Each depositor insured to at least $250,000 per insured bank



Home > Regulation & Examinations > Bank Examinations > FDIC Enforcement Decisions and Orders




FDIC Enforcement Decisions and Orders

ED&O Home | Search Form | Text Search | ED&O Help


{{6-30-04 p.C-6037}

   [12,186] In the Matter of Heritage Bank of Ashland, Inc., Ashland, Kentucky, Docket No. 04-032b (4-12-04).

   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.

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

   [.2] Dividends—Dividends Restricted

   [.3] Management—Qualifications Specified

   [.4] Loan Collector/Consultant—Required

   [.5] Compensation— Executives—"Golden Parachute," Restricted

   [.6] Consultants—Retention Required

   [.7] Board of Directors— Training Program Required

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

   [.9] Assets—Charge-off or Collection

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

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

   [.12] Reports of Condition and Income—Nonaccrual Status

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

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

   [.15] Loans—Special Mention

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

   [.17] Loan Committee—Duties Specified
{{6-30-04 p.C-6038}

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

   [.19] Interagency Guidance on Subprime Lending—Compliance with Policy Required

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

   [.21] Interest Rate Risk Policy—Plan Required

   [.22] Growth Plan—Minimum Requirements

   [.23] Strategic Plan—Preparation of Required

   [.24] Earnings Plan—Written Earnings Plan Required

   [.25] Profit Plan—Preparation of Plan Required

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

   [.27] Insurance—Life Insurance, Review Required

   [.28] Audit—Internal Audit—Minimum Procedures Specified

   [.29] Bank Operations—Internal Routine and Controls, Correction of Weaknesses Required

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

   [.31] Compliance Committee—Establishment Required

   [.32] Progress Report—Written Report Required

In the Matter of
HERITAGE BANK OF ASHLAND, INC.
ASHLAND, KENTUCKY
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST

FDIC-04-032b

   Heritage Bank of Ashland, Inc., Ashland, 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 31, 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 there was 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:

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

       A. Engaging in hazardous lending and lax collection practices.

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

       C. Violating laws, rules, or regulations.

       D. Operating with an excessive level of adversely classified assets.

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


{{6-30-04 p.C-6039}

       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 and inadequate net interest margins.

       H. Operating with inadequate internal routines and controls.

       I. Operating with an inadequate loan policy.

       J. Operating with an inadequate audit program.

       K. Operating with inadequate policies to monitor and control asset growth.

       L. Operating outside of the requirements of Appendix A to Part 364 of the FDIC Rules and Regulations, 12 C.F.R. Part 364, Appendix A.

       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 that 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 regulation.

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

CAPITAL PROVISIONS

   [.1] 1. (a) Within 30 days from the last day of each calendar quarter following the effective date of this ORDER, the Bank shall determine from its Report of Condition and Income its level of Tier 1 capital as a percentage of its total assets ("capital ratio") for that calendar quarter. If the capital ratio is less than 7.5 percent, the Bank shall, within 60 days of the date of the required determination, increase its capital ratio to not less than 7.5 percent calculated as of the end of that preceding quarterly period. For purposes of this ORDER, Tier 1 capital and total assets shall be 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" or one-half of the assets classified "Doubtful" as of September 29, 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 Director of KDFI ("Director"); 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 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
{{6-30-04 p.C-6040}

   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.

DIVIDEND RESTRICTION

   [.2] 2. 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 Director if, after payment of such dividend, the capital ratio would fall below 7.5 percent.

MANAGEMENT

   [.3] 3. (a) Within 150 days from the effective date of this ORDER, the Bank shall have and retain qualified management. At a minimum, such management shall include: (i) a chief executive officer with demonstrated ability to manage a comparably-sized financial institution and to upgrade a low-quality loan portfolio; and (ii) a senior lending officer with an appropriate level of lending, collection, and loan supervision experience for the type and quality of the Bank's loan portfolio. Such persons shall be provided the necessary written authority to implement the provisions of this ORDER. 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) 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 Director's written approval  prior to the addition of any individual to the board of directors and the employment of any individual as a senior executive officer.

   [.4] 4. (a) Within 30 days from the effective date of this ORDER, the Bank shall employ or retain a loan collector, loan collection service, bank consultant, or attorney experienced in the collection, sale and restructuring of delinquent and nonaccrual loans, and in the recovery of charged-off loans.

