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Home > Regulation & Examinations > Bank Examinations > FDIC Enforcement Decisions and Orders |
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FDIC Enforcement Decisions and Orders
{{3-31-04 p.C-5949}} 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 banking practices. (This order was terminated by order of
the FDIC dated 11-17-05; see ¶ [.1] Compliance Committee—Establishment Required [.2] Capital—Tier 1 Capital Increase/Maintain [.3] Strategic Plan—Preparation of Required [.4] Profit Plan—Preparation of Plan Required [.5] Board of Directors—Committee to Review Board's Committee Structure [.6] Management—Qualifications Specified [.7] Loan Policy—Preparation or Revision of Policy Required [.8] Overdrafts—Written Policy Required [.9] Assets—Charge-off or Collection [.10] Loan Review and Grading System—Establishment of Required [.11] Assets—Criticized Assets, Individual Plans Required [.12] Loans—Real Estate—Review Required [.13] Loan Loss Reserve—Establishment of or Increase in Required [.14] Risk Management Program—Minimum Requirements [.15] Contracts—Renewed or New Contracts for Professional Services Not Allowed [.16] Audit—Internal Audit—Minimum Procedures Specified [.17] Funds Management and Liquidity—Preparation or Revision of Funds Management Policy Required [.18] Interest Rate Management System—Preparation Required [.19] Consumer Loans—Review Required [.20] Bank Secrecy Act—Compliance [.21] Information Technology Plan—Minimum Requirements [.22] Management—Management Information System Required [.23] Violations of Law—Corrections of Violations Required [.24] Audit—External Audit, Minimum Procedures Specified [.25] Shareholders—Disclosure of Cease and Desist Order Required In the Matter of
First Bank of Northern Kentucky, Inc., Fort Mitchell, 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 December 23, 2003, 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 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, delinquent loans, and nonaccrual loans. E. Operating with inadequate liquidity in light of the Bank's asset and liquidity mix. F. Operating with an inadequate allowance for loans and lease losses for the volume, kind, and quality of loans and leases held. G. Operating in such a manner as to result in inadequate earnings. H. Operating with inadequate information systems. I. Failing to have adequate policies in place for outside consultants. J. Operating with inadequate internal routines and controls. K. Operating with an inadequate loan policy. L. Operating with an inadequate audit program. M. Operating with an inadequate asset/liability management policy. N. Operating with management whose policies and practices are detrimental to the Bank and jeopardize the safety of its deposits. IT IS FURTHER ORDERED, that the Bank, its institution-affiliated parties, and its successors and assigns, take affirmative action as follows:
(1) Within 30 days, the Board shall appoint a Compliance Committee of at least 3 directors, none of whom shall be employees of the Bank or any of the affiliates (as the term "affiliate" is defined in 12 U.S.C. §371c(b)(1)), or a family member of any such person. Upon appointment of the Committee members, the Board shall submit the names of the members in writing to the Regional Director of the Chicago Regional Office of the FDIC ("Regional Director") and the Commissioner of KDFI ("Commissioner"). The Compliance Committee shall monitor and coordinate the Bank's adherence to the provisions of this ORDER. (2) The Compliance Committee shall meet at least monthly. (3) Within 15 days of the appointment of the Committee and every ninety (90) days thereafter, the Compliance Committee shall submit a written progress report to the Board setting forth in detail: (a) actions taken to comply with each Article of this ORDER; and (b) the results of those actions. (4) The Board shall, within fifteen (15) days of receipt of the progress report, forward a copy of the Compliance Committee's progress report with any additional comments by the Board, to the Regional Director and Commissioner.
(1) The Bank shall maintain the following minimum capital levels (as defined in 12 C.F.R. Part 325): (a) Tier 1 capital at least equal to twelve percent (12%) of risk-weighted assets; (b) Tier 1 capital at least equal to nine percent (9%) of actual adjusted total assets. {{3-31-04 p.C-5951}} (2) The requirement in this ORDER to meet and maintain a specific capital level means that the Bank may not be deemed to be "well capitalized" for purposes of 12 U.S.C. §1831o and 12 C.F.R. Part 325, pursuant to 12 C.F.R. §352.103(b)(1). (3) Within sixty (60) days, the Bank (subject to Board review, approval, and ongoing monitoring) shall develop, implement, and thereafter ensure adherence to a three-year capital program. The program shall include: (a) specific plans for the maintenance of adequate capital that may in no event be less than the requirements of paragraph (1); (b) projections for growth and capital requirements based upon a detailed analysis of the Bank's assets, liabilities, earnings, fixed assets, and off-balance sheet activities; (c) projections of the sources and timing of additional capital to meet the Bank's current and future needs; (d) the primary source(s) from which the Bank will strengthen its capital structure to meet the Bank's needs; (e) contingency plans that identify alternative methods should the primary source(s) under (d) above not be available; (f) a dividend policy that permits the declaration of a dividend only: (i) when the Bank is in compliance with its approved capital program; (ii) when the Bank is in compliance with sections 287.090 and 287.350 of the Kentucky Revised Statutes; and (iii) with the prior written determination of no supervisory objection by the Regional Director and Commissioner. (g) specific plans detailing how the Bank will comply with the restrictions or requirements set forth in this ORDER and 12 U.S.C. §1831o, including the restrictions against brokered deposits in 12 C.F.R. §337.6. (4) Upon completion, the Bank's capital program shall be submitted to the Regional Director and Commissioner for prior determination of no supervisory objection. Upon receiving a determination of no supervisory objection from the Regional Director and Commissioner, the Bank shall implement and adhere to the capital program. The Board shall review and update the Bank's capital program on an annual basis, or more frequently if necessary. Copies of the reviews and updates shall be submitted to the Regional Director and Commissioner. (5) The Board shall ensure that the Bank develops and thereafter maintains processes, personnel, and control systems to ensure implementation of and adherence to the program developed pursuant to this Article. (6) If the FDIC and KDFI determine, in their sole judgment, that the Bank has failed to submit an acceptable capital program as required by paragraph (3) of this Article, or fails to implement or adhere to a capital program for which the FDIC and KDFI have taken no supervisory objection pursuant to paragraph (4) of this Article, then within thirty (30) days of receiving written notice from the FDIC and KDFI of such fact (including an explanation of the reasons for such determination), the Bank shall develop and submit to the FDIC and KDFI for their review and prior determination of no supervisory objection a revised capital plan or, if so directed by the FDIC and KDFI, a capital contingency plan, which shall detail the Board's proposal to sell or merge the Bank, or liquidate the Bank under Chapter 287 of the Kentucky Revised Statutes. After the FDIC and KDFI has advised the Bank that it does not take supervisory objection to the capital contingency plan, the Board shall immediately implement, and shall thereafter ensure adherence to, the terms of the contingency plan, unless the Bank receives no supervisory objection from the Regional Director and Commissioner to a revised capital plan. Failure to submit a timely, acceptable contingency plan may be deemed a violation of this ORDER, in the exercise of the FDIC and KDFI's sole discretion. (7) 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. (8) In complying with the provisions of this paragraph, the Bank shall provide to any subscriber and/or purchaser of Bank's 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.
