Federal Deposit
Insurance Corporation

{{5-31-94 p.C-1651}}
   [¶10,380] In the Matter of Skaneateles Savings Bank, Skaneateles, New York, Docket No. FDIC-91-362b (11-8-91).

   Bank to cease and desist from such unsafe or unsound practices as operating with management whose policies are detrimental to the Bank; failing to provide adequate supervision over the Bank's affairs; failing to provide Bank with adequately trained and knowledgeable officers and staff; operating with inadequate capital; operating with excessive volumes of adversely classified assets; following hazardous lending and lax collection practices; operating with inadequate allowance for loan and lease losses; operating without adequate internal audit function; operating with inadequate routine and controls policies; operating in such a manner as to produce unsatisfactory earnings; operating in violation of applicable laws or regulations; and providing excessive "golden parachute" arrangements for officers. (This order was modified by order of the FDIC dated 7-28-92; see ¶ 15,491. It was terminated by order of the FDIC dated 3-4-94; see ¶ 15,823.)

   [.1] Management—Qualifications—Review
   [.2] Management—CEO Duties
   [.3] Board of Directors—Committee to Evaluate Management
   [.4] Assets—Adversely Classified—Eliminate/Reduce
   [.5] Allowance for Loan and Lease Losses—Establish/Maintain
   [.6] Loans—Extensions of Credit—Existing Borrowers—Curtail
   [.7] Assets—Problem Assets—Individual Written Plans
   [.8] Board of Directors—Problem Assets Plans—Review
   [.9] Lending and Collection Policy—Minimum Requirements
   [.10] Technical Exceptions—Eliminate/Correct
   [.11] Violations of Law—Eliminate/Correct
   [.12] Capital—Tier 1 Capital—Increase/Maintain—Methods
   [.13] Dividends—Restricted
   [.14] Compensation—Executives—"Golden Parachutes"
   [.15] Strategic Plan—Minimum Requirements
   [.16] Audit—Internal—Minimum Requirements
   [.17] Bank Operations—Internal Routine and Controls—Written Policy Required
   [.18] Board of Directors—Committee to Review Compliance with Cease and Desist Order
   [.19] Shareholders—Disclosure—Cease and Desist Order
   [.20] Compliance Reports—Frequency

In the Matter of

SKANEATELES SAVINGS BANK
SKANEATELES, NEW YORK
(Insured State Nonmember Bank)
ORDER TO CEASE AND DESIST

   Skaneateles Savings Bank, Skaneateles, New York ("Bank"), having been advised of its right to a Notice of Charges and of {{5-31-94 p.C-1652}}Hearing detailing the unsafe or unsound banking practices and violations of law and regulations alleged to have been committed by the Bank and of its right to a hearing on such alleged charges under section 8(b) of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. § 1818(b), and having waived those rights, entered into a STIPULATION AND CONSENT TO THE ISSUANCE OF AN ORDER TO CEASE AND DESIST ("CONSENT AGREEMENT") with counsel for the Federal Deposit Insurance Corporation ("FDIC"), dated November 8, 1991, whereby, solely for the purpose of this proceeding and without admitting or denying the alleged charges of unsafe or unsound banking practices and violations of law and regulations, the Bank consented to the issuance of an ORDER TO CEASE AND DESIST ("ORDER") by the FDIC.
   The FDIC considered the matter and determined that it had reason to believe that the Bank had engaged in unsafe or unsound banking practices and violations of law and regulations. The FDIC, therefore, accepted the CONSENT AGREEMENT and issued the following:

   IT IS HEREBY ORDERED, that Skaneateles Savings Bank, Skaneateles, New York, its successors, assigns, directors, officers, employees, agents, and other "institution affiliated parties", as defined in Section 3(u) of the Act, 12 U.S.C. § 1813(u), CEASE AND DESIST from the following unsafe or unsound banking practices and violations of law and regulations:

