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Home > Regulation & Examinations > Bank Examinations > FDIC Enforcement Decisions and Orders |
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FDIC Enforcement Decisions and Orders |
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A cease and desist order was issued, based on findings by the FDIC that
it had reason to believe that respondent was engaged in unsafe and
unsound practices.
[.1] Capital—Tier 1 Capital Increase/Maintain
[.2] Dividends—Dividends Restricted
[.3] Management—Qualifications Specified
[.4] Loan Collector/Consultant—Required
[.5] Compensation— Executives—"Golden Parachute," Restricted
[.6] Consultants—Retention Required
[.7] Board of Directors— Training Program Required
[.8] Loans—Extensions of Credit—To Borrowers with Existing Adversely Classified Credits
[.9] Assets—Charge-off or Collection
[.10] Loan Loss Reserve—Establishment of or Increase in Required
[.11] Assets—Adversely Classified Assets—Reduction Required
[.12] Reports of Condition and Income—Nonaccrual Status
[.13] Loans—Overdue—Written Plan for Reduction Required
[.14] Loan Review and Grading System—Establishment of Required
[.15] Loans—Special Mention
[.16] Technical Exceptions—Correction of Technical Exceptions Required
[.17] Loan Committee—Duties Specified
[.18] Loan Policy—Preparation or Revision of Policy Required
[.19] Interagency Guidance on Subprime Lending—Compliance with Policy Required
[.20] Funds Management and Liquidity—Preparation or Revision of Funds Management Policy Required
[.21] Interest Rate Risk Policy—Plan Required
[.22] Growth Plan—Minimum Requirements
[.23] Strategic Plan—Preparation of Required
[.24] Earnings Plan—Written Earnings Plan Required
[.25] Profit Plan—Preparation of Plan Required
[.26] Violations of Law—Corrections of Violations Required
[.27] Insurance—Life Insurance, Review Required
[.28] Audit—Internal Audit—Minimum Procedures Specified
[.29] Bank Operations—Internal Routine and Controls, Correction of Weaknesses Required
[.30] Shareholders—Disclosure of Cease and Desist Order Required
[.31] Compliance Committee—Establishment Required
[.32] Progress Report—Written Report Required
In the Matter of
Heritage Bank of Ashland, Inc., Ashland, Kentucky ("Bank"),
having been advised of its right to a NOTICE OF CHARGES AND OF HEARING
detailing the unsafe or unsound banking practices and violations of
law, rule, or regulation alleged to have been committed by the Bank,
and of its right to a hearing on the charges under section 8(b) of the
Federal Deposit Insurance Act ("Act"), 12 U.S.C. §1818(b), and
under section 287.690 of the Kentucky Revised Statutes, Ky. Rev. Stat.
Ann. §287.690 (Michie 1981), regarding hearings before the
Department of Financial Institutions for the Commonwealth of Kentucky
("KDFI"), and having waived those rights, entered into a
STIPULATION AND CONSENT TO THE ISSUANCE OF AN ORDER TO CEASE AND DESIST
("CONSENT AGREEMENT") with representatives of the Federal Deposit
Insurance Corporation ("FDIC") and KDFI, dated March 31, 2004,
whereby, solely for the purpose of this proceeding and without
admitting or denying the charges of unsafe or unsound banking practices
and violations of law, rule, or regulation, the Bank consented to the
issuance of an ORDER TO CEASE AND DESIST ("ORDER") by the FDIC
and KDFI.
The FDIC and KDFI considered the matter and determined
there was
reason to believe that the Bank had engaged in unsafe or unsound
banking practices and had violated laws, rules, or regulations. The
FDIC and KDFI, therefore, accepted the CONSENT AGREEMENT and issued the
following:
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
the volume, kind, and quality of loans and leases held.
G. Operating with excessive overhead and inadequate net interest
margins.
H. Operating with inadequate internal routines and controls.
I. Operating with an inadequate loan policy.
J. Operating with an inadequate audit program.
K. Operating with inadequate policies to monitor and control asset
growth.
L. Operating outside of the requirements of Appendix A to Part 364 of
the FDIC Rules and Regulations, 12 C.F.R. Part 364, Appendix A.
M. Operating with management whose policies and practices are
detrimental to the Bank and jeopardize the safety of its deposits.
N. Operating with a board of directors that has failed to provide
adequate supervision over and direction to the management of the Bank
to prevent unsafe or unsound banking practices and violations of law,
rule, or regulation.
