FEDERAL DEPOSIT INSURANCE CORPORATION
 
WASHINGTON, D.C.
 
AND
 
COMMONWEALTH OF KENTUCKY
 
DEPARTMENT OF FINANCIAL INSTITUTIONS
 
FRANKFORT, KENTUCKY

       
)
 
In the Matter of
)
CONSENT ORDER
 
)
   
)
 
FIRST FEDERAL SAVINGS BANK OF
)
 
ELIZABETHTOWN
)
 
ELIZABETHTOWN, KENTUCKY
)
FDIC-10-817b
 
)
   
)
 
(KENTUCKY CHARTERED
)
 
INSURED NONMEMBER BANK)
)
   
)
 

 
           First Federal Savings Bank of Elizabethtown, Elizabethtown, 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 286.3-690 of the Kentucky
Revised Statutes, Ky. Rev. Stat. Ann. § 286.3-690 (Michie 2006), regarding
hearings before the Department of Financial Institutions for the Commonwealth of
Kentucky (“DFI”), and having waived those rights, entered into a STIPULATION AND
CONSENT TO THE ISSUANCE OF A CONSENT ORDER (“STIPULATION”) with representatives
of the Federal Deposit Insurance Corporation (“FDIC”) and the DFI, dated January
27, 2011, whereby, solely for the purpose of this proceeding and without
admitting or denying any charges of unsafe or unsound banking practices relating
to weaknesses in asset quality, earnings, liquidity, management, and capital,
the Bank has consented to the issuance of this CONSENT ORDER (“ORDER”) by the
FDIC and the DFI.

 
 

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The FDIC and the DFI considered the matter and determined to accept the
STIPULATION.
 
Having also determined that the requirements for issuance of an order under 12
U.S.C. § 1818(b) and section 286.3-690 of the Kentucky Revised Statutes, Ky.
Rev. Stat. Ann. § 286.3-690 (Michie 2006), have been satisfied, the FDIC and DFI
HEREBY ORDER 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 take affirmative action as follows:
 
MANAGEMENT
 
1.           (a)           During the life of this ORDER, the Bank shall have
and retain qualified management. Management 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:

 
 

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(i)
Comply with the requirements of this ORDER;

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

 
 
(iii)
Comply with applicable statutes, rules, and regulations; and

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

 
(b)           During the life of this ORDER, prior to the addition of any
individual to the board of directors (“Board”) or the employment of any
individual as a senior executive officer, the Bank shall request and obtain the
FDIC’s and DFI’s written approval.  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).
 
MANAGEMENT PLAN
 
2.           (a)           Within 30 days from the effective date of this ORDER,
the Bank shall retain a bank consultant acceptable to the Regional Director of
the Chicago Regional Office of the FDIC (“FDIC Regional Director”) and the
Commissioner of the Kentucky Department of Financial Institutions
(“Commissioner”) who will develop a written analysis and assessment of the
Bank’s management needs (“Management Study”) for the purpose of providing
qualified management for the Bank.

 
 

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(b)           The Bank shall provide the FDIC Regional Director and the
Commissioner with a copy of the proposed engagement letter or contract with the
consultant for review.
 
(c)           The Management Study shall be developed within 120 days from the
effective date of this ORDER.  The Management Study shall include, at a minimum:
 
 
(i)
Identification of both the type and number of officer positions needed to
properly manage and supervise the affairs of the Bank;

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

 
 
(iii)
Evaluation of all executive Bank officers and senior commercial lending staff
(having the title of Vice President or above) to determine whether these
individuals possess the ability, experience and other qualifications required to
perform present and anticipated duties, including adherence to the Bank’s
established policies and practices, and restoration and maintenance of the Bank
in a safe and sound condition;

 
 

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(iv)
Evaluation of all executive Bank officers and senior lending staff (having the
title of Vice President or above) compensation, including salaries, director
fees, and other benefits; and

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

 
(d)           Within 30 days after receipt of the Management Study, the Bank
shall formulate a plan to implement the recommendations of the Management Study.
 
(e)           The plan required by this paragraph shall be submitted to and
approved by the FDIC Regional Director and the Commissioner.

 
 

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CAPITAL
 
3.           (a)           By March 31, 2011, the Bank shall have and maintain
its level of Tier 1 capital as a percentage of its total assets (“capital
ratio”) at a minimum of 8.5 percent and its level of qualifying total capital as
a percentage of risk-weighted assets (“total risk based capital ratio”) at a
minimum of 11.5 percent.  By June 30, 2011, the Bank shall have and maintain its
level of Tier 1 capital as a percentage of its total assets (“capital ratio”) at
a minimum of 9.0 percent and its level of qualifying total capital as a
percentage of risk-weighted assets (“total risk based capital ratio”) at a
minimum of 12.0 percent. For purposes of this ORDER, Tier 1 capital, qualifying
total capital, total assets, and risk-weighted assets shall be calculated in
accordance with Part 325 of the FDIC Rules and Regulations (“Part 325”), 12
C.F.R. Part 325.
 
