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FDIC Enforcement Decisions and Orders



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   [12,136] In the Matter of Farmers Deposit Bank, Eminence, Kentucky, Docket No. 03-201b (12-22-03).

   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. (This order was terminated by order of the FDIC dated 12-09-05; see ¶16,448.)

   [.1] Management—Qualifications Specified

   [.2] Board of Directors—Increased Participation in Bank Affairs Required

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

   [.4] Dividends—Dividends Restricted

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

   [.6] Assets—Charge-off or Collection

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

   [.8] Assets—Adversely Classified Assets—Reduction Required

   [.9] Loans—Extensions of Credit—To Borrowers with Existing Adversely Classified Credits

   [.10] Loan Policy—Preparation or Revision of Policy Required

   [.11] Budget Plan—Preparation Required

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

   [.13] Bank Operations—Internal Routine and Control Procedures—Establish

   [.14] Funds Management and Liquidity—Preparation or Revision of Funds Management Policy Required
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   [.15] Shareholders—Disclosure of Cease and Desist Order Required

   [.16] Progress Report—Written Report Required

In the Matter of
FARMERS DEPOSIT BANK
EMINENCE, KENTUCKY
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST

FDIC-03-201b

   The FARMERS DEPOSIT BANK, EMINENCE, KENTUCKY ("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/or regulations 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 Chapter 13B of the Kentucky Revised Statutes, Ky. Rev. Stat. Ann. §287.690, 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") and the Commissioner of the Kentucky Department of Financial Institutions ("Commissioner"), dated December 4, 2003, 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/or regulations, the Bank consented to the issuance of an ORDER TO CEASE AND DESIST ("ORDER") by the FDIC and the Commissioner.

   The FDIC and the Commissioner considered the matter and determined that they have reason to believe that the Bank had engaged in unsafe or unsound banking practices and had committed violations of law and/or regulations. The FDIC and the Commissioner, therefore, accepted the CONSENT AGREEMENT and issued the following:

ORDER TO CEASE AND DESIST

   IT IS HEREBY ORDERED, that the Bank, its 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 and unsound banking practices and violations of law and/or regulation:

       (a) Operating with management whose policies and procedures are detrimental to the Bank and jeopardize the safety of its deposits;

       (b) Operating with an inadequate level of capital protection for the kind and quality of assets held by the Bank;

       (c) Operating with a large volume of adversely classified loans or assets and/or delinquent loans and/or nonaccrued loans;

       (d) Operating with an inadequate allowance for loan and lease losses for the volume, kind and quality of loans and leases held by the Bank;

       (e) Engaging in hazardous lending and lax collection practices;

       (f) Operating with inadequate provisions for liquidity and funds management;

       (g) Operating with disregard of routine and controls policies;

       (h) Operating in such a manner as to produce operating losses; and

       (i) Violating laws and/or regulations as more fully described on pages 12 through 14 of the Report of Examination dated June 30, 2003 ("Report").

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

1. MANAGEMENT

   [.1] (1) The Bank shall have and retain qualified management.

       (a) Each member of management shall have qualifications and experience commensurate with his or her duties and responsibilities at the Bank. Management shall include a Chief Executive Officer, Senior Lending Officer, and Chief Financial Officer. Each member of management shall be provided appropriate written authority from the Bank's Board of Directors ("Board") to implement the provisions of this ORDER.

       (b) The qualifications of management shall be assessed on its ability to:


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         (i) comply with the requirements of this ORDER;

         (ii) operate the Bank in a safe and sound manner;

         (iii) comply with applicable laws and regulations; and

         (iv) restore all aspects of the Bank to a safe and sound condition, including asset quality, capital adequacy, earnings, management effectiveness, sensitivity to market risk, and liquidity.

       (c) During the life of this ORDER, the Bank shall notify the Regional Director of the FDIC's Atlanta Regional Office ("Regional Director") and the Commissioner (collectively, "Supervisory Authorities") in writing when it proposes to add any individual to the Bank's Board or employ any individual as a senior executive officer as that term is defined in Part 303 of the FDIC's Rules and Regulations, 12 C.F.R. §303.102. The notification must be received at least 30 days before such addition or employment is intended to become effective and should include a description of the background and experience of the individual or individuals to be added or employed. If the Commissioner provides written disapproval of such individual or the Regional Director issues a notice of disapproval pursuant to section 32 of the Act, 12 U.S.C. §1831i, with respect to any proposed individual, then such individual may not be added or employed by the Bank.