(1) Within sixty (60) days, the Bank (subject to Board review, approval, and ongoing monitoring) shall adopt, implement, and thereafter ensure adherence to a written strategic plan for the Bank covering at least a three-year period. The strategic plan shall establish objectives for the Bank's overall risk profile, earnings performance, growth, balance sheet mix, off-balance sheet activities, liability structure, capital adequacy, reduction in the volume of non-performing assets, product line development, and market segments that the Bank intends to promote or develop, together with strategies to achieve those objectives and, at a minimum, include: (a) a mission statement that forms the framework for the establishment of strategic goals and objectives; (b) a formal assessment of the Bank's present and future operating environment to include a written risk management program, which at a minimum, includes the following: (i) identification of existing credit, interest rate, liquidity, transaction, compliance, strategic, reputation, price, and foreign currency translation risks, if any, and a written analysis of those risks to the extent they exist; (ii) action plans and time frames to reduce risks in areas identified as high risk to include those discussed in the Report of Examination; (iii) reasonable and appropriate limits for credit, interest rate, liquidity, transaction, compliance, strategic, reputation, price, and foreign currency translation risks, which limits shall be consistent with the Strategic Plan and defined in terms of readily measurable standards; (iv) policies, procedures and control systems to ensure that the Bank complies with the risk limits approved by the Board. These policies, procedures and control systems shall require analyzing and limiting the risks associated with any new lines of business, which the Bank undertakes. The policies, procedures and control systems shall ensure that strategic direction and risk tolerances are effectively communicated and followed by relevant personnel throughout the Bank and shall describe the actions to be taken where noncompliance with risk policies is identified; (v) systems to measure and control risks within the Bank, which must provide timely and accurate risk reports sortable by customer and by department, division, or other categories as appropriate, as well as bankwide; and (vi) policies and procedures to ensure that relevant Bank employees have the necessary skills to supervise effectively the current and the new business risks within the Bank, and procedures to describe the actions to be taken to address deficiencies in staff levels and skills. (c) the development of strategic goals and objectives to be accomplished over the short and long term; (d) an identification of the Bank's present and future market and product lines (assets and liabilities) that will be utilized to accomplish the strategic goals and objectives established in (1)(c) of this Article; (e) an evaluation of the Bank's internal operations, staffing
requirements, board
and management information systems and policies and procedures for their adequacy and contribution to the accomplishment of the goals and objectives developed under (1)(c) of this Article; (f) a management employment and succession program to promote the hiring, retention and continuity of capable management; (g) strategic plans to establish responsibilities and accountability for the strategic planning process, new products, growth goals, or proposed changes in the Bank's operating environment; and (h) systems to monitor the Bank's progress in meeting the plan's goals and objectives. (2) Upon adoption, a copy of the plan shall be forwarded to the Regional Director and Commissioner for review and prior determination of no supervisory objection. (3) The Board shall ensure that the Bank develops and thereafter maintains processes, personnel, and control systems to ensure implementation of and adherence to the plan developed pursuant to this Article. (4) Failure to submit a timely, acceptable strategic plan may be deemed a violation of this ORDER, in the exercise of the FDIC's and KDFI's sole discretion.
(1) Within sixty (60) days, the Bank (subject to Board review, approval, and ongoing monitoring) shall develop, implement, and thereafter ensure adherence to a written profit plan to improve and sustain the earnings of the Bank. This plan shall cover at least a three-year period, consistent with the Strategic Plan, and shall include, at minimum, the following elements: (a) identification of the major areas and means by which the Board will seek to improve the Bank's operating performance; (b) realistic and comprehensive budgets, including projected balance sheets and year-end income statements; (c) a budget review process to monitor both the Bank's income and expenses, and to compare actual figures with budgetary projections; and (d) a description of the operating assumptions that form the basis for major projected income and expense components. (2) The Board shall submit the budgets and related documents required in paragraph (1) above for 2004 to the Regional Director and Commissioner upon completion. Thereafter, the Board shall submit to the Regional Director and Commissioner annual budgets as described in paragraph (1) above, on or before November 30, of the preceding year, for each year this ORDER remains in effect. (3) The Board shall forward comparisons of its actual balance sheet and profit and loss statement to the profit plan projections to the Regional Director and Commissioner on a quarterly basis. (4) The Board shall ensure that the Bank develops and thereafter maintains processes, personnel, and control systems to ensure implementation of and adherence to the plan developed pursuant to this Article.