   (b) Should the Bank obtain the services of a consultant as to fulfill the requirements of this paragraph, the consultant's contract shall include the following which, for purposes of this ORDER, are deemed mandatory consultant contract terms:

       (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.

   [.5] 5. (a) Prior to entering into any agreement to pay and prior to making any golden parachute payment or excess nondiscriminatory severance plan payment to any institution-affiliated party, the Bank shall comply with the requirements of Part 359 of the FDIC Rules and Regulations, 12 C.F.R. Part 359. Pursuant to sections 303.244 and 359.6 of the FDIC Rules and Regulations, 12 C.F.R. §§ 303.244 and 359.6, the Bank shall file an application to obtain the consent of the Regional Director and Director.

   (b) For purposes of this ORDER, "golden parachute payment" and "excess nondiscriminatory severance" are defined as in sections
{{6-30-04 p.C-6041}

   359.1(f)(1) and (f)(2)(v), respectively, of the FDIC Rules and Regulations, 12 C.F.R. §§ 359.1(f)(1) and (f)(2)(v).

   [.6] 6. (a) Within 30 days from the effective date of this ORDER, the Bank shall retain a bank consultant acceptable to the Regional Director and Director. The consultant shall develop a written analysis and assessment of the Bank's senior management and senior lending staff needs for the purpose of providing qualified management for the Bank.

   (b) The Bank shall provide the Regional Director and Director 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, shall include the mandatory consultant contract terms, as set out in this ORDER.

   (c) The consultant's assessment and analysis of the Bank's senior management and lending staff needs shall be developed within 90 days from the effective date of this ORDER. This assessment shall include, at a minimum:

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

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

       (iii) Evaluation of all Bank officers and all lending personnel to determine whether these individuals possess the ability, experience and 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

       (iv) A plan to recruit and hire any additional or replacement personnel with the requisite ability, experience and qualifications to fill those officer positions or lending personnel identified by this paragraph.

   (d) The report produced by the consultant shall be submitted to the Regional Director and Director for review and comment upon its completion. Within 30 days from the receipt of any comments from the Regional Director and Director and after the adoption of any recommended changes, the Bank shall approve the plan outlined in the report 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 plan and any subsequent modification.

   [.7] 7. (a) Within 90 days from the effective date of this ORDER, the Bank shall submit to the Regional Director and Director a schedule reflecting not less than eight hours of training for each member of the Board of Directors. The training shall focus on the duties and responsibilities of bank directors, and shall be conducted, sponsored, or approved by nationally-recognized bankers' organizations.

   (b) The minimum eight hours of director training required by this paragraph shall be completed within one year from the effective date of this ORDER.

   (c) Certificates of completion or organizational letters indicating the director's name, the number of course hours completed, and date and title of the course attended shall be maintained by the Bank and shall be readily accessible by FDIC and KDFI examiners.

LENDING RESTRICTIONS TO CLASSIFIED BORROWERS

   [.8] 8. (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 extensions of credit (including any portion thereof) that has been charged off the books of the Bank or classified "Loss" or "Doubtful" in the Report of Examination of the Bank conducted jointly by the FDIC and KDFI as of September 29, 2003 ("Joint Report") 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, prior to such extensions of credit, the Bank's loan committee has adopted a detailed written statement giving the reasons why such extension of credit is in the best interest of the Bank. The statement shall be incorporated in the minutes of the applicable loan committee's meeting, and a copy of the statement shall be retained in the appropriate
{{6-30-04 p.C-6042}

   loan file. The requirements of this paragraph do not eliminate the need for review and approval of the board of directors consistent with the Bank's loan policy.

REQUIRED CHARGE-OFFS

   [.9] 9. 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" and 50 percent of all assets classified "Doubtful" in the Joint Report 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 Director. Elimination or reduction of these assets with the proceeds of other Bank extensions of credit is not considered collection for purposes of this paragraph.

ALLOWANCE FOR LOAN AND LEASE LOSSES

   [.10] 10. (a) Within 10 days from the effective date of this ORDER, the Bank shall make a 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" or "Doubtful" and all other loans and leases in the Bank's portfolio. In making this determination, the board of directors shall consider the Federal Financial Institutions Examination Council Instructions for the Reports of Condition and Income ("Call Report Instructions"), the Policy Statement on Allowance for Loan and Lease Losses Methodologies and Documentation for Banks and Savings Institutions ("ALLL Policy Statement"), and any analysis of the Bank's ALLL provided by the FDIC and 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 September 29, 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 Allowance for Loan and Lease Losses ("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 the ALLL recommended, and the basis for determination of the amount of ALLL provided. In making these determinations, the board of directors shall consider the Call Report Instructions, the ALLL Policy Statement, and any analysis of the Bank's ALLL provided by the FDIC or KDFI.