   (a) Operating the Bank with management whose policies and practices are detrimental to the Bank and jeopardize the safety of its deposits;
   (b) Operating the Bank without adequate supervision and direction of the operating management of the Bank by the board of directors;
   (c) Failing to provide the Bank with an adequately trained and knowledgeable officer and employee staff;
   (d) Operating the Bank with a level of Tier 1 capital which is inadequate in relation to the kind and quality of its assets;
   (e) Operating the Bank with an excessive level of adversely classified assets;
   (f) Engaging in hazardous lending and lax collection practices;
   (g) Failing to provide an adequate allowance for loan and lease losses;
   (h) Failing to provide the Bank with an adequate internal audit function;
   (i) Operating the Bank without establishing and following acceptable internal routine and controls and audit procedures;
   (j) Operating the Bank in such a manner as to produce unsatisfactory earnings;
   (k) Engaging in violations of applicable laws and regulations as more fully set forth on pages 6-a through 6-a-3 of the Report of Examination of the Bank by the FDIC as of March 4, 1991, and on pages 10 through 10(3) of the Report of Examination of the Bank by the New York State Department of Banking as of February 28, 1991; and
   (l) Entering into agreements with executive officers which provide for excessive "golden parachute payments," as defined in section 18(k)(4) of the Act, 12 U.S.C. § 1828(k)(4), by the Bank.

   [.1] 1. The Bank shall have and retain sufficient qualified management and qualified staff. Each member of management and of staff shall have qualifications and experience commensurate with his or her duties and responsibilities at the Bank. The qualifications and sufficiency of management and of staff shall be assessed on their ability, commensurate with their duties and responsibilities, to:

   (a) comply with the requirements of this ORDER;
   (b) operate the Bank in a safe and sound manner;
   (c) comply with applicable laws and regulations; and
   (d) restore all aspects of the Bank to a safe and sound condition, including capital adequacy, asset quality, management effectiveness, earnings and liquidity.

   [.3] 3. (a) To facilitate having and retaining qualified management, the Bank's board of directors shall, within 15 days from the effective date of this ORDER, appoint a committee with at least three members (the "Committee"), the majority of whom are directors who are not now and have never been involved in the daily operations of the Bank ("Outside Directors"), and whose composition is acceptable to the Regional Director of the New York Regional Office of the FDIC ("Regional Director") and the Superintendent of Banks ("Superintendent") of the New York State Banking Department ("Department"). The Committee shall, immediately upon being appointed, undertake an in-depth analysis of the Bank's managerial requirements. This analysis shall include a review of the board of directors, its committee structure, senior management, and the overall staffing resources and needs of the Bank. This analysis shall also include a review of the composition, policies, and practices of current management, consideration of whether current management should be changed, and consideration of the terms and conditions under which current management should be continued.
   (b) Within 60 days from the effective date of this ORDER, the Committee shall prepare and present to the board of directors of the Bank a written report of its findings and recommendations. The board of directors of the Bank shall review the Committee's report and evaluate its current management in light of such report and shall take whatever action is necessary to implement its determinations. A copy of the Committee's report, as well as the board of directors' evaluations, determinations, and implementing actions, shall be submitted to the Regional Director and the Superintendent within 90 days from the effective date of this ORDER.
   (c) As part of the in-depth analysis conducted pursuant to paragraphs 3(a) and 3(b) of this ORDER, the Committee shall review the appropriateness of salaries, fees, retainers paid to directors of the Bank and, in the context of, among other things, the Bank's ability to pay and its overall financial condition. The recommendations of the committee shall be evaluated and acted upon by the board of directors to assure full implementation of the new policy.

