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FDIC Enforcement Decisions and Orders


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   [12,161] In the Matter of United Community Bank, Glasgow, Kentucky, Docket No. 04-001b (3-5-04).

   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 10-25-04; see ¶16,401.)

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

   [.2] Management—Qualifications Specified

   [.3] Management—Management Plan Required

   [.4] Dividends—Dividends Restricted

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

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

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

   [.9] Technical Exceptions—Correction of Technical Exceptions Required

   [.10] Loans—Overdue—Written Plan for Reduction Required

   [.11] Loan Committee—Duties Specified

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

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

   [.14] Strategic Plan—Preparation of Required

   [.15] Profit Plan—Preparation of Plan Required

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

   [.17] Institution-Affiliated Parties—Transactions with—Restricted

   [.18] Bank Operations—Expense Reimbursement, Policy Required

   [.19] Audit—Program Required

   [.20] Bank Operations—Internal Review and Control Procedures—Establish

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

   [.22] Board of Directors—Committee to Review Compliance with Cease and Desist Order Required

   [.23] Progress Report—Written Report Required

In the Matter of
UNITED COMMUNITY BANK
GLASGOW, KENTUCKY
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST

FDIC-04-001b

   United Community Bank, Glasgow, 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, rule, or regulation alleged to have been committed by the Bank, and of its right to a hearing on the charges under section 8(b) of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. § 1818(b), and under section 287.690 of the Kentucky Revised Statutes, Ky. Rev. Stat. Ann. § 287.690 (Michie 1981), regarding hearings before the Department of Financial Institutions for the Commonwealth of Kentucky ("KDFI"), and having waived those rights, entered into a STIPULATION AND CONSENT TO THE ISSUANCE OF AN ORDER TO CEASE AND DESIST ("CONSENT AGREEMENT") with representatives of the Federal Deposit Insurance Corporation ("FDIC") and KDFI, dated March 5, 2004, whereby, solely for the purpose of this proceeding and without admitting or denying the charges of unsafe or unsound banking practices and violations of law, rule, or regulation, the Bank consented to the issuance of an ORDER TO CEASE AND DESIST ("ORDER") by the FDIC and KDFI.

   The FDIC and KDFI considered the matter and determined that they had reason to believe that the Bank had engaged in unsafe or unsound banking practices and had violated laws, rules, or regulations. The FDIC and KDFI, therefore, accepted the CONSENT AGREEMENT and issued the following:

   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 or unsound banking practices and violations of law, rule, or regulations:

   A. Engaging in hazardous lending and lax collection practices, including, but not limited to:

    •   The failure to obtain proper loan documentation;


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    •   The failure to obtain adequate collateral;

    •   The failure to establish and monitor collateral margins of secured borrowers;

    •   The failure to establish and enforce adequate loan repayment programs;

    •   The failure to obtain current and complete financial information;

   B. Operating with an inadequate level of capital protection for the kind and quality of assets held.

   C. Violating law, rule, or regulation, including:

    •   The Commonwealth of Kentucky legal lending limit restrictions as set forth in section 287.280 of the Kentucky Revised Statutes, Ky. Rev. Stat. Ann. § 287.280 (Michie 1981).

    •   The Commonwealth of Kentucky investment in fixed assets restrictions as set forth in section 287.100 of the Kentucky Revised Statutes, Ky. Rev. Stat. Ann. § 287.100 (Michie 1981).

    •   The substantially same terms requirement of section 23B of the Federal Reserve Act ("section 23B"), 12 U.S.C. § 371c-1(a)(1)(A).

    •   The good faith terms and circumstances requirement of section 23B of the Federal Reserve Act ("section 23B"), 12 U.S.C. § 371c-1(a)(1)(B).

    •   The requirement to establish limitations for transactions with correspondent banks in accordance with section 206.3 of Regulation F of the Board of Governors of the Federal Reserve System ("Regulation F"), 12 C.F.R. § 206.3.

    •   The requirements of section 103.22(b)(1), 103.22(d)(4), and 103.22(d)(6)(i) of the Treasury Department's Financial Recordkeeping and Reporting of Currency and Foreign Transactions Regulation, 31 C.F.R. § 103.22.