STRUCTURE (1) Within sixty (60) days, the Compliance Committee shall conduct a review of the Board's committee structure. The review shall include: (a) a detailed description of the responsibilities currently assigned to the existing committees, the composition of each committee, and the technical expertise (if any) which the Board currently requires for members of each committee; (b) a detailed evaluation of the performance of the existing committee structure; and (c) specific recommendations to improve the performance of each committee and the committee structure as a whole. (2) Upon completion of the review, the Board shall forward a copy of the review to the Regional Director and Commissioner along with a copy of the Board resolution making appropriate adjustments in the committee structure.
(1) Within 60 days from the effective date of this ORDER, the Bank
shall have and
retain qualified management. At a minimum, such management shall include a new 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 person(s) 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: (a) Comply with the requirements of this ORDER; (b) Operate the Bank in a safe and sound manner; (c) Comply with applicable laws, rules, and regulations; and (d) Restore all aspects of the Bank to a safe and sound condition, including asset quality, capital adequacy, earnings, management effectiveness, and liquidity. (2) During the life of this ORDER, the Bank shall notify the Regional Director and 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) 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. (3) 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. (4) Within one hundred twenty (120) days, the Board, or a designated committee shall for its management personnel: (a) identify the skills and expertise needed by management personnel to develop, market, administer and support the products identified in the strategic plan and otherwise operate the Bank in a safe and sound manner; (b) develop position descriptions, duties and responsibilities for each officer position; (c) assess each current officer's experience, other qualifications and performance compared to the position's description, duties and responsibilities; and (d) determine whether management changes should be made, including the need for additions to or deletions from current management. (5) Within thirty (30) days of the analysis noted in (4) of this Article, the Board shall determine, and thereafter direct the Bank to begin implementing any changes necessary to provide the Bank with a management staff that possesses the skills and expertise identified in this Article. (6) If the Board determines pursuant to paragraphs (4) and (5) that an officer will continue in his/her position but that the individual's skills need improvement, the Bank (subject to Board review, approval, and ongoing monitoring) shall, within the next thirty (30) days, develop and implement a written program, with specific time frames, to improve the officer's skills. At a minimum the written program with respect to such officer shall include: (a) an education program designed to ensure that the officer has skills and abilities necessary to supervise effectively; (b) specific additional steps necessary to improve the effectiveness of the officer; (c) objectives by which the officer's effectiveness will be measured; and (d) a performance appraisal program for evaluating performance according to the position's description and responsibilities and for measuring performance against the Bank's goals and objectives. (7) If the analysis under paragraphs (4) and (5) results in an officer vacancy, including if the Board realigns an existing officer's responsibilities or an officer position becomes vacant, the Board shall within sixty (60) days of such vacancy to identify a capable person to fill the position who shall be vested with sufficient executive authority to ensure the safe and sound operation of functions within the scope of that position's responsibility. (8) Within sixty (60) days of the analysis under paragraph (4), the
Board shall implement an ongoing development program for Bank staff.
The program, at a minimum, should provide for continuing education or
other training designed to enhance and maintain the skills of the staff. (9) Upon completion, a copy of the written program shall be submitted to the Regional Director and Commissioner.
(1) Within ninety (90) days, the Board shall review and revise the Bank's written loan policy, consistent with applicable FDIC and KDFI guidance. Revisions to the policy shall incorporate, but not necessarily be limited to, the following: (a) that current and satisfactory credit information will be obtained on each borrower; (b) specific requirements on the types of financial statements required in relation to the size of the loan; (c) maturity scheduling related to the anticipated source of repayment, the purpose of the loan, and the useful life of the collateral; (d) maximum ratio of loan value to appraised value or acquisition costs of collateral securing the loan; (e) collection procedures, to include follow-up efforts, that are systematically and progressively stronger; (f) a risk-based pricing policy that takes into consideration costs, general overhead, and potential for loss, while providing for a reasonable margin of profit; (g) guidelines for loans to insiders, including a requirement that such loans will not be granted on terms more favorable than those offered to similar outside borrowers; (h) charge-off guidelines, by type of loan or other asset, including Other Real Estate Owned, addressing the circumstances under which a charge-off would be appropriate and ensuring the recognition of losses within the quarter of discovery; (i) guidelines setting forth the criteria for extending of loans; (j) specific definitions of acceptable terms and maturities of loans; (k) appropriate definitions of loan grades, (l) appropriate loan policy to address legal lending limit and appraisal requirements; (m) appropriate policy on granting and monitoring revolving credit facilities; (n) appropriate policy on capitalization of interest; (o) appropriate underwriting and collateral requirements for inventory and receivable financing loans; (p) appropriate and clear guidance on borrower equity and down payment requirements; (q) appropriate loan agreement requirements; and (r) appropriate guidelines for collateral evaluations. (2) Upon adoption by the Board, the Board shall direct the Bank to implement the policy, and the Board shall, thereafter, ensure Bank adherence to the policy. The Board shall also forward copies of the policy to the Regional Director and Commissioner. (3) The Board shall ensure that the Bank develops and thereafter maintains processes, personnel, and control systems to ensure implementation of and adherence to the policy developed pursuant to this Article.