   [.4] 4. (a) Within 10 days from the effective date of this ORDER, the Bank shall eliminate from its books, by collection, charge-off, or other proper entry, all assets or portions of assets classified "Loss" and 50 percent of all assets or portions of assets classified "Doubtful" by the FDIC or the Department as a result of their examinations of the Bank as of March 4, 1991, and February 28, 1991, respectively, which have not been previously charged off or collected. In addition, and so long as this ORDER remains in effect, the Bank shall, within 30 days of the receipt of any subsequent Report of Examination of the Bank from the FDIC or the Department, eliminate from its books, by collection, charge-off, or other proper entry, all assets or portions of assets classified "Loss" and 50 percent of all assets or portions of assets classified "Doubtful" in said Reports of Examination. Elimination of these assets through the use of the proceeds of loans or other extensions of credit made by the Bank does not constitute collection for the purposes of this paragraph 4(a).
   (b) Within 180 days from the effective date of this ORDER, the Bank shall re- {{1-31-92 p.C-1654}}duce the remaining total of all assets classified "Doubtful" and "Substandard" by the FDIC or the Department as a result of their examinations of the Bank as of March 4, 1991, and February 28, 1991, respectively, to not more than 80 percent of total equity capital and reserves and, subsequently, the Bank shall reduce the total of such assets to not more than 70 percent of total equity capital and reserves within 360 days from the effective date of this ORDER.
   (c) The requirements of paragraph 4(b) of this ORDER shall not be construed as a standard for future operations of the Bank. In addition to accomplishing the foregoing schedule of reductions, the Bank shall eventually reduce all adversely classified assets of the Bank.
   (d) As used in paragraphs 4(b) and 4(c) of this ORDER, the word "reduce" means (1) to collect, (2) to charge off or eliminate by other proper entry, or (3) to improve the quality of adversely classified assets sufficiently to warrant removing any adverse classification, as determined by the FDIC and the Department. Reduction of these assets through the use of the proceeds of loans or other extensions of credit made by the Bank does not constitute collection for the purposes of paragraphs 4(b) and 4(c) of this ORDER.

   [.5] 5. (a) Within 30 days from the effective date of this ORDER, the Bank's board of directors shall adopt a method of computing the balance of the Bank's allowance for loan and lease losses that gives consideration to the volume and composition of the loan portfolio not subject to criticism, as well as to the volume and composition of assets which are subject to criticism, whether by any bank regulatory agency or by the Bank as a result of its internal review of assets. Thereafter, the Bank's board of directors shall, during the first month of each quarter, reevaluate the allowance for loan and lease losses and make such additional provisions for loan and lease losses that are, in the judgment of the board, necessary to maintain the allowance at an adequate level relative to the volume of risk of the Bank's loan portfolio. All such additional provisions for loan and lease losses shall be made in the first month of the calendar quarter in which the deficiency in the allowance is identified, but as of the end of the preceding calendar quarter, and shall be reflected in the Report of Condition and the Report of Income filed in the calendar quarter in which the deficiency in the allowance is identified. The minutes of the board of directors of the Bank shall reflect that such reevaluation has been performed, and documentary proof of the method employed in determining the level of the allowance shall be maintained for future regulatory review.
   (b) All increases in the allowance for loan and lease losses, with the exception of recoveries credited directly to the allowance, shall be accomplished by charges to operating earnings through the provision for loan and lease losses.

   [.6] 6. (a) Immediately upon the effective date of this ORDER, and notwithstanding any other provision of this ORDER, the Bank shall not extend, either directly or indirectly, any new or additional credit (which, for the purposes of this ORDER, shall include the granting of renewals or extensions, or the capitalizing of accrued interest) to, or for the benefit of, any borrower who is obligated in any manner to the Bank on any extension of credit, or portion thereof, which has been charged off the books of the Bank in whole or in part, or to any affiliate or related interest of, or other person or entity associated with, any such borrower, so long as any portion of such extension of credit, whether or not that portion was charged off, remains uncollected. The provisions of this paragraph 6(a) shall not apply to the advance of funds by the Bank:

   (i) when such advance is required by an outstanding order issued by a court of competent jurisdiction prior to the effective date of this ORDER; or
   (ii) for the sole purpose of maintaining or protecting the Bank's real estate collateral for any extension of credit, up to a maximum amount of $50,000 in the aggregate for all such advances, with respect to each real estate property securing, in whole or in part, all such extensions of credit; or
   (iii) in connection with any extension of credit subject to paragraph 6(a)(ii) of this ORDER which is presently in a workout situation, where the Bank determines that it will have to exceed the $50,000 limit set forth in paragraph 6(a)(ii) of this ORDER during the life
{{1-31-92 p.C-1655}}of this ORDER; provided that, prior to the effective date of this ORDER, the Bank submits to the Regional Director and the Superintendent a written list of and a discussion of the circumstances surrounding each such extension of credit; and, provided further, the Bank subsequently supplies whatever further information the Regional Director or the Superintendent may request, and both the Regional Director and the Superintendent, whether prior or subsequent to the effective date of this ORDER, issue written statements of nonobjection, which may, at their discretion, specify the extent to which any such advance of funds may exceed $50,000. The Bank shall be bound by the lesser of whichever amount, if any, is specified by the Regional Director and/or the Superintendent.