    •   The requirements to maintain an adequate Bank Secrecy Act program as required by section 326.8(b)(1) and (c)(2) of the FDIC Rules and Regulations, 12 C.F.R. § 326.8.

    •   The requirements to file accurate Reports of Condition as required by section 7(a)(1) of the Federal Deposit Insurance Act, 12 U.S.C. § 1817(a).

   D. Operating with an excessive level of adversely classified assets, and delinquent loans.

   E. Operating with inadequate liquidity in light of the Bank's asset and liquidity mix.

   F. Operating with an inadequate allowance for loan and lease losses for the volume, kind, and quality of loans and leases held.

   G. Operating with excessive overhead, occupancy costs, and personnel costs.

   H. Failing to have an adequate written policy limiting payment of expenses of officers and directors.

   I. Operating with inadequate internal routines and controls.

   J. Operating with inadequate lending policies.

   K. Operating with an inadequate audit program.

   L. Operating with an inadequate asset asset/liability management policy.

   M. Operating with management whose policies and practices are detrimental to the Bank and jeopardize the safety of its deposits.

   N. Operating with a board of directors which has failed to provide adequate supervision over and direction to the management of the Bank to prevent unsafe or unsound banking practices and violations of law, rule, or regulations.

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

CAPITAL

   [.1] 1. (a) Within 60 days from the effective date of this ORDER, the Bank shall develop and begin implementation of a written plan to increase its level of Tier 1 capital as a percentage of its total assets ("capital ratio") to no less than 7.5 percent, and to maintain the Bank's capital ratio at no less than 7.5 percent as determined from its Report of Condition and Income at the end of each calendar quarter. A copy of the plan shall be submitted to the Regional Director and Commissioner for review and comment upon completion. For purposes of this ORDER, Tier 1 capital and total assets shall be
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   calculated in accordance with Part 325 of the FDIC Rules and Regulations ("Part 325"), 12 C.F.R. Part 325.

   (b) Any such increase in Tier 1 capital may be accomplished by the following:

       (i) The sale of common stock and noncumulative perpetual preferred stock constituting Tier 1 capital under Part 325; or

       (ii) The elimination of all or part of the assets classified "Loss" as of October 20, 2003 without loss or liability to the Bank, provided any such collection on a partially charged-off asset shall first be applied to that portion of the asset which was not charged-off pursuant to this ORDER; or

       (iii) The collection in cash of assets previously charged-off; or

       (iv) The direct contribution of cash by the directors and/or the shareholders of the Bank; or

       (v) Any other means acceptable to the Regional Director of the Chicago Regional Office of the FDIC ("Regional Director") and the Commissioner of KDFI ("Commissioner"); or

       (vi) Any combination of the above means.

   (c) If all or part of the increase in capital required by this paragraph is to be accomplished by the sale of new securities, the board of directors of the Bank shall adopt and implement a plan for the sale of such additional securities, including the voting of any shares owned or proxies held by or controlled by them in favor of said plan. Should the implementation of the plan involve public distribution of Bank securities, including a distribution limited only to the Bank's existing shareholders, the Bank shall prepare detailed offering materials fully describing the securities being offered, including an accurate description of the financial condition of the Bank and the circumstances giving rise to the offering, and other material disclosures necessary to comply with 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 materials used in the sale of the securities shall be submitted to the FDIC Registration and Disclosure Section, 550 17th Street, N.W., Washington, D.C. 20429 and to the Kentucky Department of Financial Institutions, 1025 Capital Center Drive, Suite 200, Frankfort, Kentucky 40601, for their review. Any changes requested to be made in the materials by the FDIC or KDFI shall be made prior to their dissemination.

   (d) In complying with the provisions of this paragraph, the Bank shall provide to any subscriber and/or purchaser of Bank securities written notice of any planned or existing development or other changes which are materially different from the information reflected in any offering materials used in connection with the sale of Bank securities. The written notice required by this paragraph shall be furnished within 10 calendar days of the date any material development or change was planned or occurred, whichever is earlier, and shall be furnished to every purchaser and/or subscriber of the Bank's original offering materials.