   

[.2] 2. BOARD OF DIRECTORS

   Beginning with the effective date of this ORDER, the Board shall increase its participation in the affairs of the Bank, assuming full responsibility for the approval of sound policies and objectives and for the supervision of all of the Bank's activities, consistent with the role and expertise commonly expected for directors of banks of comparable size. This participation shall include meetings to be held no less frequently than monthly at which, at a minimum, the following areas shall be reviewed and approved: reports of income and expenses; new, overdue, renewal, insider, charged-off, and recovered loans; investment activity; operating policies; and individual committee actions. Board minutes shall document these reviews and approvals, including the names of any dissenting directors.

   

[.3] 3. CAPITAL

   (a) Beginning with the effective date of this ORDER, the Bank shall have and maintain Tier 1 capital in such an amount as to equal or exceed five (5) percent of the Bank's total assets. No later than December 31, 2004, the Bank shall have and maintain Tier 1 capital in such an amount as to equal or exceed eight (8) percent of the Bank's total assets.

   (b) To facilitate the increase in Tier 1 capital required by this paragraph, within 30 days from the effective date of this ORDER, the Bank shall submit a written capital plan ("Capital Plan") to the Supervisory Authorities to restore the Bank's Tier 1 capital to such an amount as to equal or exceed eight (8) percent of the Bank's total assets on or before December 31, 2004. The Capital Plan shall describe the means and timing by which the Bank shall increase its Tier 1 capital. No more than 30 days after receipt of any comment from the Supervisory Authorities, the Board shall adopt and implement the Capital Plan and/or any subsequent modifications. The Board shall maintain in its minutes a written record of its initial adoption of the Capital Plan and all subsequent actions taken by the Bank to implement the Capital Plan and comply with the provisions of this Paragraph 3.

   (c) Any increase in Tier 1 capital necessary to meet the requirements of Paragraph 3 of this ORDER may not be accomplished through a deduction from the Bank's Allowance except with the prior written consent of the Supervisory Authorities.

   (d) For the purposes of this ORDER, the terms "Tier 1 capital" and "total assets" shall have the meanings ascribed to them in Part 325 of the FDIC Rules and Regulations, 12 C.F.R. §§ 325.2(t) and 325.2(v).

   

[.4] 4. CASH DIVIDENDS

   The Bank shall not pay cash dividends without the prior written consent of the Supervisory Authorities.

   

[.5] 5. ALLOWANCE FOR LOAN AND LEASE LOSSES

   Within 30 days from the effective date of this ORDER, the Board shall review the adequacy of the Allowance and establish a comprehensive policy for determining the adequacy of the Allowance. For the purpose of this determination, the adequacy of the Allowance shall be determined after the charge-off of all loans or other items classified "Loss". The policy shall provide for a review
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   of the Allowance at least once each calendar quarter. Said review should be completed at least ten (10) days prior to the end of each quarter, in order that the findings of the Board with respect to the Allowance may be properly reported in the quarterly Reports of Condition and Income. The review should focus on the results of the Bank's internal loan review, loan and lease loss experience, trends of delinquent and non-accrual loans, an estimate of potential loss exposure of significant credits, concentrations of credit, and present and prospective economic conditions, and may include such other factors as the Board deems relevant. A deficiency in the Allowance shall be remedied in the calendar quarter it is discovered, prior to submitting the Report of Condition and Income, by a charge to current operating earnings. The minutes of the Board meeting at which such review is undertaken shall indicate the results of the review. The Bank's policy for determining the adequacy of the Allowance and its implementation shall be satisfactory to the Supervisory Authorities as determined at subsequent examinations and/or visitations.

   

[.6] 6. CHARGE-OFF

   (a) Within 10 days from the effective date of this ORDER, the Bank shall eliminate from its books, by charge-off or collection, all assets or portions of assets classified "Loss" and 50 percent of all assets or portions of assets classified "Doubtful" in the Report that have not been previously collected or charged-off. (If an asset classified "Doubtful" is a loan or a lease, the Bank may, in the alternative, increase its allowance for loan and lease losses by an amount equal to 50 percent of the loan or lease classified "Doubtful".)