IT IS FURTHER ORDERED, that the Bank, its institution-affiliated
parties, and its successors and assigns, take affirmative action as
follows:
[.1] 1. (a) Within 30 days from the last day of each calendar quarter
following the effective date of this ORDER, the Bank shall determine
from its Report of Condition and Income its level of Tier 1 capital as
a percentage of its total assets ("capital ratio") for that
calendar quarter. If the capital ratio is less than 7.5 percent, the
Bank shall, within 60 days of the date of the required determination,
increase its capital ratio to not less than 7.5 percent calculated as
of the end of that preceding quarterly period. For purposes of this
ORDER, Tier 1 capital and total assets shall be calculated in
accordance with Part 325 of the FDIC Rules and Regulations ("Part
325"), 12 C.F.R. Part 325.
(b) Any such increase in Tier 1 capital may be accomplished by the
following:
(i) The sale of common stock and noncumulative perpetual
preferred stock constituting Tier 1 capital under Part 325; or
(ii) The elimination of all or part of the assets classified
"Loss" or one-half of the assets classified "Doubtful" as
of September 29, 2003 without loss or liability to the Bank, provided any such collection on a partially charged-off asset shall first be
applied to that portion of the asset which was not charged off pursuant
to this ORDER; or
(iii) The collection in cash of assets previously charged off; or
(iv) The direct contribution of cash by the directors and/or the
shareholders of the Bank; or
(v) Any other means acceptable to the Regional Director of the Chicago
Regional Office of the FDIC ("Regional Director") and the
Director of KDFI ("Director"); or
(vi) Any combination of the above means.
(c) If all or part of the increase in capital required by this
paragraph is to be accomplished by the sale of new securities, the
board of directors of the Bank shall adopt and implement a plan for the
sale of such additional securities, including the voting of any shares
owned or proxies held by or controlled by them in favor of said plan.
Should the implementation of the plan involve public distribution of
Bank securities, including a distribution limited only to the Bank's
existing shareholders, the Bank shall prepare detailed offering
materials fully describing the securities being offered, including an
accurate description of the financial condition of the Bank and the
circumstances giving rise to the offering, and other material
disclosures necessary to comply with Federal securities laws. Prior to
the implementation of the plan and, in any event, not less than 20 days
prior to the dissemination of such materials, the materials used in the
sale of the securities shall be submitted to the FDIC Registration and
Disclosure Section, 550 17th Street, N.W., Washington, D.C. 20429 and
to the Kentucky Department of Financial Institutions, 1025 Capital
Center Drive, Suite 200, Frankfort, Kentucky 40601, for review. Any
changes requested to be made in the materials by the FDIC or KDFI shall
be made prior to their dissemination.
(d) In complying with the provisions of this paragraph, the Bank shall
provide to any subscriber and/or purchaser of Bank securities
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.
[.2] 2. As of the effective date of this ORDER, the Bank shall not declare
or pay any cash dividend without the prior written consent of the
Regional Director and Director if, after payment of such dividend, the
capital ratio would fall below 7.5 percent.
[.3] 3. (a) Within 150 days from the effective date of this ORDER, the Bank
shall have and retain qualified management. At a minimum, such
management shall include: (i) a chief executive officer with
demonstrated ability to manage a comparably-sized financial institution
and to upgrade a low-quality loan portfolio; and (ii) a senior lending
officer with an appropriate level of lending, collection, and loan
supervision experience for the type and quality of the Bank's loan
portfolio. Such persons shall be provided the necessary written
authority to implement the provisions of this ORDER. The qualifications
of management shall be assessed on its ability to:
(i) Comply with the requirements of this ORDER;
(ii) Operate the Bank in a safe and sound manner;
(iii) Comply with applicable laws, rules, and regulations; and
(iv) Restore all aspects of the Bank to a safe and sound condition,
including asset quality, capital adequacy, earnings, management
effectiveness, and liquidity.
(b) Prior to the addition of any individual to the board of
directors or the employment of any individual as a senior executive
officer, the Bank shall comply with the requirements of section 32 and
Subpart F of Part 303 of the FDIC Rules and Regulations, 12 C.F.R.
§§ 303.100–303.104. Further, the Bank shall request and obtain the
Director's written approval prior to the addition of any individual to the
board of directors and the employment of any individual as a senior
executive officer.
