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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] ManagementQualifications Specified
[.2] CapitalTier 1 Capital Increase/Maintain
[.3] Loan Loss ReserveEstablishment of or Increase in Required
[.4] Profit PlanPreparation of Plan Required
[.5] AssetsCharge-off or Collection
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[.6] LoansExtensions of CreditTo Borrowers with Existing Adversely Classified Credits
[.7] Loan Review and Grading SystemEstablishment of Required
[.8] Violations of LawCorrections of Violations Required
[.9] Funds Management and LiquidityPreparation or Revision of Funds Management Policy Required
[.10] Bank OperationsInternal Routine and Control ProceduresWritten Plan Required
[.11] Reports of Condition and IncomeAmendment Required
[.12] ShareholdersDisclosure of Cease and Desist Order Required
[.13] Progress ReportWritten 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.