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

REDUCTION OF CLASSIFIED ASSETS

   [.11] 11. (a) Within 60 days from the effective date of this ORDER, the Bank shall adopt and implement a written plan to reduce the Bank's risk position with any borrower whose aggregate exposure is in excess of $100,000 and which is classified "Substandard" or "Doubtful" in the Joint Report. A copy of the written plan shall be submitted to the Regional Director and Director upon its completion. In developing such plan, the Bank shall, at a minimum:

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

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

       (iii) Establish dollar levels to which the Bank shall reduce each asset within 12 months from the effective date of this ORDER; and

       (iv) 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.

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

   (c) Within 30 days from the receipt of any comment from the Regional Director and Director, and after the adoption of any recommended changes, the Bank shall approve
{{6-30-04 p.C-6043}

   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 plan.

DELINQUENT AND NONACCRUAL LOANS

   [.12] 12. Within 10 days from the effective date of this ORDER, the Bank shall adopt procedures for placement of delinquent loans on nonaccrual status. These procedures shall be in accordance with Call Report Instructions, and will necessarily require the reversal of accrued interest on loans placed on nonaccrual status.

   [.13] 13. (a) Within 90 days from the effective date of this ORDER, the Bank shall formulate, adopt, and submit to the Regional Director and Director for review and comment, a plan for reducing the level of delinquent loans.

   (b) The plan required by this paragraph shall include, at a minimum, provisions which: prohibit extending credit for the payment of interest; clearly define areas of responsibility among Bank personnel; and establish acceptable guidelines for the collection of troubled credits, including standards for the initiation of collections and restructurings required by this ORDER.

INTERNAL LOAN REVIEW/LOAN ADMINISTRATION

   [.14] 14. (a) Within 90 days from the effective date of this ORDER, the Bank shall revise, adopt, and implement an internal loan review and grading system to periodically review the Bank's loan portfolio and identify and categorize problem credits. At a minimum, the loan review/grading system required by this paragraph shall provide for:

       (i) Identification of the overall quality of the loan portfolio;

       (ii) Identification and amount of each delinquent loan;

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

       (v) Identification of credit and collateral documentation exceptions;

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

       (vii) Identification of loans not in conformance with the Bank's lending policy and exceptions to the Bank's lending policy;

       (viii) Identification of insider loan transactions; and

       (ix) The creation of a mechanism for reporting, 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 Bank to collect or strengthen assets identified as problem credits, shall be kept with the minutes of the board of directors.

   [.15] 15. Within 90 days from the effective date of this ORDER, the Bank shall correct, or document its best efforts to correct, all deficiencies in the loans listed for "Special Mention" in the Joint Report.

   [.16] 16. Within 90 days from the effective date of this ORDER, the Bank shall correct, or document its best efforts to correct, the technical exceptions listed in the Joint Report.

LOAN COMMITTEE

   [.17] 17. (a) As of the effective date of this ORDER, the Bank's loan committee shall meet at least twice monthly, and shall be composed of a majority of independent directors. For purposes of this ORDER, "independent director" is defined as a member of the board: (i) who is not an officer of the Bank, any Bank subsidiary, or any of its affiliated organizations; and (ii) who does not own more than 5 percent of the outstanding shares of the Bank; and (iii) who is not related by blood or marriage to an officer or director of the Bank or to any shareholder owning more than 5 percent of the Bank's outstanding shares, and who does not otherwise share a common financial interest with such officer, director or shareholder; and (iv) who is not indebted to the Bank directly or indirectly by blood, marriage or common financial interest, including the indebtedness of any entity in which the individual has a substantial financial interest in an amount exceeding 5 percent of the Bank's total Tier 1 capital and allowance for loan
{{6-30-04 p.C-6044}

   and lease losses; or (v) who is deemed to be an independent for purposes of this ORDER by the Regional Director and Director.