[.4] 4. (a) Within 30 days from the effective date of this ORDER, the Bank
shall employ or retain a loan collector, loan collection service, bank
consultant, or attorney experienced in the collection, sale and
restructuring of delinquent and nonaccrual loans, and in the recovery
of charged-off loans.
(b) Should the Bank obtain the services of a consultant as to fulfill
the requirements of this paragraph, the consultant's contract shall
include the following which, for purposes of this ORDER, are deemed
mandatory consultant contract terms:
(i) A description of the work to be performed under the contract
or engagement letter;
(ii) The responsibilities of the consultant;
(iii) An identification of the professional standards covering the work
to be performed;
(iv) Identification of the specific procedures to be used when carrying
out the work to be performed;
(v) The qualifications of the employee(s) who are to perform the work;
(vi) The time frame for completion of the work;
(vii) Any restrictions on the use of the reported findings; and
(viii) A provision for unrestricted examiner access to workpapers.
[.5] 5. (a) Prior to entering into any agreement to pay and prior to making
any golden parachute payment or excess nondiscriminatory severance plan
payment to any institution-affiliated party, the Bank shall comply with
the requirements of Part 359 of the FDIC Rules and Regulations, 12
C.F.R. Part 359. Pursuant to sections 303.244 and 359.6 of the FDIC
Rules and Regulations, 12 C.F.R. §§ 303.244 and 359.6, the Bank
shall file an application to obtain the consent of the Regional
Director and Director.
(b) For purposes of this ORDER, "golden parachute payment" and
"excess nondiscriminatory severance" are defined as in sections
359.1(f)(1) and (f)(2)(v), respectively, of the FDIC Rules and
Regulations, 12 C.F.R. §§ 359.1(f)(1) and (f)(2)(v).
[.6] 6. (a) Within 30 days from the effective date of this ORDER, the Bank
shall retain a bank consultant acceptable to the Regional Director and
Director. The consultant shall develop a written analysis and
assessment of the Bank's senior management and senior lending staff
needs for the purpose of providing qualified management for the Bank.
(b) The Bank shall provide the Regional Director and Director with a
copy of the proposed engagement letter or contract with the consultant
for review before it is executed. The contract or engagement
letter, at a minimum, shall include the mandatory consultant contract
terms, as set out in this ORDER.
(c) The consultant's assessment and analysis of the Bank's senior
management and lending staff needs shall be developed within 90 days
from the effective date of this ORDER. This assessment shall include,
at a minimum:
(i) Identification of both the type and number of officer
positions needed to properly manage and supervise the Bank's
affairs;
(ii) Identification and establishment of such Bank committees as are
needed to provide guidance and oversight to active management;
(iii) Evaluation of all Bank officers and all lending personnel to
determine whether these individuals possess the ability, experience and
qualifications required to perform present and anticipated duties,
including adherence to the Bank's established policies and practices,
and restoration and maintenance of the Bank in a safe and sound
condition; and
(iv) A plan to recruit and hire any additional or replacement personnel
with the requisite ability, experience and qualifications to fill those
officer positions or lending personnel identified by this paragraph.
(d) The report produced by the consultant shall be submitted to
the Regional Director and Director for review and comment upon its
completion. Within 30 days from the receipt of any comments from the
Regional Director and Director and after the adoption of any
recommended changes, the Bank shall approve the plan outlined in the
report and record its approval in the minutes of the board of
directors' meeting. Thereafter, the Bank, its directors, officers, and
employees shall implement and follow the plan and any subsequent
modification.
[.7] 7. (a) Within 90 days from the effective date of this ORDER, the Bank
shall submit to the Regional Director and Director a schedule
reflecting not less than eight hours of training for each member of the
Board of Directors. The training shall focus on the duties and
responsibilities of bank directors, and shall be conducted, sponsored,
or approved by nationally-recognized bankers' organizations.
(b) The minimum eight hours of director training required by this
paragraph shall be completed within one year from the effective date of
this ORDER.
(c) Certificates of completion or organizational letters indicating the
director's name, the number of course hours completed, and date and
title of the course attended shall be maintained by the Bank and shall
be readily accessible by FDIC and KDFI examiners.