   (i) the Bank's failure to extend further credit to a classified borrower would be substantially detrimental to the best interests of the Bank;
   (ii) a comparison with the written program adopted pursuant to paragraph 7 of this ORDER shows that the Bank's formal program to eliminate the basis of criticism of said criticized asset is not compromised; and
   (iii) prior to extending any credit, a majority of the Bank's full board of directors approves the extension of credit and certifies, in writing, the specific reasons why failure to so act would be substantially detrimental to the best interests of the Bank. A copy of the board of director's certification shall be maintained in the credit file of the classified borrower, and shall also be submitted promptly to the Regional Director and the Superintendent.

   (a) has been adversely classified or listed for Special Mention by the FDIC or the Department as a result of their examinations of the Bank as of March 4, 1991, and February 28, 1991, respectively, or is adversely classified or listed for Special Mention by either the FDIC or the Department as a result of any subsequent examination of the Bank; or
   (b) has been accorded a sub-investment quality rating and/or has been designated a work-out or watch list asset, or some equivalent designation, as the result of an internal asset review and rating procedure performed by the Bank or by another party on behalf of the Bank; or
   (c) is past due in excess of 120 days and/or has been placed in either a nonaccrual or nonearning status by the Bank; or
   (d) has been partially charged off.

   [.8] 8. (a) The Bank's board of directors shall conduct a review of each program adopted pursuant to paragraph 7 of this ORDER at least once in each month, to determine:

   (i) the status of each problem item;
   (ii) management's adherence to each written program;
   (iii) the status and effectiveness of each written program; and
   (iv) the need to revise each written program and/or take other actions.

   [.9] 9. Within 60 days from the effective date of this ORDER, the Bank's board of directors shall revise, adopt, and implement written lending and collection policies and procedures to provide effective guidance and control over the lending function of the Bank. Upon adoption by the board of the revised policies, a copy of each such policy shall be provided to the Regional Director and the Superintendent. At a minimum, the policies shall include the following:

   (a) Standards for all applications for credit which shall include, at a minimum:

   (i) financial statement requirements;
   (ii) credit analysis requirements;
   (iii) loan purpose statement requirements;
   (iv) identification of repayment sources (primary and secondary);
   (v) realistic repayment plan requirements;
   (vi) collateral requirements; and
   (vii) documentation requirements.

   (b) Effective loan administration, servicing and collection procedures including, at a minimum:

   (i) establishing lending limits for specific officers and loan amounts requiring board of directors' approval;
   (ii) establishing appropriate control and periodic review of collateral;
   (iii) setting forth requirements for maintaining current information, including financial data, in credit files;
   (iv) establishing appraisal and inspection standards, and guidelines for performing reappraisals and reinspections;
   (v) standardizing follow-up procedures on maturing and delinquent loans;
   (vi) ensuring that delinquencies are accurately reported to the board of directors on a monthly basis; and
   (vii) prohibiting the capitalization of interest.

   (c) A loan review system which will effectively identify, categorize, and report problem credits to the board of directors. Such reports shall, at a minimum, include the following information:

   (i) the overall quality of the loan portfolio;
   (ii) the identification, type and amount of problem loans;
   (iii) the identification and amount of delinquent loans;
   (iv) credit and collateral documentation exceptions; and
   (v) the identification and status of violations of law or regulations.

   [.10] 10. Within 60 days from the effective date of this ORDER, the Bank shall take all necessary steps, which it shall document, to eliminate and/or correct all technical exceptions on loans and leases noted on pages 2-b through 2-b-2 of the FDIC's Report of Examination of the Bank as of March 4, 1991 and on supplemental pages 5 through 5(3) of the Department's Report of Examination of the Bank as of February 28, 1991.