   (b) Additionally, while this ORDER remains in effect, the Bank shall, within 30 days of the receipt of any official Report of Examination of the Bank from the Supervisory Authorities, eliminate from its books, by collection, charge-off, or other proper entries, the remaining balance of any assets classified "Loss" and 50 percent of those classified "Doubtful" unless otherwise approved in writing by the Supervisory Authorities.

   

[.7] 7. INTERNAL LOAN REVIEW

   Within 90 days from the effective date of this ORDER, the Bank shall review its internal loan review and grading system to ensure that the program accurately identifies the levels of risk exposure within the loan portfolio. The Board shall ensure that the system is fully implemented. The adequacy of such system and its implementation shall be satisfactory to the Supervisory Authorities as determined at subsequent examinations and/or visitations.

   

[.8] 8. PLANS FOR REDUCING/IMPROVING CLASSIFIED ASSETS

   Within 90 days from the effective date of this ORDER, the Bank shall submit to the Supervisory Authorities a written plan to effect the reduction and/or improvement of any lines of credit which are adversely classified by the Supervisory Authorities in the Report and which aggregate $250,000 or more as of the date of the Report. In developing such plan, the Bank shall, at a minimum:

       (i) review the financial position of each such borrower, including source of repayment, repayment ability, and alternative payment sources; and

       (ii) evaluate the available collateral for each such credit, including possible actions to improve the Bank's collateral position.

   Such plans shall thereafter be monitored and progress reports thereon resubmitted by the Bank concurrently with the other reporting requirements set forth in Paragraph 18 of this ORDER.

   

[.9] 9. NO ADDITIONAL CREDIT

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

   (b) Additionally, during the life of this ORDER, 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 from the Bank that has been classified, in whole or in part, "Substandard" and is uncollected.
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   (c) Paragraph 9(b) shall not apply if the Bank's failure to extend further credit to a particular borrower would be detrimental to the best interests of the Bank. Prior to the extension of any additional credit pursuant to this paragraph, either in the form of a renewal, extension, or further advance of funds, such additional credit shall be approved by a majority of the Board or a designated committee thereof, who shall certify in writing as follows:

       (i) why the failure of the Bank to extend such credit would be detrimental to the best interests of the Bank;

       (ii) that the Bank's position would be improved thereby; and

       (iii) how the Bank's position would be improved.

   The signed certification shall be made a part of the minutes of the Board or its designated committee and a copy of the signed certificate shall be retained in the borrower's credit file.

10. SPECIAL MENTION

   Within 90 days from the effective date of this ORDER, the Bank shall correct the cited deficiencies in the loans listed for "Special Mention" on pages 58 and 59 of the Report.

11. DOCUMENTATION EXCEPTIONS

   Within 90 days from the effective date of this ORDER, the Bank shall correct documentation exceptions on loans listed in the schedule of Assets with Credit Data or Collateral Documentation Exceptions on pages 60 through 71 of the Report and to prevent future credit data and/or collateral documentation exceptions.

   

[.10] 12. LENDING POLICIES

   Within 90 days from the effective date of this ORDER, the Bank shall revise, adopt, and implement a written lending and collection policy to provide effective guidance and control over the Bank's lending function, which policy shall include, at a minimum, revisions to address all items of criticism enumerated on pages 3 and 4 in the Report as well as specific guidelines for placing loans on a nonaccrual basis. In addition, the Bank shall obtain adequate and current documentation for all loans in the Bank's loan portfolio. Such policy and its implementation shall be in a form and manner acceptable to the Supervisory Authorities as determined at subsequent examinations and/or visitations.

   

[.11] 13. BUDGET

   (a) Within 90 days from the effective date of this ORDER, the Bank shall formulate and fully implement a written plan to improve earnings. This plan shall be forwarded to the Supervisory Authorities for review and comment and shall address, at a minimum, the goals and strategies for improving and sustaining the earnings of the Bank, including:

       (i) an identification of the major areas in, and means by which, the Board will seek to improve the Bank's operating performance;

       (ii) realistic and comprehensive budgets;

       (iii) a budget review process to monitor the income and expenses of the Bank to compare the actual figures with budgetary projections;

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

       (v) coordination of the Bank's loan, investment, operating policies, budget, and profit planning, with the funds management policy.