(1) Within sixty (60) days, the Bank (subject to Board review, approval, and ongoing monitoring) shall adopt, implement, and thereafter ensure adherence to a written policy concerning the extension of overdrafts that shall include, at a minimum: (a) conditions and circumstances under which overdrafts will be allowed, consistent with the requirements of Regulation O of the Board of Governors of the Federal Reserve System, 12 C.F.R. Part 215; (b) charges that will be levied against depositors using overdrafts and clear guidelines and controls on when these fees can be waived; (c) conditions and circumstances under which overdrafts will be permitted to principal shareholders or the related interests (as that term is defined in 12 C.F.R. Part 215) of executive officers, directors or principal shareholders; (d) conditions and circumstances under which overdrafts will be charged off; and (e) the documentation to support compliance with the overdraft policy. (2) The Board shall ensure that the Bank develops and thereafter
maintains processes, personnel, and control systems to ensure
implementation of and adherence to the policy developed pursuant to this Article.
(1) The Bank shall immediately reverse or charge off all interest that has been accrued contrary to the requirements contained in the Instructions for Preparation of Consolidated Reports of Condition and Income (Call Report Instructions) governing nonaccrual loans. (2) Within sixty (60) days, the Bank (subject to Board review, approval, and ongoing monitoring) shall revise its existing written policies and procedures governing the identification, supervision and control of nonaccrual loans. Such revisions and the resulting policies and procedures shall: (a) be consistent with the accounting requirements contained in the Call Report Instructions; (b) specify the circumstances under which accrued interest due on a loan may be added to the outstanding principal amount when the loan is renewed or restructured; and (c) require the monthly presentation to the Board of all loans meeting any of the nonaccrual criteria. (3) The Board shall ensure that the Bank develops and thereafter maintains processes, personnel, and control systems to ensure implementation of and adherence to the policies developed pursuant to this Article.
(1) The Board shall within thirty (30) days employ or designate an experienced and qualified person(s) or firm to ensure the timely and independent identification of problem loans and leases. (2) Within ninety (90) days, the Board shall establish an effective, independent and on-going loan review system to review, at least quarterly, the Bank's loan and lease portfolios to assure the timely identification and categorization of problem credits. The system shall provide for a written report to be filed promptly with the Board after each review and shall use a loan and lease grading system consistent with the guidelines set forth by the FDIC and KDFI. Each loan review shall, at a minimum, include conclusions regarding: (a) the overall quality of the loan and lease portfolios; (b) the identification, type, rating, and amount of problem loans and leases; (c) the identification and amount of delinquent loans and leases; (d) credit and collateral documentation exceptions; (e) the identification and status of credit related violations of law, rule or regulation; (f) the identity of the loan officer who originated each loan reported in accordance with subparagraphs (b) through (e) of this paragraph; (g) concentrations of credit; (h) loans and leases to executive officers, directors, principal shareholders (and their related interests) of the Bank; (i) loans and leases not in conformance with the Bank's lending and leasing policies, and exceptions to the Bank's lending and leasing policies; and (j) the adequacy of: (i) monitoring systems for early problem loan identification to assure the timely identification and rating of loans and leases based on lending officer submissions; (ii) statistical records that serve as a basis for identifying sources of problem loans by industry, size, collateral, and individual lending officer; (iii) systems for monitoring previously charged-off assets and their recovery potential; (iv) systems for monitoring compliance with the Bank's lending policies and laws, rules, and regulations pertaining to the Bank's lending function; and (v) systems for monitoring the adequacy of credit and collateral documentation. (3) A written description of the program called for in this Article shall be forwarded to the Regional Director and Commissioner upon implementation. (4) The Board shall ensure that the Bank develops and thereafter maintains processes, personnel, and control systems to ensure implementation of and adherence to the program developed pursuant to this Article. (5) The Board, or a designated committee, shall evaluate the internal
loan and lease review
report(s) and shall ensure the immediate, adequate, and continuing remedial action, if appropriate, is taken upon all findings noted in the report(s). (6) The Bank shall preserve, in the Bank, copies of the report submitted to the Board, as well as documentation of the action taken by the Bank to collect or strengthen assets identified as problem credits. The Board shall forward copies of the reports promptly to the Regional Director and Commissioner upon request.