   [.11] 11. Within 30 days from the effective date of this ORDER, the Bank shall eliminate and/or correct all violations of law and regulations, as described on pages 6-a through 6-a-3 of the FDIC's Report of Examination of the Bank as of March 4, 1991, and pages 10 through 10(3) of the Depart- {{1-31-92 p.C-1657}}ment's Report of Examination of the Bank as of February 28, 1991. In addition, within 30 days from the effective date of this ORDER, the board of directors of the Bank shall adopt and implement specific procedures to ensure future compliance with all applicable laws and regulations. Such procedures shall include, but not be limited to, the designation of a qualified compliance officer, who shall be responsible for making the Bank aware, on a continuing basis, of all applicable laws and regulations, and for ensuring compliance therewith. A copy of these procedures shall be forwarded to the Regional Director and the Superintendent.

   [.12] 12. (a) Within 60 days from the effective date of this ORDER, the board of directors of the Bank shall achieve and thereafter maintain a ratio of Tier 1 capital to total assets of not less than 5.5 percent. For the purposes of this ORDER, the terms "Tier 1 capital" and "total assets" shall have the meanings ascribed to them in Part 325 of the FDIC's Rules and Regulations, respectively subsections 325.2(m) and (n), 56 Fed. Reg. 10,154, 10,161 (1991) (to be codified at 12 C.F.R. §§ 325.2(m) and (n)). Such increase in Tier 1 capital necessary to achieve and maintain the ratio required by this paragraph may accomplished by:


   (i) the sale of securities in the form of new common stock; or
   (ii) the direct contribution of cash by the shareholders and/or directors of the Bank; or
   (iii) any combination of the above, or alternative means acceptable to the FDIC.

   (b) If all or part of the increase in Tier 1 capital required by paragraph 12(a) of this ORDER is accomplished by the sale of new securities, the board of directors of the Bank shall forthwith adopt and implement a plan for the sale of such additional securities, including the voting of any shares owned or proxies controlled by them in favor of the plan. Should the implementation of the plan involve a public distribution of Bank securities (including a distribution limited only to the Bank's existing shareholders), the Bank shall prepare 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 any other material disclosures necessary to comply with State and 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 plan and any materials used in the sale of the securities shall be submitted to the FDIC, Registration and Disclosure Section, Washington, D.C. 20429, and to the Department for review. Any changes requested to be made in the plan or materials by the FDIC or the Department shall be made prior to their dissemination.
   (c) In complying with the provisions of paragraph 12(b) of this ORDER, written notice shall be provided by the Bank to any subscriber and/or purchaser of Bank securities detailing any planned or existing development or other change which is 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 from the date such material development or change was planned or occurred, whichever is earlier, and shall be furnished to every purchaser and/or subscriber of Bank securities who received or was tendered the information contained in the Bank's original offering materials.

   [.13] 13. While this ORDER is in effect, the Bank shall not declare or pay, either directly or indirectly, any dividends, whether in cash, stock, or otherwise, on its common stock, without the prior written consent of the Regional Director and the Superintendent.

   [.14] 14. Immediately upon the effective date of this ORDER, the Bank shall: (a) rescind all agreements or portions of agreements with present and former executive officers of the Bank which constitute "golden parachute payments" as defined in section 18(k)(4) of the Act, 12 U.S.C. § 1828(k)(4); (b) immediately cease making any payments pursuant thereto; and (c) forthwith take whatever legal steps are necessary to obtain reimbursement from all former executive officers of the Bank for any such payments which have already been made to them pursuant to such agreements or portions thereof.

   [.15] 15. (a) Within 90 days from the effective date of this ORDER, the board of
{{1-31-92 p.C-1658}}directors of the Bank shall submit to the Regional Director and the Superintendent a strategic plan ("Plan") for the Bank covering at least a three year period. At a minimum, the Plan shall establish objectives for the Bank's earnings performance, growth, balance sheet mix, liability structure, capital adequacy and reduction in the volume of nonperforming and underperforming assets, together with strategies for achieving those objectives. The Plan shall also identify capital, funding, managerial, and other resources needed to accomplish its objectives.
   (b) The Bank shall submit, in conjunction with the Plan submitted pursuant to paragraph 15(a) of this ORDER, financial projections for a period covering at least two years. Additionally, by the thirtieth day of each subsequent calendar quarter, the Bank shall provide to the Regional Director and the Superintendent a detailed analysis of the extent to which the Bank has achieved the submitted projections and the reasons therefor, together with appropriate supporting documentation. By January 31st of each year, while this ORDER remains in effect, the Bank shall submit updated financial projections for the ensuing two year period.
   (c) Upon receipt of written approval or a statement of nonobjection from the Regional Director and the Superintendent, the Plan submitted pursuant to paragraph 15(a) of this ORDER shall be forthwith adopted and implemented by the Bank's board of directors.

