REGULATORY MATTERS

6 Months Ended

Jun. 30, 2013

Regulatory Matters [Abstract]

Regulatory Capital Requirements under Banking Regulations [Text Block]

2. REGULATORY MATTERS

On January 27, 2011, the Bank entered into a Consent Order with the Federal Deposit Insurance Corporation (“FDIC”) and the Kentucky Department of Financial Institutions (“KDFI”). The 2011 Consent Order required the Bank to achieve a total capital to risk-weighted assets ratio of 12% and a Tier 1 capital to average total assets ratio of 9% by June 30, 2011. The 2011 Consent Order also forbade the Bank from declaring dividends without the prior written approval of the FDIC and KDFI and required the Bank to develop and implement plans to reduce its level of non-performing assets and concentrations of credit in commercial real estate loans, maintain adequate reserves for loan and lease losses, implement procedures to ensure compliance with applicable laws, and take certain other actions. A copy of the Consent Order is included as an exhibit to our Form 8-K filed on January 27, 2011.

In April 2011, the Corporation entered into a formal agreement with the Federal Reserve Bank of St. Louis, which requires the Corporation to obtain regulatory approval before declaring any dividends and to take steps to ensure the Bank complies with the Consent Order. We also may not redeem shares or obtain additional borrowings without prior approval.

On March 9, 2012, the Bank entered into a new Consent Order with the FDIC and KDFI. The 2012 Consent Order requires the Bank to achieve the minimum capital ratios in the 2011 Consent Order by June 30, 2012. The Bank also agreed that if it should be unable to reach the required capital levels by that date, and if directed in writing by the FDIC, then within 30 days the Bank would develop, adopt and implement a written plan to sell or merge itself into another federally insured financial institution. To date, the Bank has not received such a written direction. The 2012 Consent Order includes the substantive provisions of the 2011 Consent Order and requires the Bank to continue to adhere to the plans implemented in response to the 2011 Consent Order. A copy of the March 9, 2012 Consent Order is included as Exhibit 10.8 to our 2011 Annual Report on Form 10-K filed March 30, 2012. At June 30, 2013, the Bank’s Tier 1 capital ratio was 7.27% and the total risk-based capital ratio was 12.36% as compared to the minimum capital ratios as required by the 2011 Consent Order of 9.00% and 12.00%, respectively.

We notified the bank regulatory agencies that we have achieved and maintained the total risk-based capital ratio, but we have yet to achieve the Tier 1 capital ratio. We are continuing to explore our strategic alternatives to achieve and maintain the Tier 1 capital ratio as well as all of the other consent order issues.

The Consent Orders also resulted in the Bank being designated as a "troubled institution," which status prohibits the Bank from accepting, renewing or rolling over brokered deposits, restricts the amount of interest the Bank may pay on deposits, and increases its deposit insurance assessment.

Bank regulatory agencies can exercise discretion when an institution does not meet the terms of a regulatory order. The agencies may initiate changes in management, issue mandatory directives, impose monetary penalties or refrain from formal sanctions, depending on individual circumstances. Any material failures to comply with our regulatory orders would likely result in more stringent enforcement actions by the bank regulatory agencies, which could damage our reputation and have a material adverse effect on our business.

The 2012 Consent Order and the formal agreement will remain in effect until modified or terminated by the FDIC, KDFI and Federal Reserve Bank of St. Louis.

In response to the 2011 Consent Order, we engaged an investment banking firm with expertise in the financial services sector to assist with a review of all of our strategic alternatives as we work to achieve the higher required capital ratios. One of these alternatives was to sell branches located outside of our core market. On July 6, 2012, we sold our four banking centers in Southern Indiana, receiving a 3.65% premium on the $102.3 million of consumer and commercial deposits at closing. The buyer assumed a total of approximately $115.4 million in non-brokered deposits, which included $13.1 million of government, corporate, other financial institution and municipal deposits for which we received no premium or discount. We also sold approximately $30.4 million in performing loans at a discount of 0.80%. Other assets sold included vault cash of $367,000 and fixed assets of $887,000. The Indiana branch sale resulted in a gain of $3.1 million.

In addition to the sale of our Indiana branches, we also sold commercial real estate loans totaling $10.7 million at par during 2012.

Our plans for 2013 include the following even though there can be no assurances that our plans will be achieved:

⋅ Continuing to identify and evaluate available strategic options to meet regulatory capital levels and all other requirements of our Consent Order.

⋅ Continuing to serve our community banking customers and operate the Corporation and the Bank in a safe and sound manner. We have worked diligently to maintain the strength of our retail and deposit franchise.

⋅ Continuing to reduce expenses and improve our ability to operate in a profitable manner.

⋅ Continuing to reduce our lending concentration in commercial real estate through expected maturities and repayments.

⋅ Enhancing our resources dedicated to special asset dispositions, both on a permanent and temporary basis, to accelerate our efforts to dispose of problem assets.

⋅ Reducing our inventory of other real estate owned properties.