REGULATORY MATTERS

9 Months Ended

Sep. 30, 2013

Regulatory Matters [Abstract]

Regulatory Capital Requirements under Banking Regulations [Text Block]

2. REGULATORY MATTERS

Since January 2011, the Bank has operated under Consent Orders with the Federal Deposit Insurance Corporation (“FDIC”) and the Kentucky Department of Financial Institutions (“KDFI”). The initial 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%. It also prohibited the Bank from declaring dividends without the prior written approval of the FDIC and KDFI and has 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. When the Bank entered into a new Consent Order with the FDIC and KDFI in March 2012, it agreed that should it be unable to reach the required capital levels by June 30, 2012, 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 latest Consent Order also includes the same substantive provisions as the initial Consent Order and requires the Bank to continue to adhere to the plans implemented in response to the initial Consent Order.

Copies of the Consent Orders are included as exhibits to our Form 8–K filed on January 27, 2011 and our 2011 Annual Report on Form 10-K filed March 30, 2012.

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.

At September 30, 2013, the Bank’s Tier 1 capital ratio was 7.80% and the total risk-based capital ratio was 13.09% compared to the minimum 9.00% and 12.00% capital ratios required by the Consent Order. For the fourth consecutive quarter, we have achieved and maintained the total risk-based capital ratio but 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 to comply with all of the other terms of the consent order.

The Bank is currently designated as a "troubled institution” which status prohibits the Bank from accepting, renewing or rolling over brokered deposits and restricts the amount of interest the Bank may pay on deposits. 

Bank regulatory agencies have 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 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.

Management and the Board of Directors have been actively engaged with our investment banking firm in reviewing all of the strategic alternatives. One of these alternatives was to sell branches that were 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.

Our plans for the remainder of 2013 include the following:

· 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.

· Continuing to reduce  our inventory of other real estate owned properties.