(b)           If, while this ORDER is in effect, the Bank increases capital by
the sale of new securities, the Board 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 the DFI shall be made prior to their dissemination.

 
 

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(c)           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.

 
 

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DIVIDEND RESTRICTION
 
4.           As of the effective date of this ORDER, the Bank shall not declare
or pay any dividend without the prior written consent of the FDIC Regional
Director and the Commissioner.
 
LOSS CHARGE-OFF
 
5.           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 as “Loss” in the Report of Examination dated July 19, 2010 (“Report”)
and in subsequent Reports or Examinations that have not been previously
collected or charged off.
 
PROHIBITION OF ADDITIONAL LOANS TO CLASSIFIED BORROWERS
 
6.           (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” in the Report, so long as such
credit remains uncollected.

 
 

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(b)           As of the effective date of this ORDER, the Bank shall not extend,
directly or indirectly, any additional credit  (including any extension of
credit for the payment of interest) to, or for the benefit of, any borrower
whose loan or other credit has been classified “Substandard” or “Doubtful” or is
listed for “Special Mention” in the Report, and is uncollected unless the Bank’s
Board has adopted, prior to such extension of credit, a detailed written
statement giving the reasons why such extension of credit is in the best
interest of the Bank.  A copy of the statement shall be signed by each Director
participating in the decision, and incorporated in the minutes of the applicable
Board meeting. A copy of the statement shall be placed in the appropriate loan
file.
 
REDUCTION OF DELINQUENCIES AND CLASSIFIED LOANS
 
7.                (a)           Within 60 days from the effective date of this
ORDER, the Bank shall adopt, implement, and adhere to, a written plan to reduce
the Bank’s risk position in each loan in excess of $800,000 which is delinquent
in excess of 90 days or classified “Substandard” or “Doubtful” in the Report.
The plan shall include, but not be limited to, provisions which:
 
 
(i)
Provide for review of the current financial condition of each delinquent or
classified borrower, including a review of borrower cash flow and collateral
value;

 
 
(ii)
Delineate areas of responsibility for loan officers;

 
 

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(iii)
Establish target dollar levels to which the Bank plans to reduce delinquencies
and classified loans within 6, 12, and 24 months from the effective date of this
ORDER; and

 
 
(iv)
Provide for the submission of monthly written progress reports to the Bank’s
Board for review and notation in minutes of the meetings of the Board.

 
(b)           As used in this paragraph, “reduce” means to: (1) collect; (2)
charge off; (3) sell; or (4) improve the quality of such assets so as to warrant
removal of any adverse classification by the FDIC and the DFI.
 
(c)           A copy of the plan required by this paragraph shall be submitted
to the FDIC Regional Director and the Commissioner.
 
(d)           While this ORDER remains in effect, the plan shall be revised to
include assets which become delinquent after the effective date of this ORDER or
are adversely classified at any subsequent examinations.

 
 

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ALLOWANCE FOR LOAN AND LEASE LOSSES
 
 8.           (a)           Prior to submission or publication of all Reports of
Condition and Income required by the FDIC after the effective date of this
ORDER, the Bank’s Board shall review the adequacy of the Bank’s ALLL, provide
for an adequate ALLL, and accurately report the same. The minutes of the Board
meeting at which such review is undertaken shall indicate the findings of the
review, the amount of increase in the ALLL recommended, if any, and the basis
for determination of the amount of ALLL provided.  In making these
determinations, the Board shall consider the FFIEC Instructions for the Reports
of Condition and Income and any analysis of the Bank’s ALLL provided by the FDIC
or DFI.
 
(b)           Regarding ALLL methodology, management will ensure FAS 114
calculations utilize values which are updated on an ongoing basis as warranted
by changes in market conditions.
 
LOAN REVIEW AND GRADING
 
9.           Within 60 days from the date of this ORDER, the Bank shall
implement revised comprehensive loan grading and review procedures in order to
effectively manage and control risks in the loan portfolio.  The procedures
shall require that such loan grading and review will be performed by a qualified
individual who is not a member of the Bank’s lending staff.  The loan review
procedures shall, at a minimum:
 
(a)          Require periodic confirmation of the accuracy and completeness of
the watch list and all risk grades assigned by the Bank’s loan officers;

 
 

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(b)          Identify loans or relationships that warrant special attention of
management, including but not limited to, loans requiring loss recognition,
adjustments to ALLL allocations, or nonaccrual status;
 
(c)          Identify credit and collateral documentation exceptions and track
corrective measures;
 
(d)          Identify violations of law, rules, or regulations and track
corrective measures; and
 
(e)           Identify loans not in conformance with the Bank’s loan policy.
 