   (e) The capital ratio analysis required by this paragraph shall not negate the responsibility of the Bank and its board of directors for maintaining throughout the year an adequate level of capital protection for the kind, quality and degree of market depreciation of assets held by the Bank.

MANAGEMENT

   [.2] 2. (a) During the life of this ORDER, the Bank shall have and thereafter retain qualified management. Each member of management shall have the qualifications and experience commensurate with his or her duties and responsibilities at the Bank. The qualifications of management shall be assessed on its ability to:

       (i) comply with the requirements of this ORDER;

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

       (iii) comply with applicable laws, rules, and regulations; and

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

   (b) During the life of this ORDER, the Bank shall notify the Regional Director of the Chicago Regional Office of the FDIC ("Regional Director") and the Commissioner of KDFI ("Commissioner") in writing of any changes in any of the Bank's directors or senior executive officers. For purposes of this ORDER, "senior executive officer" is defined as in section 32 of the Act ("section 32"), 12 U.S.C. 1831(i), and section 303.101(b) of the FDIC Rules and Regulations, 12 C.F.R. § 303.101(b),
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   and includes any person identified by the FDIC and KDFI, whether or not hired as an employee, with significant influence over, or who participates in, major policymaking decisions of the Bank.

   (c) Prior to the addition of any individual to the board of directors or the employment of any individual as a senior executive officer, the Bank shall comply with the requirements of section 32 and Subpart F of Part 303 of the FDIC Rules and Regulations, 12 C.F.R. §§ 303.100–303.104. Further, the Bank shall request and obtain the Commissioner's written approval prior to the addition of any individual to the board of directors and employment of any individual as a senior executive officer.

STAFFING ANALYSIS

   [.3] 3. (a) Within 60 days from the effective date of this ORDER, the Bank shall retain a bank consultant acceptable to the Regional Director and Commissioner. The consultant shall develop a written analysis and assessment of the Bank's management and staffing needs ("Management Plan") for the purpose of providing qualified management for the Bank.

   (b) The Bank shall provide the Regional Director and Commissioner with a copy of the proposed engagement letter or contract with the consultant for review before it is executed. The contract or engagement letter, at a minimum, should include:

       (i) A description of the work to be performed under the contract or engagement letter;

       (ii) The responsibilities of the consultant;

       (iii) An identification of the professional standards covering the work to be performed;

       (iv) Identification of the specific procedures to be used when carrying out the work to be performed;

       (v) The qualifications of the employee(s) who are to perform the work;

       (vi) The time frame for completion of the work;

       (vii) Any restrictions on the use of the reported findings; and

       (viii) A provision for unrestricted examiner access to workpapers.

   (c) The Management Plan shall be developed within 120 days from the effective date of this ORDER. The Management Plan shall include, at a minimum:

       (i) Identification of both the type and number of officer positions needed to properly manage and supervise the affairs of the bank;

       (ii) An evaluation of the current salary structure;

       (iii) Identification and establishment of such Bank committees as are needed to provide guidance and oversight to active management;

       (iv) Evaluation of all Bank officers and staff members to determine whether these individuals possess the ability, experience and other qualifications required to perform present and anticipated duties, including adherence to the Bank's established policies and practices, and restoration and maintenance of the Bank in a safe and sound condition; and

       (v) A plan to recruit and hire any additional or replacement personnel with the requisite ability, experience and other qualifications to fill those officer or staff member positions identified by this paragraph of this ORDER.

   (d) The Management Plan shall be submitted to the Regional Director and Commissioner for review and comment upon its completion. Within 30 days from the receipt of any comments from the Regional Director and Commissioner and after the adoption of any recommended changes, the Bank shall approve the Management Plan, and record its approval in the minutes of the board of directors' meeting. Thereafter, the Bank, its directors, officers, and employees shall implement and follow the Management Plan and/or any subsequent modification.

DIVIDEND RESTRICTION

   [.4] 4. As of the effective date of this ORDER, the Bank shall not declare or pay any cash dividend without the prior written consent of the Regional Director and Commissioner.