(1) The Bank shall take immediate and continuing action to protect its interest in those assets criticized in the Report of Examination, in any subsequent Report of Examination, by internal or external loan review, or in any list making reference to this Article XI that is provided to management by the Examiners during any examination. (2) For each asset criticized as "doubtful," "substandard," or "special mention," in the Report of Examination, in any subsequent Report of Examination, by any internal or external loan review, or in any list making reference to this Article XI that is provided to management by the Examiners during any examination, the Bank (subject to Board review, approval, and ongoing monitoring) shall, within thirty (30) days of such criticism, adopt, implement, and thereafter ensure adherence to a written program designed to eliminate the basis of criticism. Each program shall include, at a minimum: (a) an identification of the expected sources of repayment; (b) the appraised value of supporting collateral and the position of the Bank's lien on such collateral where applicable; (c) an analysis of current and satisfactory credit information, including cash flow analysis where loans are to be repaid from operations; and (d) a well-defined plan of action and timeframes for eliminating the basis of criticism and, if appropriate, a proposed exit strategy. (3) Upon adoption, the Board shall forward a copy of each program for criticized assets equal to or exceeding ninety thousand dollars ($90,000) in outstanding principal to the Regional Director and Commissioner. (4) The Board shall ensure that the Bank develops and thereafter maintains processes, personnel, and control systems to ensure implementation of and adherence to the program developed pursuant to this Article. (5) The Board, or a designated committee, shall conduct a review, on at least a quarterly basis, to determine: (a) the status of each criticized asset or criticized portion thereof that equals or exceeds ninety thousand dollars ($90,000) in outstanding principal; (b) management's adherence to the program adopted pursuant to this Article; (c) the status and effectiveness of the program; and (d) the need to revise the program or take alternative action. (6) The Board shall forward a copy of each review to the Regional Director and Commissioner on a monthly basis. (7) The Bank may extend credit, directly or indirectly, including renewals, extensions, or capitalization of accrued interest to a borrower whose loans or other extensions of credit are criticized in the Report of Examination, in any subsequent Report of Examination, in any internal or external loan review, or in any list making reference to this Article XI that is provided to management by the Examiners during any examination and whose aggregate loans or other extensions exceed ninety thousand dollars ($90,000) in outstanding principal only if each of the following conditions are met: (a) the Board or designated committee finds that the extension of additional credit is necessary to promote the best interests of the Bank and that prior to renewing, extending or capitalizing any additional credit, a majority of the full Board (or designated committee) approves the credit extension and records, in writing with documentation retained in the file, why such extension is necessary to promote the best interests of the Bank; and (b) the extension or renewal does not compromise or undermine the goals of the written program adopted pursuant to this Article. {{3-31-04 p.C-5958}}
(1) Within ninety (90) days, the Bank shall perform a search of its files to identify all loans where real estate was taken as collateral and determine, for those loans, if a valid appraisal is in file. (2) In cases where an appraisal was not obtained, or is deficient, the Bank shall request a new appraisal and specifically instruct the appraiser(s) to comply with the requirements of 12 C.F.R. Part 323. (3) Within ninety (90) days, the Bank shall develop and implement an appraisal review and analysis process. The appraisal review and analysis process shall ensure: (a) that appraisals are performed in accordance with 12 C.F.R. Part 323; (b) are consistent with the Bank's written loan policy; and (c) documentation supporting the review and analysis is retained in the file.
(1) The Board shall review the adequacy of the Bank's Allowance for Loan Losses (Allowance) and shall within thirty (30) days review and revise its program for the maintenance of an adequate Allowance. This review and program shall be consistent with the guidelines on maintaining a proper Allowance found in the Interagency Policy Statement on the Allowance for Loan and Lease Losses dated July 2, 2001, and shall also address the following additional factors: (a) results of the Bank's internal loan review and external or regulatory findings; (b) an estimate of inherent loss exposure on each credit or related credits in excess of ninety thousand dollars ($90,000) in outstanding principal; (c) the Bank's loan loss experience, including adjustments for the qualitative factors; (d) trends of delinquent and nonaccrual loans; (e) concentrations of credit in the bank; and (f) present and prospective economic conditions. (2) The program shall provide for a review of the Allowance by the Board at least once each calendar quarter. The Bank shall remedy any deficiency in the Allowance in the quarter it is discovered, prior to the filing of the Consolidated Reports of Condition and Income, by additional provisions from earnings. The Bank shall maintain written documentation indicating the factors considered and the conclusions reached by the Board in determining the adequacy of the Allowance for Loan and Lease Losses. (3) The Board shall ensure that the Bank develops and thereafter maintains processes, personnel, and control systems to ensure implementation of and adherence to the program developed pursuant to this Article.
(1) Within one hundred twenty (120) days, the Bank (subject to Board review, approval, and ongoing monitoring) shall develop, implement, and ensure adherence to a written program to improve and maintain the Bank's credit risk systems. The program shall include, but not be limited to, systems to: (a) identify, record, track and analyze exceptions relating to: (i) policy; (ii) financial information including fiscal and interim operating statements, credit reports and budgets/projections; and (iii) collateral and loan-to-value exceptions; (b) track and analyze concentrations of credit, including commitments, and maintain a system to calculate each concentration as a percentage of total capital; (c) ensure that extensions of credit are granted, by renewal or otherwise, to any borrower only after obtaining and analyzing current and satisfactory credit information; (d) use standard forms, contracts and notes and maintain loan files in a uniform manner; (e) assist in early problem loan identification and support the timely identification and rating of loans based on lending officer submissions; (f) ensure compliance with the Bank's lending policies and laws, rules, and regulations pertaining to the Bank's lending function; (g) identify and analyze loans to executive officers, directors,
principal shareholders
(and their related interests) of the Bank; and (h) identify, aggregate and monitor debt of individual borrowers and their related interests. (2) The Board shall ensure that the Bank develops and thereafter maintains processes, personnel, and control systems to ensure implementation of and adherence to the program developed pursuant to this Article.