   (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 Joint Report, or that are included on the Bank's internal watch list;

       (iii) Review and give prior written approval for all advances, renewals, or extensions of credit to any borrower or the borrower's related interests when the aggregate volume of credit extended to the borrower and the borrower's related interests exceeds $250,000. The requirements of this paragraph do not eliminate the need for review and approval of the board of directors consistent with the Bank's loan policy. For purposes of this ORDER, the term "related interest" is defined pursuant to section 215.2(n) of Regulation O, 12 C.F.R. §215.2(n); and

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

LOAN POLICY

   [.18] 18. (a) Within 90 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. At a minimum the Bank shall revise the loan policy consistent with the requirements of this ORDER and the comments and recommendations in the Joint Report. The revised written loan policy shall be submitted to the Regional Director and Director for review and comment upon its completion.

   (b) Within 30 days from the receipt of any comments from the Regional Director and Director, 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. The Bank shall inform the Regional Director and Director, in writing, of the manner in which it intends to implement this policy and ensure compliance therewith.

SUBPRIME LENDING

   [.19] 19. (a) Within 90 days from the effective date of this ORDER, the Bank shall develop procedures to identify, measure, monitor, and control the credit risk associated with all subprime loans in its portfolio. These procedures shall be consistent with the guidance provided in FDIC Financial Institution Letter, "Subprime Lending," FIL-09-01 (January 31, 2001).

   (b) Within 90 days from the effective date of this ORDER, the Bank's loan policy shall be revised to address subprime lending, and include, at a minimum, the following provisions:

       (i) Permissible types of subprime loans and those not authorized;

       (ii) Portfolio targets and limits for each credit grade or class;

       (iii) Lending authority;

       (iv) A framework for pricing and profitability that considers all costs, including origination, administration/servicing charge-offs, funding, and capital;

       (v) Collateral guidelines which address: required/eligible collateral, monitoring of value with initial and periodic evaluations, and verification of collateral information;

       (vi) Well-defined underwriting parameters;

       (vii) Control systems;

       (viii) Requirements to verify information that, at a minimum, address income and employment information;

       (ix) Procedures for approving policy exceptions;


{{6-30-04 p.C-6045}

       (x) Procedures for tracking and monitoring loans approved as policy exceptions;

       (xi) Credit file documentation requirements;

       (xii) Cure programs allowed;

       (xiii) Loan review and allowance for loan losses methodology; and

       (xiv) Prudent asset classification and charge-off criteria.

LIQUIDITY

   [.20] 20. (a) Within 120 days from the effective date of this ORDER, the Bank shall develop and submit to the Regional Director and Director for review and comment a written plan addressing the Bank's liquidity needs. 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 maintain adequate provisions to meet the Bank's liquidity needs. The initial plan shall include, at a minimum, provisions:

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

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

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

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

       (v) Addressing the proper use of borrowings (i.e., seasonal credit needs, match funding mortgage loans, etc.) 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).

   (b) Within 30 days from the receipt of all such comments from the Regional Director and Director, 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.

INTEREST RATE SENSITIVITY

   [.21] 21. Within 90 days from the effective date of this ORDER, the Bank shall formulate, adopt, and submit to the Regional Director and Director for review and comment, a plan to secure accurate interest rate sensitivity reports and reduce interest rate risk. After receipt and consideration of any comments from the Regional Director and Director, the Bank shall revise the policy and shall thereafter consistently follow the revised policy.

GROWTH PLAN

   [.22] 22. During the life of this ORDER, the Bank shall not increase its total assets by more than 3 percent during any consecutive three-month period without providing, at least 30 days prior to its implementation, a growth plan to the Regional Director and Director. Such growth plan, at a minimum, shall include the funding source to support the projected growth, as well as the anticipated use of funds. This growth plan shall not be implemented without the prior written consent of the Regional Director and Director. For the purpose of this paragraph, "total assets" shall be defined as in the Call Report Instructions, and shall be measured commencing March 31, 2004.

STRATEGIC PLAN

   [.23] 23. (a) Within 180 days from the effective date of this ORDER, the Bank shall formulate and adopt a realistic, comprehensive, written three-year 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) The organization's mission statement;

       (ii) Economic issues of the industry and the market areas served;

       (iii) Internal strengths and weaknesses;

       (iv) Strategies;

       (v) Succession of management;

       (vi) Staffing needs at the management level;

       (vii) Staff training;


{{6-30-04 p.C-6046}

       (viii) Financial goals, including, but not limited to target ranges for asset growth, capital adequacy, and earnings performance; and

       (ix) Identification of any new lines of business and new types of lending, as well as the Bank's expertise in these areas.

   (c) The strategic plan shall include the development of detailed pro forma balance sheets and income statements. Key operating ratios such as Return on Average Assets, Return on Equity, and Net Interest Margin shall be forecast.