[.8] 8. (a) As of the effective date of this ORDER, the Bank shall not
extend, directly or indirectly, any additional credit to, or for the
benefit of, any borrower who is already obligated in any manner to the
Bank on any extensions of credit (including any portion thereof) that
has been charged off the books of the Bank or classified "Loss"
or "Doubtful" in the Report of Examination of the Bank conducted
jointly by the FDIC and KDFI as of September 29, 2003 ("Joint
Report") so long as such credit remains uncollected.
(b) As of the effective date of this ORDER, the Bank shall not extend,
directly or indirectly, any additional credit to, or for the benefit
of, any borrower whose loan or other credit has been classified
"Substandard" or is listed for Special Mention and is uncollected
unless, prior to such extensions of credit, the Bank's loan committee
has adopted a detailed written statement giving the reasons why such
extension of credit is in the best interest of the Bank. The statement
shall be incorporated in the minutes of the applicable loan committee's meeting,
and a copy of the statement shall be retained in the
appropriate
loan file. The requirements of this paragraph do not
eliminate the need for review and approval of the board of directors
consistent with the Bank's loan policy.
[.9] 9. As of the effective date of this ORDER, the Bank shall eliminate
from its books, by charge-off or collection, all assets or portions of
assets classified "Loss" and 50 percent of all assets classified
"Doubtful" in the Joint Report that have not been previously
collected or charged off. Any such charged-off asset shall not be
rebooked without the prior written consent of the Regional Director and
Director. Elimination or reduction of these assets with the proceeds of
other Bank extensions of credit is not considered collection for
purposes of this paragraph.
[.10] 10. (a) Within 10 days from the effective date of this ORDER, the Bank
shall make a provision for loan and lease losses which, after review
and consideration by the board of directors, reflects the potential for
further losses in the remaining loans or leases classified
"Substandard" or "Doubtful" and all other loans and leases
in the Bank's portfolio. In making this determination, the board of
directors shall consider the Federal Financial Institutions
Examination Council Instructions for the Reports of Condition and
Income ("Call Report Instructions"), the Policy Statement on
Allowance for Loan and Lease Losses Methodologies and Documentation for
Banks and Savings Institutions ("ALLL Policy Statement"), and any
analysis of the Bank's ALLL provided by the FDIC and KDFI.
(b) Within 30 days from the effective date of this ORDER, Reports of
Condition and Income required by the FDIC and filed by the Bank
subsequent to September 29, 2003 but prior to the effective date of
this ORDER, shall be amended and refiled if they do not reflect a
provision for loan and lease losses and an Allowance for Loan and Lease
Losses ("ALLL") which are adequate considering the condition of
the Bank's loan portfolio, and which, at a minimum, incorporate the
adjustments required by this paragraph.
(c) Prior to submission or publication of all Reports of Condition and
Income required by the FDIC after the effective date of this ORDER, the
board of directors of the Bank shall review the adequacy of the Bank's
ALLL, provide for an adequate ALLL, and accurately report the same. The
minutes of the board meeting at which such review is undertaken shall
indicate the findings of the review, the amount of the ALLL
recommended, and the basis for determination of the amount of ALLL
provided. In making these determinations, the board of directors shall
consider the Call Report Instructions, the ALLL Policy Statement, and
any analysis of the Bank's ALLL provided by the FDIC or KDFI.
(d) ALLL determinations required by this paragraph shall be made prior
to any Tier 1 capital calculations required by this ORDER.
[.11] 11. (a) Within 60 days from the effective date of this ORDER, the Bank
shall adopt and implement a written plan to reduce the Bank's risk
position with any borrower whose aggregate exposure is in excess of
$100,000 and which is classified "Substandard" or
"Doubtful" in the Joint Report. A copy of the written plan shall
be submitted to the Regional Director and Director upon its completion.
In developing such plan, the Bank shall, at a minimum:
(i) Review the financial position of each such borrower,
including repayment ability, source of repayment, and alternative
repayment sources;
(ii) Evaluate the available collateral for each such credit, including
potentially initiating actions to improve the Bank's collateral
position;
(iii) Establish dollar levels to which the Bank shall reduce each asset
within 12 months from the effective date of this ORDER; and
(iv) Provide for the submission of monthly written progress reports to
the Bank's board of directors for review and notation in minutes of
the meetings of the board of directors.
(b) As used in this paragraph, "reduce" means to: collect;
charge off; or improve the quality of such assets so as to warrant
removal of any adverse classification by the FDIC or KDFI.