(1) The Bank shall not renew or enter into new contracts or engagements exceeding a threshold of ten thousand dollars ($10,000) on an annual basis with a third party company, entity, or person (third party) to perform professional services for, or on behalf of, the Bank unless: (a) the Board reviews and approves a written analysis performed by the Bank that includes: (i) a cost/benefit analysis for using a third party; (ii) a description of the Bank's due diligence process for selecting the third party and the results of the due diligence review; (iii) a determination that the contract or commitment is being conducted at arm's length on terms and conditions fair and reasonable to the Bank, including the ability of the parties to perform under the contract or commitment; (iv) a disclosure of any affiliation with any present or past Bank Insider or Related Interest of such Insider; and (v) a determination that the contract is in the best interests of the Bank. (b) the written analysis pursuant to paragraph (1)(a) of this Article is included in the Board minutes along with details of the deliberations and approval; and (c) the contract or engagement is in writing. (2) The Board shall immediately forward any Board-approved, written contract, along with the written analysis and Board approval pursuant to paragraph (1)(b) of this Article, to the Regional Director and Commissioner. Unless otherwise advised in writing by the Regional Director and Commissioner, the contract must, at a minimum: (a) be made a part of the Bank's books and records, identify the third party, and specify all services to be provided; (b) define the rights, obligations, and responsibilities of all parties to the contract; (c) specify the beginning and ending dates of the contract, including any renewal options; (d) specify and itemize the price to be paid by the Bank for the services; (e) set standards for quality of services provided by the third party, as applicable, given the nature of the services to be provided; (f) provide the Bank appropriate remedies in the event of a default, failure of the third party to meet the quality standards, or failure of the third party to comply with any other material provision of the contract; (g) require the third party to provide the Bank with annual financial statements if the viability of the third party is integral to the Bank's safe and sound operation; (h) require the third party to carry appropriate insurance, if applicable, given the nature of the contract; (i) require the third party to maintain reliable and accurate books, records, and management information systems as they relate to the services performed on behalf of the Bank; and (j) require the third party to grant the Bank, Bank auditors, and the regulators immediate access to the third party's books and records as they relate to services performed on behalf of the bank; however, this Article XV does not negate the right to assert legally recognized privileges where applicable. (3) The Board must ensure all existing third party relationships for the performance of professional services conform with paragraphs (1) and (2) of this Article, including the execution of a written contract where the existing agreement is oral. The Bank shall not use the services of or compensate in any way any third party where the Board has determined that the relationship is not in the best interests of the Bank. (4) The Bank must routinely monitor the performance of the third party
to ensure that committed goods and services are received,
and that the third party is in compliance with the contract. (5) The Board shall ensure that the Bank develops and thereafter maintains processes, personnel, and control systems to ensure implementation of and adherence to this Article.
(1) Within ninety (90) days, the Board shall adopt, implement, and thereafter ensure Bank adherence to an independent, internal audit program sufficient to: (a) detect irregularities in the Bank's operations; (b) determine the Bank's level of compliance with all applicable laws, rules and regulations; (c) evaluate the Bank's adherence to established policies and procedures, with particular emphasis directed to the Bank's adherence to its loan policies concerning underwriting standards and problem loan identification and classification; (d) ensure adequate audit coverage in all areas; (e) ensure timely follow-up on identified deficiencies to ensure their correction; and (f) establish an annual audit plan using a risk-based approach sufficient to achieve these objectives. (2) As part of this audit program, the Board, or a designated committee, shall evaluate the audit reports of any party providing services to the Bank, and shall assess and document their discussion of the impact on the Bank of any audit deficiencies cited in such reports. (3) The Board shall ensure that the audit function is supported by an adequately staffed department or outside firm, with respect to both the experience level and number of the individuals employed. (4) The Board shall ensure that the audit program is independent. The person(s) responsible for implementing the internal audit program described above shall report directly to the Board, or a designated committee, who shall have the sole power to direct their activities. All reports prepared by the audit staff shall be filed directly with the Board and not through any intervening party. (5) All audit reports shall be in writing. The Board shall ensure that immediate actions are undertaken to remedy deficiencies cited in audit reports, that management provides detailed explanations in those circumstances, if any, where the deficiencies cannot be remedied, and that auditors maintain a written record describing those actions. The Board shall provide for timely independent follow-up and obtain written confirmation of this. (6) The audit staff shall have access to any records necessary for the proper conduct of its activities. The Bank shall ensure that bank examiners have access to all reports and work papers of the audit staff and any other parties working on its behalf. (7) Upon adoption, a copy of the internal audit program shall be promptly submitted to the Regional Director and Commissioner. (8) The Board shall ensure that the Bank develops and thereafter maintains processes, personnel, and control systems to ensure implementation of and adherence to the program developed pursuant to this Article.
(1) The Bank (subject to Board review, approval, and ongoing monitoring) shall immediately take appropriate action to ensure that it maintains adequate sources of liquidity to meet the Bank's needs. The Bank (subject to Board review, approval, and ongoing monitoring) shall also establish within ninety (90) days a liquidity contingency plan to withstand any anticipated or extraordinary demand against its funding base. Such plan must consider, at a minimum, the following: (a) selling assets; (b) obtaining lines of credit from correspondent banks; (c) recovering charged-off assets; and (d) injecting additional equity capital. (2) Upon completion, a copy of this plan shall be forwarded to the Regional Director and Commissioner for review and prior determination of no supervisory objection. (3) The Board shall ensure that management reviews the Bank's liquidity on a weekly basis. Such reviews shall consider: (a) a maturity schedule of certificates of deposit, including large
uninsured deposits;
(b) the volatility of demand deposits including escrow deposits; (c) the amount and type of loan commitments and standby letters of credit; (d) an analysis of the continuing availability and volatility of present funding sources; (e) an analysis of the impact of decreased cash flow from the Bank's loan portfolio resulting from delinquent and non-performing loans; (f) an analysis of the impact of decreased cash flow from the sale of loans or loan participations; and (g) geographic disbursement of and risk from brokered deposits. (4) A copy of each review shall be forwarded to the Regional Director and Commissioner on a quarterly basis. (5) The Bank (subject to Board review, approval, and ongoing monitoring) shall develop a thorough and accurate report for the projection of sources and uses of funds. The Bank shall produce this report monthly and the report shall cover a minimum of a three-month window into the future. Additionally, an independent source shall periodically verify the accuracy of the reports. (6) The Board shall forward a copy of the above report to the Regional Director and Commissioner on a quarterly basis.