PROHIBITION OF ADDITIONAL LOANS TO CLASSIFIED BORROWERS

   [.5] 5. (a) As of 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 is already obligated in any manner to the Bank on any
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   extensions of credit (including any portion thereof) that has been charged off the books of the Bank or classified "Loss" so long as such credit remains uncollected.

   (b) As of 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 whose loan or other credit has been classified "Substandard" or is listed for Special Mention and is uncollected unless the Bank's board of directors has adopted, prior to such extension of credit, a detailed written statement giving the reasons why such extension of credit is in the best interest 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 of directors' meeting.

LOSS CHARGE-OFF

   [.6] 6. As of 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" as of October 20, 2003 that have not been previously collected or charged off. Any such charged-off asset shall not be rebooked without the prior written consent of the Regional Director and Commissioner. Elimination or reduction of these assets with the proceeds of other Bank extensions of credit is not considered collection for the purpose of this paragraph.

ALLOWANCE FOR LOAN AND LEASE LOSSES

   [.7] 7. (a) Within 30 days from the effective date of this ORDER, the Bank shall make an additional provision for loan and lease losses which, after review and consideration by the board of directors, reflects the potential for further losses in the remaining loans or leases classified "Substandard" and all other loans and leases in its portfolio. In making this determination, the board of directors shall consider the Federal Financial Institutions Examination Council ("FFIEC") Instructions for the Reports of Condition and Income and any analysis of the Bank's ALLL provided by the FDIC or KDFI.

   (b) Within 30 days from the effective date of this ORDER, Reports of Condition and Income required by the FDIC and filed by the Bank subsequent to October 20, 2003, but prior to the effective date of this ORDER, shall be amended and refiled if they do not reflect a provision for loan and lease losses and an ALLL which are adequate considering the condition of the Bank's loan portfolio, and which, at a minimum, incorporate the adjustments required by this paragraph.

   (c) Prior to submission or publication of all Reports of Condition and Income required by the FDIC after the effective date of this ORDER, the board of directors of the Bank shall review the adequacy of the Bank's ALLL, provide for an adequate ALLL, and accurately report the same. The minutes of the board meeting at which such review is undertaken shall indicate the findings of the review, the amount of increase in the ALLL recommended, if any, and the basis for determination of the amount of ALLL provided. In making these determinations, the board of directors shall consider the FFIEC Instructions for the Reports of Condition and Income and any analysis of the Bank's ALLL provided by the FDIC or KDFI.

   (d) ALLL entries required by this paragraph shall be made prior to any Tier 1 capital determinations required by this ORDER.

REDUCTION OF SUBSTANDARD ASSETS

   [.8] 8. (a) Within 90 days from the effective date of this ORDER, the Bank shall adopt and implement a written plan to reduce the Bank's risk position in each asset in excess of $90,000 which is classified "Substandard" in the FDIC Report of Examination as of October 20, 2003 ("Report"). A copy of the written plan shall be submitted to the Regional Director and Commissioner for review and comment upon its completion. 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 repayment sources; and

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

   (b) Such plan shall include, but not be limited to:

       (i) Dollar levels to which the Bank shall reduce each asset within twelve months from the effective date of this ORDER; and

       (ii) Provisions for the submission of monthly written progress reports to the Bank's board of directors for review and


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       notation in minutes of the meetings of the board of directors.

   (c) As used in this paragraph, "reduce" means to: (a) collect; (2) charge off; or (3) improve the quality of such assets so as to warrant removal of any adverse classification by the FDIC or KDFI.

   (d) Within 30 days from the receipt of any comment from the Regional Director and Commissioner, and after the adoption of any recommended changes, the Bank shall approve the written plan, which approval shall be recorded in the minutes of a board of directors' meeting. Thereafter, the Bank shall implement and follow this written plan.

SPECIAL MENTION/TECHNICAL EXCEPTIONS

   [.9] 9. Within 90 days from the effective date of this ORDER, the Bank shall correct the technical exceptions listed in the FDIC Report of Examination as of October 20, 2003 ("Report").

