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FDIC Enforcement Decisions and Orders



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[12,343] In the Matter of Heritage Community Bank, Danville, Kentucky, Docket No. 05-005b (12-28-04).

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 7-1-05; see ¶16,427.)

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

[.2] Dividends—Dividends Restricted

[.3] Management—Qualifications Specified

[.4] Golden Parachute Payments—Prohibited

[.5] Management—Management Plan Required

[.6] Board of Directors—Conflicts of Interest—Policy Required

[.7] Loans—Extensions of Credit—To Borrowers with Existing Adversely

[.8] Assets—Charge-off or Collection

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

[.10] Assets—Problem Assets—Reduce Substandard Assets

[.11] Loans—Special Mention

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

[.13] Cease and Desist Orders—Banking Practices Unsafe and Unsound—Concentrations of Credit Reduced

[.14] Loans—Collections—Written Policy Required

[.15] Loans—Specific Categories of Loans, Review of Reduction Required—Acquisition, Development and Construction

[.16] Real Estate Activities—Appraisal Required

[.17] Board of Directors—Internal Loan Review and Grading System—Written Plan Required

[.18] Loan Committee—Duties Specified

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

[.20] Asset/Liability Management—Preparation or Revision of Asset/Liability Management Policy Required

[.21] Strategic Plan—Preparation of Required

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

[.23] Profit Plan—Preparation of Plan Required

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

[.25] Cease and Desist Orders—Banking Practices Unsafe and Unsound—Compliance Committee Established by Board

[.26] Progress Report—Written Report Required
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In the Matter of
HERITAGE COMMUNITY BANK
DANVILLE, KENTUCKY
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST

FDIC-05-005b

Heritage Community Bank, Danville, 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 Office of Financial Institutions for the Commonwealth of Kentucky ("KOFI"), 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 KOFI, dated December 15, 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 KOFI.

The FDIC and KOFI 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 KOFI, 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.

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

    G. Operating with excessive overhead.

    H. Operating with an inadequate loan policy.

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

    J. 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 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 8 percent, the Bank shall, within 60 days of the date of the required determination, increase its capital ratio to not less than 8 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 collection of, or recovery on, all or part of the assets classified "Loss" as of August 9, 2004 without loss or liability to the Bank, provided any such collection


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    on a partially charged-off asset shall first be applied to that portion of the asset which was not charged off as of September 30, 2004, as provided in 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 KOFI ("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 to the extent approval of the plan by the shareholders of the Bank is required. 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 Office of Financial Institutions, 1025 Capital Center Drive, Suite 200, Frankfort, Kentucky 40601, for their review. Any changes required to be made in the materials by the FDIC or KOFI 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.

DIVIDEND RESTRICTION

[.2] 2. As of the effective date of this ORDER, the Bank shall pay no cash dividends which would result in a Tier 1 capital ratio of less than 8 percent, without the prior written consent of the Regional Director and Director.

MANAGEMENT

[.3] 3. (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 and Director 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. §1818(i), and section 303.101(b) of the FDIC Rules and Regulations, 12 C.F.R. §303.101(b), and includes any person identified by the FDIC and KOFI, 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,
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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) 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. §$sect; 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 359.1(f)(1) and (f)(2)(v), respectively, of the FDIC Rules and Regulations, 12 C.F.R. §$sect; 359.1(f)(1) and (f)(2)(v).

[.5] 5. (a) Within 90 days from the effective date of this ORDER, the Bank 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 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) Development of written job descriptions, including quantifiable performance measures;

    (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 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.

(c) Within 10 days from the development of the Management Plan, the Bank shall approve the Management Plan, which approval shall be recorded in the minutes of the board of directors meeting. Thereafter, the Bank shall implement and follow the Management Plan. A copy of the Management Plan shall be submitted to the Regional Director and Director.