(c) Within 30 days from the receipt of any comment from the Regional
Director and Director, and after the adoption of any recommended
changes, the Bank shall approve
the written plan, which approval shall
be recorded in the minutes of a board of directors' meeting.
Thereafter, the Bank shall implement and follow this plan.
[.12] 12. Within 10 days from the effective date of this ORDER, the Bank
shall adopt procedures for placement of delinquent loans on nonaccrual
status. These procedures shall be in accordance with Call Report
Instructions, and will necessarily require the reversal of accrued
interest on loans placed on nonaccrual status.
[.13] 13. (a) Within 90 days from the effective date of this ORDER, the Bank
shall formulate, adopt, and submit to the Regional Director and
Director for review and comment, a plan for reducing the level of
delinquent loans.
(b) The plan required by this paragraph shall include, at a minimum,
provisions which: prohibit extending credit for the payment of
interest; clearly define areas of responsibility among Bank personnel;
and establish acceptable guidelines for the collection of troubled
credits, including standards for the initiation of collections and
restructurings required by this ORDER.
[.14] 14. (a) Within 90 days from the effective date of this ORDER, the Bank
shall revise, adopt, and implement an internal loan review and grading
system to periodically review the Bank's loan portfolio and identify
and categorize problem credits. At a minimum, the loan review/grading
system required by this paragraph shall provide for:
(i) Identification of the overall quality of the loan portfolio;
(ii) Identification and amount of each delinquent loan;
(iii) Identification, or grouping, of loans that warrant the special
attention of management;
(iv) For each loan identified, a statement of the amount and an
indication of the degree of risk that the loan will not be fully repaid
according to its terms and the reason(s) why the particular loan merits
special attention;
(v) Identification of credit and collateral documentation exceptions;
(vi) Identification and status of each violation of law, rule or
regulation;
(vii) Identification of loans not in conformance with the Bank's
lending policy and exceptions to the Bank's lending policy;
(viii) Identification of insider loan transactions; and
(ix) The creation of a mechanism for reporting, no less than quarterly,
to the board of directors on the status of each loan identified and the
action(s) taken by management.
(b) A copy of the reports submitted to the board, as well as
documentation of the action taken by the Bank to collect or
strengthen assets identified as problem credits, shall be kept with the
minutes of the board of directors.
[.15] 15. Within 90 days from the effective date of this ORDER, the Bank
shall correct, or document its best efforts to correct, all
deficiencies in the loans listed for "Special Mention" in the
Joint Report.
[.16] 16. Within 90 days from the effective date of this ORDER, the Bank
shall correct, or document its best efforts to correct, the technical
exceptions listed in the Joint Report.
[.17] 17. (a) As of the effective date of this ORDER, the Bank's loan
committee shall meet at least twice monthly, and shall be composed of a
majority of independent directors. For purposes of this ORDER,
"independent director" is defined as a member of the board: (i)
who is not an officer of the Bank, any Bank subsidiary, or any of its
affiliated organizations; and (ii) who does not own more than 5 percent
of the outstanding shares of the Bank; and (iii) who is not related by
blood or marriage to an officer or director of the Bank or to any
shareholder owning more than 5 percent of the Bank's outstanding
shares, and who does not otherwise share a common financial interest
with such officer, director or shareholder; and (iv) who is not
indebted to the Bank directly or indirectly by blood, marriage or
common financial interest, including the indebtedness of any entity in
which the individual has a substantial financial interest in an amount
exceeding 5 percent of the Bank's total Tier 1 capital and allowance
for loan
and lease losses; or (v) who is deemed to be an independent
for purposes of this ORDER by the Regional Director and Director.
(b) The loan committee shall, at a minimum, perform the following
functions:
(i) Evaluate, grant and/or approve loans in accordance with the
Bank's loan policy amended to comply with this ORDER. The loan
committee shall provide a thorough written explanation of any
deviations from the loan policy, which explanation shall address
how said exceptions are in the Bank's best interest. The written
explanation shall be included in the minutes of the corresponding
committee meeting;
(ii) Review and monitor the status of repayment and collection of
overdue and maturing loans, as well as all loans classified
"Substandard" in the Joint Report, or that are included on the
Bank's internal watch list;
(iii) Review and give prior written approval for all advances,
renewals, or extensions of credit to any borrower or the
borrower's related interests when the aggregate volume of credit
extended to the borrower and the borrower's related interests exceeds
$250,000. The requirements of this paragraph do not eliminate the need
for review and approval of the board of directors consistent with the
Bank's loan policy. For purposes of this ORDER, the term "related
interest" is defined pursuant to section 215.2(n) of Regulation O,
12 C.F.R. §215.2(n); and
(iv) Maintain written minutes of the committee meetings, including a
record of the review and status of the aforementioned loans. Such
minutes shall be reviewed at the next board of directors' meeting.