REDUCTION OF DELINQUENCIES

   [.10] 10. Within 90 days from the effective date of this ORDER, the Bank shall adopt and implement a written plan for the reduction and collection of delinquent loans. The plan shall include, but not be limited to, provisions which:

       (a) prohibit the extension of credit for the payment of interest;

       (b) delineate areas of responsibility for collections;

       (c) establish acceptable guidelines for collection of delinquent credits;

       (d) establish dollar levels to which the Bank shall reduce delinquencies within six and twelve months from the effective date of this ORDER; and

       (e) Provide for the submission of monthly written progress reports to the Bank's board of directors for review and notation in minutes of the meetings of the board of directors.

       (f) A copy of the written plan shall be submitted to the Regional Director and Commissioner upon its completion. As used in paragraph, "reduce" means to: (1) collect; (2) charge off; or (3) bring payments current.

       (g) Within 30 days from receipt of any comment from the Regional Director and Commissioner, and after the adoption of any recommended changes, the Bank shall approve the plan, which approval shall be recorded in the minutes of a board of directors' meeting. Thereafter, the Bank shall implement and follow the plan.

LOAN COMMITTEE

   [.11] 11. (a) Within 30 days from the effective date of this ORDER, the Bank shall appoint a loan committee which shall meet at least twice monthly. The loan committee shall consist of at least five members, a majority of whom are outside directors.

   (b) The loan committee shall, at a minimum, perform the following functions:

       (i) Evaluate, grant and/or approve loans in accordance with the Bank's loan policy amended to comply with this ORDER. The loan committee shall provide a thorough written explanation of any deviations from the loan policy, which explanation shall address how said exceptions are in the Bank's best interest. The written explanation shall be included in the minutes of the corresponding committee meeting.

       (ii) Review and monitor the status of repayment and collection of overdue and maturing loans, as well as all loans classified "Substandard" in the FDIC Report of Examination as of October 20, 2003 ("Report"), or that are included on the Bank's internal watch list.

       (iii) Maintain written minutes of the committee meetings, including a record of the review and status of the aforementioned loans. Such minutes shall be made available at the next Bank board of directors' meeting.

LOAN POLICY

   [.12] 12. (a) Within 60 days from the effective date of this ORDER, and annually thereafter, the board of directors of the Bank shall review the Bank's loan policy and procedures for adequacy and, based upon this review, shall make all appropriate revisions to the policy necessary to strengthen lending procedures and abate additional loan deterioration. The revised written loan policy shall be submitted to the Regional Director and Commissioner for review and comment upon its completion.

   (b) The initial revisions to the Bank's loan policy required by this paragraph, at a minimum, shall include provisions:
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       (i) Establishing review and monitoring procedures to ensure that all lending personnel are adhering to established lending procedures and that the directorate is receiving timely and dully documented reports on loan activity, including any deviations from established policy;

       (ii) Requiring that all extensions of credit originated or renewed by the Bank be supported by current credit information and collateral documentation, including lien searches and the perfection of security interests; have a clearly defined and stated purpose; and have a predetermined and realistic repayment source and schedule. Credit information and collateral documentation shall include current financial information, profit and loss statements or copies of tax returns, and cash flow projections, and shall be maintained throughout the term of the loan;

       (iii) Establishing guidelines for floor plan lending and accounts receivable financing;

       (iv) Requiring the establishment and maintenance of an effective loan grading system and internal loan watch list;

       (v) Prohibiting the capitalization of interest or loan-related expenses unless the board of directors provides, in writing, a detailed explanation of why said deviation is in the best interest of the Bank;

       (vi) Requiring accurate reporting of past due loans to the loan committee on at least a monthly basis;

       (vii) Incorporating collateral valuation requirements for various acceptable types of collateral, including: (A) maximum loan-to-collateral-value limitations; (B) a requirement that the valuation be completed prior to a commitment to lend funds; (C) a requirement for periodic updating of valuations; and (D) a requirement that the source of valuations be documented in Bank records;

       (viii) Requiring that loans exceeding established officer lending limits and limitations on the aggregate level of credit to any one borrower are not granted without the prior approval of the Bank's loan committee, and that such approval is noted in the Board minutes;

       (ix) Requiring that collateral appraisals be completed prior to the making of secured extensions of credit, and that periodic collateral valuations be performed for all secured loans listed on the Bank's internal watch list, criticized in any internal or outside audit report of the Bank, or criticized in any regulatory report of examination of the Bank;

   (c) Within 30 days from the receipt of any comments from the Regional Director and Commissioner, and after the adoption of any recommended changes, the board of directors shall approve the written loan policy and any subsequent modification thereto, which approval shall be recorded in the minutes of a board of directors' meeting. Thereafter, the Bank shall implement and follow the amended written loan policy.