   (b) Following the end of each calendar quarter, the Board shall evaluate the Bank's actual performance in relation to the plan required by this paragraph and shall record the results of the evaluation, and any actions taken by the Bank, in the minutes of the Board meeting at which such an evaluation is undertaken.

   

[.12] 14. VIOLATIONS OF LAW

   Within 90 days from the effective date of this ORDER, the Bank shall eliminate and/or correct all violations of law and contraventions of statements of policy which are more succinctly described beginning on pages 12 through 14 of the Report. In addition, the Bank shall take all necessary steps to ensure future compliance with all applicable laws and regulations.

   

[.13] 15. POLICY FOR INTERNAL ROUTINE AND CONTROL

   (a) Within 90 days from the effective date of this ORDER, the Bank shall adopt and implement a policy for the operation of the Bank in such a manner as to provide adequate internal routine and control policies consistent with safe and sound banking practices.
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   Such policy shall, at a minimum, eliminate and/or correct all internal routine and control deficiencies as more fully set forth on page 11 of the Report and shall guarantee that the Bank will take all necessary steps to ensure further compliance with all applicable laws and regulations. Such policy and its implementation shall be satisfactory to the Supervisory Authorities as determined at subsequent examinations and/or visitations.

   (b) Within 90 days from the effective date of this ORDER, the Bank shall develop an internal audit program that establishes procedures to protect the integrity of the Bank's operational and accounting systems. The program shall be in a form and manner acceptable to the Supervisory Authorities as determined at subsequent examinations and/or visitations.

   

[.14] 16. POLICY FOR LIQUIDITY AND FUNDS MANAGEMENT

   Within 90 days from the effective date of this ORDER, the Bank shall develop or revise, adopt, and implement a written liquidity and funds management policy. Such policy and its implementation shall be in a form and manner acceptable to the Supervisory Authorities as determined at subsequent examinations and/or visitations.

   

[.15] 17. NOTICE TO SHAREHOLDERS

   Following the effective date of this ORDER, the Bank shall send to the shareholders of its holding company, or otherwise furnish a description of this ORDER, (i) in conjunction with the Bank's next shareholder communication, and also (ii) in conjunction with its notice or proxy statement preceding the Bank'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 both the FDIC, Division of Supervision and Consumer Protection, Accounting and Securities Section, 550 17th Street, N.W., Room F-6043, Washington, D.C. 20429, and to the Kentucky Department of Financial Institutions, 1025 Capital Center Drive, Suite 200, Frankfort, KY 40601, for review at least 20 days prior to dissemination to shareholders. Any changes requested to be made by the FDIC or the Kentucky Department of Financial Institutions shall be made prior to dissemination of the description, communication, notice, or statement.

   

[.16] 18. PROGRESS REPORTS

   Within 30 days of the end of the first quarter following the effective date of this ORDER, and within 30 days of the end of each quarter thereafter, the Bank shall furnish written progress reports to the Supervisory Authorities detailing the form and manner of any actions taken to secure compliance with this ORDER and the results thereof. Such reports shall include a copy of the Bank's Report of Condition and the Bank's Report of Income. Such reports may be discontinued when the corrections required by this ORDER have been accomplished and the Supervisory Authorities have released the Bank in writing from making further reports.

   This ORDER shall become effective 10 days from the date of 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 Supervisory Authorities.

   Pursuant to delegated authority.

   Dated at Atlanta, Georgia, this 22 day of December, 2003.

The Kentucky Department of Financial Institutions ('Department"), having duly approved the foregoing ORDER, and the Bank, through its Board, agree that the issuance of the said ORDER by the Federal Deposit Insurance Corporation shall be binding as between the Bank and the Commissioner of the Department to the same degree and legal effect that such ORDER would be binding on the Bank if the Commissioner had issued a separate Order that included and incorporated all of the provisions of the foregoing ORDER.

Dated this 4th day of December, 2003.



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