[.18] 18. (a) Within 90 days from the effective date of this ORDER, and
annually thereafter, the board of directors of the Bank shall review
the Bank's loan policy and procedures for adequacy and, based upon
this review, shall make all appropriate revisions to the policy
necessary to strengthen lending procedures and abate additional loan
deterioration. At a minimum the Bank shall revise the loan policy
consistent with the requirements of this ORDER and the comments and
recommendations in the Joint Report. The revised written loan policy
shall be submitted to the Regional Director and Director for review and
comment upon its completion.
(b) Within 30 days from the receipt of any comments from the Regional
Director and Director, and after the adoption of any recommended
changes, the board of directors shall approve the written loan policy
and any subsequent modification thereto, which approval shall be
recorded in the minutes of a board of directors' meeting. Thereafter,
the Bank shall implement and follow the amended written loan policy.
The Bank shall inform the Regional Director and Director, in writing,
of the manner in which it intends to implement this policy and ensure
compliance therewith.
[.19] 19. (a) Within 90 days from the effective date of this ORDER, the Bank
shall develop procedures to identify, measure, monitor, and control the
credit risk associated with all subprime loans in its portfolio. These
procedures shall be consistent with the guidance provided in FDIC
Financial Institution Letter, "Subprime Lending," FIL-09-01
(January 31, 2001).
(b) Within 90 days from the effective date of this ORDER, the Bank's
loan policy shall be revised to address subprime lending, and include,
at a minimum, the following provisions:
(i) Permissible types of subprime loans and those not authorized;
(ii) Portfolio targets and limits for each credit grade or class;
(iii) Lending authority;
(iv) A framework for pricing and profitability that considers all
costs, including origination, administration/servicing charge-offs,
funding, and capital;
(v) Collateral guidelines which address: required/eligible collateral,
monitoring of value with initial and periodic evaluations, and
verification of collateral information;
(vi) Well-defined underwriting parameters;
(vii) Control systems;
(viii) Requirements to verify information that, at a minimum, address
income and employment information;
(ix) Procedures for approving policy exceptions;
(x) Procedures for tracking and monitoring loans approved as policy
exceptions;
(xi) Credit file documentation requirements;
(xii) Cure programs allowed;
(xiii) Loan review and allowance for loan losses methodology; and
(xiv) Prudent asset classification and charge-off criteria.
[.20] 20. (a) Within 120 days from the effective date of this ORDER, the Bank
shall develop and submit to the Regional Director and Director for
review and comment a written plan addressing the Bank's liquidity
needs. Annually thereafter during the life of this ORDER, the Bank
shall review this plan for adequacy and, based upon such review, shall
make appropriate revisions to the plan that are necessary to maintain
adequate provisions to meet the Bank's liquidity needs. The initial
plan shall include, at a minimum, provisions:
(i) Establishing a desirable range for its net non-core funding
ratio as computed in the Uniform Bank Performance Report;
(ii) Identifying the source and use of borrowed and/or volatile funds;
(iii) Establishing a minimum liquidity ratio and defining how the ratio
is to be calculated;
(iv) Establishing contingency plans by identifying alternative courses
of action designed to meet the Bank's liquidity needs; and
(v) Addressing the proper use of borrowings (i.e., seasonal
credit needs, match funding mortgage loans, etc.) and providing for
appropriate tenor commensurate with the use of the borrowed funds,
addressing concentration of funding sources, pricing and collateral
requirements with specific allowable funding channels identified
(i.e., brokered deposits, internet deposits, Fed funds
purchased and other correspondent borrowings).
(b) Within 30 days from the receipt of all such comments from the
Regional Director and Director, and after revising the plan as
necessary, the Bank shall adopt the plan, which adoption shall be
recorded in the minutes of a board of directors' meeting. Thereafter,
the Bank shall implement the plan.