ASSET/LIABILITY MANAGEMENT

   [.13] 13. (a) Within 60 days from the effective date of this ORDER, the Bank shall adopt and implement a written plan addressing liquidity, the Bank's relationship of volatile liabilities to temporary investments, and rate sensitivity objectives. Annually thereafter during the life of this ORDER, the Bank shall review this plan for adequacy and, based upon such review, shall make appropriate revisions to the plan that are necessary to strengthen funds management procedures to meet the Bank's liquidity needs. A copy of the plan and each revision thereof shall also be submitted to the Regional Director and Commissioner for review and comment. The initial plan shall include, at a minimum, provisions:

       (i) Establishing a desirable range for its net noncore funding ratio as computed in the Uniform Bank Performance Report;

       (ii) Establishing a minimum liquidity ratio and defining how the ratio is to be calculated;

       (iii) Establishing contingency plans by identifying alternative courses of action designed to meet the Bank's liquidity needs;

       (iv) Identifying the source and use of borrowed and/or volatile funds;

       (v) Addressing the proper use of borrowings and providing for appropriate tenor commensurate with the use of the borrowed funds, addressing concentration of funding sources, pricing and collateral requirements with specific allowable funding channels identified (i.e., brokered deposits, internet deposits, Fed funds purchased and other correspondent borrowings);

       (vi) Establishing a management reporting mechanism to project liquidity needs


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       and the sources of funds available to meet those needs over various time horizons and scenarios; and

       (vii) Establishing procedures for managing the Bank's sensitivity to interest rate risk which comply with the Joint Agency Statement of Policy on Interest Rate Risk (June 26, 1996), and the Joint Supervisory Statement on Investment Securities and End-user Derivative Activities (April 23, 1998).

   (b) Within 30 days from the receipt of all such comments from the Regional Director and Commissioner, and after revising the plan as necessary, the Bank shall adopt the plan, which adoption shall be recorded in the minutes of a board of directors' meeting. Thereafter, the Bank shall implement the plan.

STRATEGIC PLAN

   [.14] 14. (a) Within 120 days from the effective date of this ORDER, the Board shall formulate and adopt a realistic comprehensive strategic plan. The plan required by this paragraph shall contain an assessment of the Bank's current financial condition and market area, and a description of the operating assumptions that form the basis for major projected income and expense components.

   (b) The written strategic plan shall address, at a minimum:

       (i) Strategies for pricing policies and asset/liability management;

       (ii) Financial goals, including pro forma statements for asset growth, capital adequacy, and earnings; and

       (iii) Strategies for reducing investments in real estate and fixed assets, as well as maintaining compliance with legal limitations on such holdings.

   (c) The Board will submit the strategic plan to the Regional Director and Commissioner for review and comment upon its completion. After consideration of all such comments, the Bank shall approve the plan, which approval shall be recorded in the minutes of a board of directors' meeting.

   (d) Within 30 days from the end of each calendar quarter following the effective date of this ORDER, the Bank's board of directors shall evaluate the Bank's actual performance in relation to the strategic plan required by this paragraph and record the results of the evaluation, and any actions taken by the Bank, in the minutes of the board of directors' meeting at which such evaluation is undertaken.

   (e) The strategic plan required by this ORDER shall be revised and submitted to the Regional Director and Commissioner for review and comment 30 days prior to the end of each calendar year for which this ORDER is in effect. Within 30 days of receipt of all such comments from the Regional Director and Commissioner, and after consideration of all such comments, the Bank shall approve the revised plan, which approval shall be recorded in the minutes of a board of directors' meeting. Thereafter, the Bank shall implement the revised plan.