(1) Within one hundred twenty (120) days, the Bank (subject to Board review, approval, and ongoing monitoring) shall adopt, implement, and thereafter ensure adherence to a written interest rate risk policy, which is consistent 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). The policy shall provide for a coordinated interest rate risk strategy and, at a minimum: (a) establish adequate management reports on which to base sound interest rate risk management decisions; (b) establish guidance regarding the Bank's strategic direction and tolerance for interest rate risk; (c) implement effective tools to measure and monitor the Bank's performance and overall interest rate risk profile; (d) set prudent limits on the nature and amount of interest rate risk that the Bank will assume; and (e) require periodic review of the Bank's adherence to the policy. (2) The Board shall forward a copy of the policy, upon adoption, to the Regional Director and Commissioner for review. (3) The Board shall ensure that the Bank develops and thereafter maintains processes, personnel, and control systems to ensure implementation of and adherence to the policy developed pursuant to this Article.
(1) Within ninety (90) days, the Bank shall adopt, implement, and thereafter ensure adherence to a written consumer compliance program designed to ensure that the Bank is operating in compliance with all applicable consumer protection laws, rules and regulations. This program shall include, but not be limited to: (a) a written description of the duties and responsibilities of the compliance officer; (b) adequate internal controls to ensure compliance with consumer protection laws, rules, and regulations; (c) a policies and procedures manual covering all consumer protection laws, rules and regulations for use by appropriate Bank personnel in the performance of their duties and responsibilities; (d) semiannual updates of the written policies and procedures manual to ensure it remains current; (e) an independent audit program to test for compliance with consumer protection laws, rules and regulations; (f) procedures to ensure that exceptions noted in the audit reports are corrected and responded to by the appropriate Bank personnel; (g) the education and training of all appropriate Bank personnel in the requirements of all federal and state consumer protection laws, rules and regulations; and (h) periodic reporting of the results of the consumer compliance audit to the Board or a committee thereof. (2) The Board shall forward a copy of the program, upon adoption,
to the Regional Director and Commissioner for review.
(3) The Board shall ensure that the Bank develops and thereafter maintains processes, personnel, and control systems to ensure implementation of and adherence to the program developed pursuant to this Article.
(1) Within thirty (30) days the Board shall appoint a capable officer of the Bank who shall be vested with sufficient authority and clear responsibility to monitor and ensure the Bank's compliance with the Bank Secrecy Act, 31 U.S.C. §§5311–5330, the regulations promulgated thereunder at 31 C.F.R. Part 103, and 12 C.F.R. Part 326, Subpart B, (collectively referred to herein as the Bank Secrecy Act), and the rules and regulations of the Office of Foreign Assets Control (OFAC). This Bank Secrecy Act officer shall report directly to the Board, or a designated committee, and shall be completely independent of the Bank's management. This officer shall be responsible for the complete and timely filing of all reports required under the Bank Secrecy Act, including, but not limited to, Currency Transaction Reports (CTRs) and Suspicious Activity Reports (SARs). (2) Within ninety (90) days, the Bank (subject to Board review, approval, and ongoing monitoring) shall develop, implement, and thereafter ensure adherence to a written program of policies and procedures to ensure compliance with the Bank Secrecy Act. At a minimum, this written program shall establish:
(b) a system of internal controls and independent testing and auditing to ensure ongoing compliance with the Bank Secrecy Act; (c) operating procedures for both the opening of new accounts and the monitoring of high risk accounts; (d) adequate controls and procedures to ensure that all suspicious and large currency transactions are identified and reported. Procedures should be comprehensive as to all points of cash entry and exit; (e) procedures to ensure that records are maintained on monetary instrument transactions and funds transfers, as required by the Bank Secrecy Act; (f) comprehensive procedures to identify and report to appropriate management personnel; (i) frequent or large volume cash deposits or wire transfers or book entry transfers to or from offshore or domestic entities or individuals; (ii) wire transfers or book entry transfers that are deposited into several accounts; (iii) receipt and disbursement of wire transfers or book entry transfers without an apparent business reason; (iv) receipt and disbursement of wire transfers or book entry transfers when they are inconsistent with the customer's business; and (v) receipt and disbursement of currency or monetary instruments when they are inconsistent with the customer's business; (g) a comprehensive training program for all appropriate operational and supervisory personnel to ensure their awareness of and compliance with the requirements of the Bank Secrecy Act and the OFAC, including the currency reporting and monetary instrument and funds transfer record-keeping requirements, and the reporting requirements associated with SARs pursuant to 12 C.F.R. Part 353; (h) an officer who will be responsible for filing (CTRs); and (i) comprehensive guidelines, procedures, and systems for compliance with the rules and regulations of the OFAC. (3) Within sixty (60) days, the Bank (subject to Board review, approval, and ongoing monitoring) shall develop, implement, and thereafter ensure adherence to a written program to establish a system of internal controls and processes to ensure compliance with the requirements to file SARs set forth in 12 C.F.R. §353.3, as amended. At a minimum, this written program shall establish procedures for identifying and reporting known or suspected violations of Federal law, violations of the Bank Secrecy Act, or suspicious transactions related to money laundering activity, including suspicious activity relating to the opening of new accounts, the monitoring of current accounts, and the transfer of funds through the Bank. (4) Upon completion, the Board shall forward a copy of these programs
to the Regional Director and Commissioner review. In the event the
Regional Director and Commissioner recommend changes to the programs,
the Board shall immediately incorporate those changes into the programs
unless the Regional Director and Commissioner
thereafter agree that such a change is no longer required. (5) The Board shall ensure that the Bank develops and thereafter maintains processes, personnel, and control systems to ensure implementation of and adherence to the programs developed pursuant to this Article.