APPRAISAL POLICIES
 
10.           (a)         Within 60 days from the effective date of this ORDER,
the Bank shall revise, adopt, and implement its real estate appraisal policy to
ensure compliance with Part 323 of the FDIC’s Rules and Regulations.  In
addition, appropriate criteria for obtaining re-appraisals and or re-evaluations
as part of an overall program to review and monitor portfolio risk should be
developed.
 
(b)           Copies of the Appraisal Policy and revisions thereto required by
this paragraph shall be submitted to the Regional Director and the Commissioner.

 
 

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CONCENTRATIONS OF CREDIT
 
11.         (a)           Within 60 days from the effective date of this ORDER,
the Bank shall formulate, adopt and implement a written plan to reduce the
construction and land development loan concentration of credit and the total
commercial real estate loan concentration of credit identified in the
Report.    Such plan shall prohibit any additional advances that would increase
the concentrations or create new concentrations unless the Bank’s board of
directors has adopted, prior to such extension of credit, a detailed written
statement giving the reasons why such extension of credit is in the best
interests of the Bank.  A copy of the statement shall be signed by each
Director, incorporated in the minutes of the applicable board of directors’
meeting, and placed in the appropriate loan file.  The plan shall include, but
not be limited to:
 
 
(i)
Target dollar level and target percentage of of capital to which the Bank plans
to reduce each concentration; and

 
 
(ii)
Provision for the submission of monthly written progress reports to the Bank’s
board of directors for review and notation in the minutes of the board of
directors’ meetings.

 
 

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CORRECTION OF VIOLATIONS
 
12.          (a)          Within 60 days from the effective date of this ORDER,
the Bank shall eliminate and/or correct all violations of law, rule, and
regulation and shall comply with the interest rate risk policy statement listed
in the Report.
 
(b)         Within 60 days from the effective date of this ORDER, the Bank shall
implement procedures to ensure future compliance with all applicable laws,
rules, regulations, and policy statements.
 
PROFIT PLAN AND BUDGET
 
13.         (a)           Within 60 days from the effective date of this ORDER,
the Bank shall revise, and implement revisions to, its written profit plan and
adopt a realistic, comprehensive budget for all categories of income and expense
for calendar year 2011.  The plan required by this paragraph shall contain
formal goals and strategies, consistent with sound banking practices, to reduce
discretionary expenses and to improve the Bank’s overall earnings, and shall
contain a description of the operating assumptions that form the basis for major
projected income and expense components.
 
(b)           The written profit plan shall address, at a minimum:
 
 
(i)
Realistic and comprehensive budgets;

 
 

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(ii)
A budget review process to monitor the income and expenses of the Bank to
compare actual figures with budgetary projections;

 
 
(iii)
Identification of major areas in, and means by which, earnings will be improved;

 
 
(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 plan and budget required by this paragraph, the Bank’s
Board 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 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 completed at least
30 days prior to the beginning of the applicable calendar year.
 
(e)           Copies of the plan and budget required by this paragraph shall be
submitted to and approved by the FDIC Regional Director and the Commissioner.

 
 

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LIQUIDITY PLAN
 
14.           (a)           Within 60 days from the effective date of this
ORDER, the Bank shall revise, and implement revisions to, its written
contingency funding plan (“Liquidity Plan”).  At a minimum, the Liquidity Plan
shall be prepared in conformance with the Liquidity Risk Management Guidance
found at FIL-84-2008 and include provisions which address the issues identified
in the Report.
 
(b)           On each Friday that the Bank is open for business, the Bank shall
submit to the FDIC Regional Director and the Commissioner a liquidity analysis
report in a format that is acceptable to the FDIC Regional Director and the
Commissioner until the Board is notified that submission of such report is no
longer warranted.
 
(c)           A copy of the plan required by this paragraph shall be submitted
to and approved by the FDIC Regional Director and the Commissioner.
 
NOTIFICATION TO SHAREHOLDER
 
15.       Following the effective date of this ORDER, the Bank shall send to its
shareholder a copy of this ORDER: (1) in conjunction with the Bank’s next
shareholder communication; or (2) in conjunction with its notice or proxy
statement preceding the Bank’s next shareholder meeting.

 
 

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PROGRESS REPORTS
 
16.              Within 30 days from the end of each calendar quarter following
the effective date of this ORDER, the Bank shall furnish to the FDIC Regional
Director and the Commissioner written progress reports signed by each member of
the Bank’s Board detailing the actions taken to secure compliance with the ORDER
and the results thereof.
 
The effective date of this ORDER shall be upon issuance by the FDIC and the DFI.
 
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 the DFI.
 
Issued Pursuant to Delegated Authority.
 
Dated: January 27, 2011

/s/ M. Anthony Lowe    /s/ Charles A. Vice 
M. Anthony Lowe
 
Charles A. Vice
Regional Director
 
Commissioner
Chicago Regional Office
 
Department of Financial
Federal Deposit Insurance
 
Institutions
Corporation
  
Commonwealth of Kentucky

 
 

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