BUDGET AND PROFIT PLAN

   [.15] 15. (a) Within 120 days from the effective date of this ORDER, the Board shall adopt and implement a written profit plan and a realistic, comprehensive budget for all categories of income and expense for calendar year 2004. The plan required by this paragraph shall contain formal goals and strategies, consistent with sound banking practices, to reduce discretionary expenses and to improve the Bank's overall earnings, and shall contain a description of the operating assumptions that form the basis for major projected income and expense components. A copy of the plan shall be submitted to the Regional Director and Commissioner for review and comment upon its completion.

   (b) The written profit plan shall address, at a minimum:

       (i) A meaningful reduction in occupancy costs and

       (ii) A meaningful reduction of personnel costs

   (c) Within 30 days from the end of each calendar quarter following completion of the profit plan and budget required by this paragraph, the Bank's board of directors shall evaluate the Bank's actual performance in relation to the plan and budget, record the results of the evaluation, and note any actions taken by the Bank in the minutes of the board of directors' meeting at which such evaluation is undertaken.

   (d) A written profit plan and budget shall be prepared for each calendar year for which this ORDER is in effect and shall be submitted to the Regional Director and Commissioner
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   for review and comment within 30 days of the end of each year. Within 30 days of receipt of all such comments from the Regional Director and Commissioner and after adoption of any recommended changes, the Bank shall approve the plan, which approval shall be recorded in the minutes of a board of directors' meeting. Thereafter, the Bank shall implement and follow the plan.

CORRECTION OF VIOLATIONS

   [.16] 16. (a) Within 90 days from the effective date of this ORDER, the Bank shall eliminate and/or correct all violations of law, rule, and regulation listed in the FDIC Report of Examination as of October 20, 2003 ("Report") with the exception of those violations of the Commonwealth of Kentucky legal lending list restrictions as set forth in section 287.280 of the Kentucky Revised Statutes, Ky. Rev. Stat. Ann. § 287.280 (Michie 1981) and the Commonwealth of Kentucky investment in fixed assets restrictions as set forth in section 287.100 of the Kentucky Revised Statutes, Ky. Rev. Stat. Ann. § 287.100 (Michie 1981).

   (b) Within 90 days from the effective date of this ORDER, the Bank shall develop and implement a plan to eliminate the violations of the Commonwealth of Kentucky legal lending list restrictions as set forth in section 287.280 of the Kentucky Revised Statutes, Ky. Rev. Stat. Ann. § 287.280 (Michie 1981) and the Commonwealth of Kentucky investment in fixed assets restrictions as set forth in section 287.100 of the Kentucky Revised Statutes, Ky. Rev. Stat. Ann. § 287.100 (Michie 1981). The plan should include realistic time frames for the resolution and correction of the violations. A copy of the plan shall be submitted to the Regional Director and Commissioner for review and comment upon its completion.

   (c) Within 90 days from the effective date of this ORDER, the Bank shall implement procedures to ensure future compliance with all applicable laws, rules, and regulations.

RELATIONS WITH BANK HOLDING COMPANY

   [.17] 17. As of the effective date of this ORDER, the Bank shall not make any payment, directly or indirectly, to or for the benefit of the Bank's holding company or any other Bank affiliate, without the prior written consent of the Regional Director and Commissioner.

POLICY FOR EXPENSE REIMBURSEMENTS

   [.18] 18. Within 60 days from the effective date of this ORDER, the Board shall adopt and implement a written policy covering expense reimbursements to its directors, officers, and employees. A copy of the written policy shall be submitted to the Regional Director and Commissioner for review and comment upon its completion. At a minimum, the policy shall include:

       (i) Provisions which specify reasonable limitations for all categories of expenses related to customer entertainment and business development;

       (ii) Provisions which require complete documentation of all expenses related to customer entertainment and business development prior to Bank reimbursement. At a minimum, the Bank shall require the submission of original receipt(s), identification of the person(s) entertained, and the business purpose of the expense; and

       (iii) Provisions which prohibit the reimbursement of personal expenses of the Bank's directors, officers, and employees.