CONFLICTS OF INTEREST

[.6] 6. (a) Within 60 days from the effective date of this ORDER, the board of directors shall review the Bank's Conflicts of Interest Policy for adequacy and, based upon this review, shall make all appropriate revisions to the policy necessary to reduce the potential for conflicts of interest. At a minimum the Bank shall revise the conflicts of interest policy to:

    (i) Preclude Bank insiders from being responsible for transactions with, or loans to, business partners, relatives, or other related entities;

    (ii) Require board of director approval for any loan or other transaction in which insiders or their associates are involved; and

    (iii) Document in the board of directors minutes all conflicts of interest, and detail actions taken to address or resolve the conflict of interest.

(b) The revised conflicts of interest policy shall be submitted to the Regional Director and Director for review and comment upon its completion.

(c) 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 conflicts of interest 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 conflicts of interest 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.
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PROHIBITION OF ADDITIONAL LOANS TO CLASSIFIED BORROWERS

[.7] 7. (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" 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

[.8] 8. The Bank has affirmed to the FDIC and KOFI that, as of September 30, 2004, the Bank has eliminated from its books, by charge-off or collection, all assets or portions of assets classified "Loss" as of August 9, 2004. 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 the purpose of this paragraph.

ALLOWANCE FOR LOAN AND LEASE LOSSES

[.9] 9. (a) Within 10 days from the effective date of this ORDER, Reports of Condition and Income required by the FDIC and filed by the Bank subsequent to August 9, 2004 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.

(b) 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 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 KOFI.

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

REDUCTION OF SUBSTANDARD ASSETS

[.10] 10. (a) Within 60 days from the effective date of this ORDER, the Bank shall formulate and adopt and implement a written plan to reduce the Bank's risk position in each asset in excess of $250,000 which is classified "Substandard" in the Joint Report of Examination as of August 9, 2004 ("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 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 for the reduction of each asset within 12 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 notation in minutes of the meetings of the board of directors.

(c) As used in this paragraph, "reduce" means to: (1) collect; (2) charge off; or (3) improve the quality of such assets so as to
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warrant removal of any adverse classification by the FDIC or KOFI.

SPECIAL MENTION

[.11] 11. Within 90 days from the effective date of this ORDER, the Bank shall correct all deficiencies in the loans listed for "Special Mention" in the Joint Report.

TECHNICAL EXCEPTIONS

[.12] 12. Within 90 days from the effective date of this ORDER, the Bank shall correct the technical exceptions listed in the Joint Report.

CONCENTRATIONS

[.13] 13. (a) Within 30 days from the effective date of this ORDER, the Bank shall identify all concentrations of credit. For purposes of this ORDER a concentration of credit is defined as obligations, direct or indirect, which amount to:

    (i) 25 percent or more of Tier 1 Capital by individual borrower, small interrelated group of individuals, single repayment source or individual project; or

    (ii) 100 percent or more of Tier 1 Capital by industry, product line, type of collateral, or short term obligations of one financial institution or affiliated group.

(b) Beginning with the quarter ending December 31, 2004 quarterly reports shall be submitted to the Bank's board of directors detailing all concentrations of credits.

(c) Within 60 days from the effective date of this ORDER, the Bank shall adopt and implement an action plan to mitigate the risks associated with the concentration of credit identified in the August 9, 2004 Joint Report.

DELINQUENT AND NONACCRUAL LOANS

[.14] 14. Within 60 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) establish acceptable guidelines for the collection of delinquent credits;

(c) establish dollar levels for the reduction of delinquencies within 6 and 12 months from the effective date of this ORDER; and

(d) 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. A copy of the written plan shall be submitted to the Regional Director and Director upon its completion.

CONSTRUCTION LOANS

[.15] 15. Within 60 days from the effective date of this ORDER, the Bank shall formulate and adopt procedures to ensure proper underwriting and monitoring of construction loans. These procedures shall include, but not be limited to:

(a) Document the background information of the builder/developer concerning reputation, work and credit experience, and financial statements.

(b) Establish loan agreements that specify the performance of each party during the course of construction.

(c) Prior to funding draw requests, complete a physical inspection of the property and prepare a written construction report supporting the draw request.