[.21] 21. Within 90 days from the effective date of this ORDER, the Bank
shall formulate, adopt, and submit to the Regional Director and
Director for review and comment, a plan to secure accurate interest
rate sensitivity reports and reduce interest rate risk. After receipt
and consideration of any comments from the Regional Director and
Director, the Bank shall revise the policy and shall thereafter
consistently follow the revised policy.
[.22] 22. During the life of this ORDER, the Bank shall not increase its
total assets by more than 3 percent during any consecutive three-month
period without providing, at least 30 days prior to its implementation,
a growth plan to the Regional Director and Director. Such growth plan,
at a minimum, shall include the funding source to support the projected
growth, as well as the anticipated use of funds. This growth plan shall
not be implemented without the prior written consent of the Regional
Director and Director. For the purpose of this paragraph, "total
assets" shall be defined as in the Call Report Instructions, and
shall be measured commencing March 31, 2004.
[.23] 23. (a) Within 180 days from the effective date of this ORDER, the Bank
shall formulate and adopt a realistic, comprehensive, written
three-year strategic plan. The plan required by this paragraph shall
contain an assessment of the Bank's current financial condition and
market area, and a description of the operating assumptions that form
the basis for major projected income and expense components.
(b) The written strategic plan shall address, at a minimum:
(i) The organization's mission statement;
(ii) Economic issues of the industry and the market areas served;
(iii) Internal strengths and weaknesses;
(iv) Strategies;
(v) Succession of management;
(vi) Staffing needs at the management level;
(vii) Staff training;
(viii) Financial goals, including, but not limited to target ranges for
asset growth, capital adequacy, and earnings performance; and
(ix) Identification of any new lines of business and new types of
lending, as well as the Bank's expertise in these areas.
(c) The strategic plan shall include the development of detailed
pro forma balance sheets and income statements. Key operating ratios
such as Return on Average Assets, Return on Equity, and Net Interest
Margin shall be forecast.
(d) The Bank shall submit the strategic plan to the Regional Director
and Director or for review and comment. After consideration of all such
comments, the Bank shall approve the plan, which approval shall be
recorded in the minutes of a board of directors' meeting.
(e) The strategic plan required by this ORDER shall be revised and
submitted to the Regional Director and Director for review and comment
30 days prior to the end of each calendar year for which this ORDER is
in effect, beginning with year-end 2005. Within 30 days of receipt of
all such comments from the Regional Director and Director, and after
consideration of all such comments, the Bank shall approve the revised
plan, which approval shall be recorded in the minutes of a board of
directors' meeting. Thereafter, the Bank shall implement the revised
plan.
[.24] 24. (a) Within 90 days from the effective date of this ORDER, the Bank
shall develop a written analysis and assessment of the Bank's
earnings.
(b) The written analysis shall include, at a minimum:
(i) An assessment and recommendations to improve the Bank's net
interest margin;
(ii) An assessment and recommendations to increase the Bank's
non-interest income; and
(iii) An assessment and recommendations to control the Bank's overhead
expenses, including an analysis of the impact of leasing versus
purchasing properties the Bank occupies, and a periodic review of the
Bank's salaries and benefits as they compare to institutions of
similar size and structure.
[.25] 25. (a) Within 120 days from the effective date of this ORDER, the Bank
shall formulate and submit to the Regional Director and Director for
review and comment a written profit plan and a realistic, comprehensive
budget for all categories of income and expense. The plans required by
this paragraph shall contain formal goals and strategies, consistent
with sound banking practices, to reduce discretionary expenses and to
improve the Bank's overall earnings, and shall contain a description
of the operating assumptions that form the basis for major projected
income and expense components. A copy of the plan shall be submitted to
the Regional Director and Director upon its completion.
(b) The written profit plan shall address, at a minimum:
(i) an identification of the major areas in, and means by which,
the board will seek to improve the Bank's operating performance;
(ii) realistic and comprehensive budgets;
(iii) a budget review process to monitor the income and expenses of the
Bank to compare actual figures with budgetary projections; and
(iv) a description of the operating assumptions that form the basis
for, and adequately support, major projected income and expense
components.
(c) Within 30 days from the end of each calendar quarter following
completion of the profit plans and budgets required by this paragraph,
the Bank's board of directors shall evaluate the Bank's actual
performance in relation to the plan and budget, record the results of
the evaluation, and note any actions taken by the Bank in the minutes
of the board of directors' meeting at which such evaluation is
undertaken.