   (d) The Bank shall submit the strategic plan to the Regional Director and Director or for review and comment. 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.

   (e) The strategic plan required by this ORDER shall be revised and submitted to the Regional Director and Director for review and comment 30 days prior to the end of each calendar year for which this ORDER is in effect, beginning with year-end 2005. Within 30 days of receipt of all such comments from the Regional Director and Director, 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

   [.24] 24. (a) Within 90 days from the effective date of this ORDER, the Bank shall develop a written analysis and assessment of the Bank's earnings.

   (b) The written analysis shall include, at a minimum:

       (i) An assessment and recommendations to improve the Bank's net interest margin;

       (ii) An assessment and recommendations to increase the Bank's non-interest income; and

       (iii) An assessment and recommendations to control the Bank's overhead expenses, including an analysis of the impact of leasing versus purchasing properties the Bank occupies, and a periodic review of the Bank's salaries and benefits as they compare to institutions of similar size and structure.

   [.25] 25. (a) Within 120 days from the effective date of this ORDER, the Bank shall formulate and submit to the Regional Director and Director for review and comment a written profit plan and a realistic, comprehensive budget for all categories of income and expense. The plans 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 Director upon its completion.

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

       (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 actual figures with budgetary projections; and

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

   (c) Within 30 days from the end of each calendar quarter following completion of the profit plans and budgets 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 Director 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 Director 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.
{{6-30-04 p.C-6047}

CORRECTION OF VIOLATIONS

   [.26] 26. (a) Within 90 days from the effective date of this ORDER, the Bank shall eliminate or correct, or document its best efforts to eliminate or correct, all violations of law, rule, and regulation listed in the Joint Report.

   (b) Within 10 days from the effective date of this ORDER, the Bank shall implement procedures to ensure future compliance with all applicable laws, rules, and regulations.

BANK-OWNED LIFE INSURANCE

   [.27] 27. Within 30 days from the effective date of this ORDER, the Bank's board of directors shall appoint a committee of "independent directors" who shall review all Bank-Owned Life Insurance products. At a minimum, the committee shall:

       (a) Determine if the size of the policy is appropriate;

       (b) Require that all asset and accounting entries be reflected in accordance with generally accepted accounting principals; and

       (c) Require that appropriate portions of the premiums paid are reported as income to the individuals covered, consistent with Internal Revenue Service rulings.

AUDIT PROGRAM AND INTERNAL CONTROLS

   [.28] 28. Within 90 days from the effective date of this ORDER, the Bank's board of directors shall formulate and submit to the Regional Director and Director for review and comment a comprehensive written audit program. At a minimum, the audit program shall provide that: (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 Director 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.

   [.29] 29. Within 30 days from the effective date of this ORDER, the Bank shall correct the deficiencies in internal routines and controls which are identified in the Joint Report. In addition, the Bank shall establish policies to prevent the recurrence of the deficiencies noted.

DISCLOSURE TO SHAREHOLDERS

   [.30] 30. Following the effective date of this ORDER, the Bank shall send to its shareholders a copy or description of this ORDER: (1) in conjunction with the Bank's next shareholder communication; and (2) in conjunction with the Bank's notice or proxy statement preceding its next shareholder meeting. 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

   [.31] 31. (a) Within 10 days from the effective date of this ORDER, the Bank shall establish a compliance committee comprised of at least 5 directors, none of whom may be active officers of the Bank, which shall monitor compliance with this ORDER.

   (b) Within 30 days from the effective date of this ORDER and on a monthly basis thereafter, the committee shall report in writing to the board of directors on the Bank's compliance with this ORDER. The committee's written report shall be reviewed and considered at the board of directors' regularly scheduled meeting, and shall be incorporated into the minutes of the board meeting. Establishment of this committee does not in any way diminish the responsibility of the entire board of directors to ensure compliance with the provisions of this ORDER.

PROGRESS REPORTS

   [.32] 32. 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 Director written progress reports signed by each member of the Bank's board of directors, detailing the actions taken to secure compliance with the ORDER and the results thereof. Such reports may be discontinued when the corrections required by this ORDER have been accomplished and the Regional Director
{{6-30-04 p.C-6048}

   and Director have, in writing, released the Bank from making further reports.

   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 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: April 12, 2004.

ED&O Home | Search Form | Text Search | ED&O Help

Last Updated 7/11/2004 legal@fdic.gov