(d) Monitor construction costs.

(e) Verify that proceeds are used properly to complete the construction or development of the project financed.

REAL ESTATE APPRAISALS

[.16] 16. Within 90 days of the effective date of this ORDER, the Bank shall formulate and adopt a real estate appraisal review program. All loans secured by real estate, and subject to the provisions of Part 323 of the FDIC's Rules and Regulations, shall be supported by a real estate appraisal obtained prior to loan origination. The review process shall document that the appraisal conforms to the Uniform Standards of Professional Appraisal Practice promulgated by the Appraisal Standards Board of the Appraisal Foundation, unless principles of safe and sound banking require compliance with stricter standards, and Part 323 requirements.

INTERNAL LOAN REVIEW

[.17] 17. (a) Within 90 days from the effective date of this ORDER, the Bank shall formulate, 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
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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 term 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.

LOAN COMMITTEE

[.18] 18. (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 and lease losses; or

    (v) who is deemed to be an independent director 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. 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 $100,000. For purposes of this ORDER, the term "related interest" is defined pursuant to section 215.2(n) of Regulation O of the Board of Governors of the Federal Reserve System, 12 C.F.R. §215.2(n).

    (iv) Review all applications for new loans and renewals of existing loans to Bank directors, executive officers, and their related interests, and prepare a written opinion as to whether the credit is in conformance with the Bank's loan policy and all applicable laws, rules, and regulations. Such applications, renewals, and written opinions shall be referred to the Bank's board of directors for consideration.

    (v) Maintain written minutes of the committee meetings, including a record of the


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    review and status of the aforementioned loans.

LOAN POLICY

[.19] 19. (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 deemed 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.

ASSET/LIABILITY MANAGEMENT

[.20] 20. (a) Within 90 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 liquidity. 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 non-core funding ratio;

    (ii) Identify the source and use of borrowed funds;

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

    (iv) Address the proper use of borrowings and provide for appropriate tenor commensurate with the use of borrowed funds.

(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.

STRATEGIC PLAN

[.21] 21. (a) Within 120 days from the effective date of this ORDER, the Bank 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) The organization's mission statement;

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

    (iii) Internal strengths and weaknesses;

    (iv) Strategies;

    (v) Succession of management;

    (vi) Staffing needs at the management level;

    (vii) Staff training;

    (viii) Financial goals, including, but not be 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.

    (x) 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.

(c) The Bank will submit the strategic plan to the Regional Director and Director 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.

(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
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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 Director 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 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.

CORRECTION OF VIOLATIONS

[.22] 22. (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 Joint Report.

(b) Within 30 days from the effective date of this ORDER, the Bank shall implement procedures to ensure future compliance with all applicable laws, rules, and regulations.

BUDGET AND PROFIT PLAN

[.23] 23. (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 that 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.

DISCLOSURE TO SHAREHOLDERS

[.24] 24. 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 its notice or proxy statement preceding the Bank's 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., Room F-6043, Washington, D.C. 20429 and to the Kentucky Office 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 KOFI shall be made prior to dissemination of the description, communication, notice or statement.

COMPLIANCE WITH ORDER

[.25] 25. Within 10 days from the effective date of this ORDER, the Bank shall establish a compliance committee comprised
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of at least 5 directors who are not officers of the Bank. The committee shall monitor compliance with this ORDER and, within 30 days from the effective date of this ORDER and every 30 days thereafter, shall submit to the board of directors for consideration at its regularly scheduled meeting a written report detailing the Bank's compliance with this ORDER. The compliance report shall be incorporated into the minutes of the board of directors' meeting. Establishment of this committee does not in any way diminish the responsibility of the entire board of directors to exercise its good faith efforts to ensure compliance with the provisions of this ORDER.

PROGRESS REPORTS

[.26] 26. 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 and Director 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 KOFI.

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 KOFI.

Pursuant to delegated authority.

Dated: December 28, 2004.



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Last Updated 11/10/2005 legal@fdic.gov