(d) A written profit plan and budget shall be prepared for each
calendar year for which this ORDER is in effect and shall be submitted
to the Regional Director and Director for review and comment within 30
days of the end of each year. Within 30 days of receipt of all such
comments from the Regional Director and Director and after adoption of
any recommended changes, the Bank shall approve the plan, which
approval shall be recorded in the minutes of a board of directors'
meeting. Thereafter, the Bank shall implement and follow the plan.
[.26] 26. (a) Within 90 days from the effective date of this ORDER, the Bank
shall eliminate or correct, or document its best efforts to eliminate
or correct, all violations of law, rule, and regulation listed in the
Joint Report.
(b) Within 10 days from the effective date of this ORDER, the Bank
shall implement procedures to ensure future compliance with all
applicable laws, rules, and regulations.
[.27] 27. Within 30 days from the effective date of this ORDER, the Bank's
board of directors shall appoint a committee of "independent
directors" who shall review all Bank-Owned Life Insurance products.
At a minimum, the committee shall:
(a) Determine if the size of the policy is appropriate;
(b) Require that all asset and accounting entries be reflected in
accordance with generally accepted accounting principals; and
(c) Require that appropriate portions of the premiums paid are reported
as income to the individuals covered, consistent with Internal Revenue
Service rulings.
[.28] 28. Within 90 days from the effective date of this ORDER, the Bank's
board of directors shall formulate and submit to the Regional Director
and Director for review and comment a comprehensive written audit
program. At a minimum, the audit program shall provide that: (a) the
internal auditor make written monthly reports of audit findings
directly to the Bank's board of directors, which findings and any
action taken as a result of the findings shall be recorded in the
minutes of the meetings of the board; and (b) the Bank provide the
Regional Director and Director with a copy of all external audit
reports within 10 days of the Bank's receipt of such report(s). The
Bank shall thereafter implement and enforce an effective system of
internal and external audits.
[.29] 29. Within 30 days from the effective date of this ORDER, the Bank
shall correct the deficiencies in internal routines and controls which
are identified in the Joint Report. In addition, the Bank shall
establish policies to prevent the recurrence of the deficiencies noted.
[.30] 30. Following the effective date of this ORDER, the Bank shall send to
its shareholders a copy or description of this ORDER: (1) in
conjunction with the Bank's next shareholder communication; and (2) in
conjunction with the Bank's notice or proxy statement preceding its
next shareholder meeting. The description shall fully describe this
ORDER in all material respects. The description and any accompanying
communication, notice or statement shall be sent to the FDIC
Registration and Disclosure Section, 550 17th Street, N.W., Washington,
D.C. 20429, and to the Kentucky Department of Financial Institutions,
1025 Capital Center Drive, Suite 200, Frankfort, Kentucky 40601, for
review at least 20 days prior to dissemination to shareholders. Any
changes requested to be made by the FDIC and KDFI shall be made prior
to dissemination of the description, communication, notice or
statement.
[.31] 31. (a) Within 10 days
from the effective date of this ORDER, the Bank shall establish a
compliance committee comprised of at least 5 directors, none of whom may
be active officers of the Bank, which shall monitor compliance with this
ORDER.
(b) Within 30 days from the effective date of this ORDER and on a
monthly basis thereafter, the committee shall report in writing to the
board of directors on the Bank's compliance with this ORDER. The
committee's written report shall be reviewed and considered at the
board of directors' regularly scheduled meeting, and shall be
incorporated into the minutes of the board meeting. Establishment of
this committee does not in any way diminish the responsibility of the
entire board of directors to ensure compliance with the provisions of
this ORDER.
[.32] 32. Within 30 days from the end of each calendar quarter following the
effective date of this ORDER, the Bank shall furnish to the Regional
Director and Director written progress reports signed by each member of
the Bank's board of directors, detailing the actions taken to secure
compliance with the ORDER and the results thereof. Such reports may be
discontinued when the corrections required by this ORDER have been
accomplished and the Regional Director
and Director have, in writing, released the Bank from making
further reports.
The effective date of this ORDER shall be 10 calendar days after its
issuance by the FDIC and KDFI.
The provisions of this ORDER shall be binding upon the Bank, its
institution-affiliated parties, and any successors and assigns thereof.
The provisions of this ORDER shall remain effective and enforceable to
the extent that, and until such time as, any provision has been
modified, terminated, suspended, or set aside by the FDIC and KDFI.
Pursuant to delegated authority.
Dated: April 12, 2004.
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