Unassociated Document


    
       

      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.


      
        
           


        

        
           


          
            

          

        

        
           


        

      

       

      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:


      
        
           


        

        
           


          
            

          

        

        
           


        

      

       

      
        	
              	
                (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.


      
        
           


        

        
           


          
            

          

        

        
           


        

      

       

      (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;

              


      


      
        
           


        

        
           


          
            

          

        

        
           


        

      

       

      
        	
                 
      

              	
                (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.


      
        
           


        

        
           


          
            

          

        

        
           


        

      

       

      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.


      
        
           


        

        
           


          
            

          

        

        
           


        

      

       

      (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.


      
        
           


        

        
           


          
            

          

        

        
           


        

      

       

      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.


      
        
           


        

        
           


          
            

          

        

        
           


        

      

       

      (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;

              


      


      
        
           


        

        
           


          
            

          

        

        
           


        

      

       

      
        	
                 
      

              	
                (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.


      
        
           


        

        
           


          
            

          

        

        
           


        

      

       

      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;


      
        
           


        

        
           


          
            

          

        

        
           


        

      

       

      (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.


      
        
           


        

        
           


          
            

          

        

        
           


        

      

       

      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.

              


      


      
        
           


        

        
           


          
            

          

        

        
           


        

      

       

      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;

              


      


      
        
           


        

        
           


          
            

          

        

        
           


        

      

       

      
        	
                 
      

              	
                (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.


      
        
           


        

        
           


          
            

          

        

        
           


        

      

       

      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.


      
        
           


        

        
           


          
            

          

        

        
           


        

      

       

      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