   (b) While this ORDER is in effect, the Bank's board of directors shall conduct monthly reviews of all expenses submitted for customer entertainment, business development, and/or any other expense submitted by the Bank's officers and directors, with the results of the reviews stated in the minutes of the meetings of the board of directors at which such reviews are performed. On a monthly basis, the Bank shall either seek reimbursement for any expenses paid which are not in conformance with the policy established pursuant to this paragraph or shall state in the minutes of the board of directors' meeting the full justification for deviations from the policy.

   (c) Within 30 days from the receipt of any such comments from the Regional Director and Commissioner and after adoption of any recommended changes, the Bank shall approve the plan, which approval shall be recorded in the minutes of the board of directors' meeting. Thereafter, the Bank shall implement and follow the plan.

AUDITS

   [.19] 19. Within 90 days from the effective date of this ORDER, the Bank's board of directors shall adopt and implement a comprehensive written audit program. At a minimum, the audit program shall provide that:
{{5-31-04 p.C-6019}}

   (a) the internal auditor make written monthly reports of audit findings directly to the Bank's board of directors, which findings and any action taken as a result of the findings shall be recorded in the minutes of the meetings of the board; and (b) the Bank provide the Regional Director and Commissioner with a copy of all external audit reports within 10 days of the Bank's receipt of such report(s). The Bank shall thereafter implement and enforce an effective system of internal and external audits. A copy of the audit program shall be submitted to the Regional Director and Commissioner upon its completion.

INTERNAL CONTROLS

   [.20] 20. Within 60 days from the effective date of this ORDER, the Bank shall correct the deficiencies in internal routines and controls which are listed in the FDIC Report of Examination as of October 20, 2003 ("Report"). Additionally, the Bank shall establish policies to prevent the recurrence of any deficiencies noted.

DISCLOSURE TO SHAREHOLDERS

   [.21] 21. Following the effective date of this ORDER, the Bank shall send to its shareholders and to the shareholders of Marrowbone Bancorp, Inc., Glasgow, Kentucky ("Bank Holding Company") a copy or description of this ORDER: (1) in conjunction with the Bank's and the Bank Holding Company's next shareholder communication; and (2) in conjunction with the Bank's and the Bank Holding Company's notice or proxy statement preceding the Bank's or their next shareholder meetings. The description shall fully describe this ORDER in all material respects. The description and any accompanying communication, notice or statement shall be sent to the FDIC Registration and Disclosure Section, 550 17th Street, N.W., Washington, D.C. 20429 and to the Kentucky Department of Financial Institutions, 1025 Capital Center Drive, Suite 200, Frankfort, Kentucky 40601, for review at least 20 days prior to dissemination to shareholders. Any changes requested to be made by the FDIC and KDFI shall be made prior to dissemination of the description, communication, notice or statement.

COMPLIANCE WITH ORDER

   [.22] 22. (a) Within 30 days from the effective date of this ORDER, the Bank's board of directors shall have in place a program that will provide for monitoring of the Bank's compliance with this ORDER.

   (b) Following the required date of compliance with subparagraph (a) of this paragraph, the Bank's board of directors shall review the Bank's compliance with this ORDER and record its review in the minutes of each regularly scheduled board of directors' meeting.

PROGRESS REPORTS

   [.23] 23. Within 30 days from the end of each calendar quarter following the effective date of this ORDER, the Bank shall furnish to the Regional Director and Commissioner written progress reports signed by each member of the Bank's board of directors, detailing the 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 and Commissioner have, in writing, released the Bank from making further reports.

CLOSING PARAGRAPHS

   The effective date of this ORDER shall be 10 calendar days after its issuance by the FDIC and KDFI.

   The provisions of this ORDER shall be binding upon the Bank, its institution-affiliated parties, and any successors and assigns thereof.

   The provisions of this ORDER shall remain effective and enforceable except to the extent that, and until such time as, any provision has been modified, terminated, suspended, or set aside by the FDIC and KDFI.

   Pursuant to delegated authority.

   Dated: March 5, 2004.



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