments to volatile liabilities. In addition, the liquidity policy shall incorporate a funds management program which designates acceptable levels for: volatile liabilities, including borrowings; asset mix, including temporary funds and investments, long-term investment securities and classes of obligors, and loans to deposits; and rate-sensitive assets as a percent of rate-sensitive liabilities. The written liquidity and funds management policy shall be submitted to the Regional Director and the Commissioner for review and comment.

   [.10]10. Within 60 days from the effective date of this ORDER, the Insured Institution shall adopt and implement a written policy for the operation of the Insured Institution in such a manner as to provide internal routine and controls consistent with safe and sound banking practices. Such policy and its implementation shall be satisfactory to the Regional Director as determined at subsequent examinations and/or visitations.

   [.11]11. (a) Within 30 days from the effective date of this ORDER, the Insured Institution shall review all Consolidated Reports of Condition and Income filed with the FDIC on and after March 31, 2002, and shall amend and file with the FDIC amended Consolidated Reports of Condition and Income which accurately reflect the financial condition of the Insured Institution as of the date of each such Report.

   (b) During the life of this ORDER, the Insured Institution shall file with the FDIC, Consolidated Reports of Condition and Income which accurately reflect the financial condition of the Insured Institution as of the reporting period. In particular, such Reports shall include any adjustment in the Insured Institution's books made necessary or appropriate as a consequence of any Commonwealth or FDIC examination of the Insured Institution during that reporting period.

   [.12]12. Following the effective date of this ORDER, the Insured Institution shall send to its shareholders or otherwise furnish a description of this ORDER (i) in conjunction with the Insured Institution's next shareholder communication, and also (ii) in conjunction with its notice or proxy statement preceding the Insured Institution's next shareholder meeting. The description shall fully describe the ORDER in all material respects. The description and any accompanying communication, statement, or notice shall be sent to the FDIC, Division of Supervision and Consumer Protection. Accounting and Securities Disclosure Section, 550 17th Street, N.W., Room F-6053, Washington, D.C. 20429 for review at least 20 days prior to dissemination to shareholders. Any changes requested to be made by the FDIC shall be made prior to dissemination of the description, communication, notice or statement.

   [.13]13. On or before the last day of the second month following the effective date of this ORDER, and on the last day of every third month thereafter, the Insured Institution shall furnish written progress reports to the Regional Director and the Commissioner
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   detailing the form and manner of any actions taken to secure compliance with this ORDER and the results thereof. Such reports may be discontinued when the corrections required by this ORDER have been accomplished and the Regional Director has released the Insured Institution in writing from making further reports.

   The provisions of this ORDER shall be binding upon the Insured Institution, its directors, officers, employees, agents, successors, assigns, and other institution-affiliated parties of the Insured Institution.

   This ORDER shall become effective immediately upon its issuance.

   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 shall have been modified, terminated, suspended, or set aside by the FDIC.

   Pursuant to delegated authority.

   Dated: September 16, 2003.

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Last Updated 12/7/2003 legal@fdic.gov