(1) Within ninety (90) days, the Bank shall take all steps necessary to improve the management of the Bank's Information Technology (IT) activities and correct each deficiency discussed with management during the recent examination, cited in internal audit reports, the Report of Examination or any subsequent Report of Examination. (2) Within sixty (60) days, the Bank shall implement effective IT security and operations procedures as described in the Federal Financial Institutions Examination Council's 1996 Information Systems Examination Handbook, and Banking Circular Number 229, dated May 31, 1988. (3) Within ninety (90) days, the Bank shall develop an effective and independent internal IT audit program. At a minimum, the IT audit program shall be performed by an independent and qualified individual, and include fundamental elements of a sound audit program as described in the Federal Financial Institutions Examination Council's 1996 Information Systems Examination Handbook. (4) Within sixty (60) days, the Board shall appoint a Security Officer familiar with IT operations. The Security Officer shall be responsible for reviewing and ensuring appropriate data security of the Bank. (5) Within one hundred twenty (120) days, the Bank shall develop and test a formal Bank Information Technology Resumption and Corporate Contingency Plan which, at a minimum, complies with the requirements set forth in the Federal Financial Institutions Examination Council's revised policy statement (SP-5), Corporate Business Resumption and Contingency Planning. At least annually thereafter, the Board shall review its resumption and contingency plans and test of all necessary programs and system applications using its backup location, or recovery operation center, to ensure the continuation of operations in the event of a disaster. The Board shall document the results of the review and tests in its meeting minutes. (6) The Board shall forward a copy of the plan and test results to the Regional Director and Commissioner for review. (7) The Board shall ensure that the Bank develops and thereafter maintains processes, personnel, and control systems to ensure implementation of and adherence to the programs developed pursuant to this Article.
(1) Within ninety (90) days, the Bank (subject to Board review, approval, and ongoing monitoring) shall develop, implement, and thereafter ensure adherence to a written program establishing an effective management information system (MIS) that facilitates risk identification, establishes controls, and delivers accurate information for timely review. In so doing, the Board shall identify the Bank's specific information requirements and establish effective reporting mechanisms to guide decisions. The program shall include procedures for: (a) expediting the timely delivery of current information; (b) establishing controls, including validation and testing, to ensure data integrity and confidentiality of information; (c) ensuring that data is processed and compiled uniformly to facilitate meaningful trend analysis, and provide for future systems changes; (d) producing complete and relevant information in a summarized form, for Board and management reports, to permit effective decision making; and (e) producing other information, which is discussed in the ROE, that is necessary to effectively supervise risk in the Bank and ensure the Bank meets regulatory record keeping and retention requirements. (2) The Board shall ensure that the Bank develops and thereafter
maintains processes, personnel, and control systems to ensure
implementation of and adherence to the program developed pursuant to this Article. (3) As a part of the Board's ongoing responsibility to ensure that the Bank has an effective MIS, the Board shall designate a senior officer to coordinate the execution of this program. (4) The Board shall submit a copy of the program to the Regional Director and Commissioner.
(1) The Board shall immediately take all necessary steps to ensure that Bank management corrects each violation of law, rule or regulation cited in the Report of Examination, any subsequent Report of Examination, or brought to their attention in writing by management, regulators, auditors, loan review, or other operating efforts. Within ninety (90) days after the violation is cited or brought to the Board's attention, the Bank shall provide to the Regional Director and Commissioner a list of any violations that have not been corrected. This list shall include an explanation of the actions taken to correct the violation, the reasons why the violation has not yet been corrected, and a plan to correct the violation by a specified time. (2) Within sixty (60) days, the Bank (subject to Board review, approval, and ongoing monitoring) shall adopt, implement, and thereafter ensure adherence to specific procedures to prevent future violations as cited in the Report of Examination and shall adopt, implement, and ensure Bank adherence to general procedures addressing compliance management which incorporate internal control systems and education of employees regarding laws, rules and regulations applicable to their areas of responsibility. (3) Within sixty (60) days, the Board shall adopt and cause the Bank to implement policies and procedures, in accordance with the Instructions for Preparation of Consolidated Reports of Condition and Income, to ensure that all official and regulatory reports filed by the Bank accurately reflect the Bank's condition as of the date that such reports are submitted. Thereafter the Board shall ensure Bank adherence to the policies and procedures adopted pursuant to this Article. (4) Upon adoption, the Board shall forward a copy of these policies and procedures to the Regional Director and Commissioner. (5) The Board shall ensure that the Bank develops and thereafter maintains policies, processes, personnel, and control systems to ensure implementation of and adherence to the procedures developed pursuant to this Article.
(1) Within ninety (90) days from the effective date of this ORDER, the Bank shall cause an external audit of its financial statements and operating procedures to be performed by an independent public accounting firm acceptable to the Regional Director and Commissioner. (2) The Bank shall provide the Regional Director and Commissioner with a copy of the proposed engagement letter with the accounting firm for review before it is executed. The engagement letter, at a minimum, should include: (a) A description of the work to be performed under the engagement letter; (b) The responsibilities of the accounting firm; (c) An identification of the professional standards covering the work to be performed; (d) Identification of the specific procedures to be used when carrying out the work to be performed; (e) The qualifications of the employee(s) who are to perform the work; (f) The time frame for completion of the work; (g) Any restrictions on the use of the reported findings; and (h) A provision for unrestricted examiner access to work papers. (3) During the life of this ORDER, the Bank shall forward copies of any external audit reports it receives to the Regional Director and Commissioner within 10 days from the Bank's receipt of such reports.
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 the Bank's 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. 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 January 6, 2004.
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Last Updated 2/27/2006 | legal@fdic.gov |