   [.16] 16. Within 60 days from the effective date of this ORDER, the Bank's board of directors shall revise, adopt and implement a comprehensive and continuous internal audit program. This audit program shall include, but not be limited to: (i) appointment of a full time, independent internal auditor, who shall report directly to the Bank's board of directors; (ii) employment of an adequately trained support staff; (iii) submission of periodic reports to the board of directors; (iv) a review of conformance with the Bank's operating policies and procedures; and (vi) an analysis of the Bank's records, systems, audit controls and internal routine and controls. The Bank shall forth-with implement any and all recommendations made as a result of any previous or future internal audit program.

   [.17] 17. Within 60 days from the effective date of this ORDER, the Bank's board of directors shall revise, adopt, and implement written policies and procedures to provide effective guidance and control over the internal routine and controls of the Bank, in accordance with safe and sound banking practices. Among other provisions, the revised policies and procedures shall specifically provide for correction of all internal routine and control deficiencies cited on pages 6-b through 6-b-5 of the FDIC Report of Examination and pages 16 through 16(3) of the Department's Report of Examination of the Bank as of March 4, 1991, and February 28, 1991, respectively. Upon adoption by the board of the revised policies and procedures, a copy of each such policy and procedure shall be provided to the Regional Director and the Superintendent.

   [.18] 18. (a) Within 15 days from the effective date of this order, the Bank's board of directors shall appoint a committee (the "Compliance Committee") with at least three members, the majority of whom are Outside Directors, and whose composition is acceptable to the Regional Director and the Superintendent, to monitor the Bank's compliance with this ORDER. The Committee appointed pursuant to paragraph 3(a) of this ORDER may, at the board's option, also serve as the Compliance Committee.
   (b) Within 30 days from the effective date of this ORDER, and at monthly intervals thereafter, the Compliance Committee shall prepare and present to the Bank's board of directors a written report of its findings, detailing the form, content and manner of any action taken to secure compliance with this ORDER and the results thereof, and any recommendations with respect to such compliance. Such progress reports shall be included in the minutes of the Bank's board of directors.

   [.19] 19. Following the effective date of this ORDER, the Bank shall send to, or otherwise furnish, its shareholders a description of this ORDER (1) in conjunction with the Bank's next shareholder communication and (2) in conjunction with its notice or proxy statement preceding the Bank's next shareholder meeting. The description shall fully describe the ORDER in all material respects. The description and any accompanying communication, statement, or notice shall be sent to the FDIC. Registration and Disclosure Section, Washington, D.C.
{{1-31-92 p.C-1659}}20429, for review at least 20 days prior to dissemination to shareholders. Any changes requested to be made by the FDIC shall be made prior to dissemination of the description, communication, notice or statement.

   [.20] 20. By the fifteenth day of each calendar quarter following the effective date of this ORDER, the Bank shall furnish written progress reports to the Regional Director and the Superintendent detailing the form, content, and manner of any actions taken to secure compliance with this ORDER, and the results thereof. Such reports shall include the progress reports by the Bank's board of directors required pursuant to paragraph 8(b) of this ORDER and the Compliance Committee reports required pursuant to paragraph 18 of this ORDER. Such reports may be discontinued when the corrections required by this ORDER have been accomplished and the Regional Director and the Superintendent have, in writing, released the Bank from making further reports.
   The effective date of this ORDER shall be 10 days from the date of its issuance.
   The provisions of this ORDER shall be binding upon Skaneateles Savings Bank, its successors, assigns, directors, officers, employees, agents, and other institution-affiliated parties.
   The provisions of this ORDER shall remain effective and enforceable except to the extent that, and until such time as, any provisions of this ORDER shall have been modified, terminated, suspended, or set aside by the FDIC.
   Date of Issuance: November 8, 1991.
   Pursuant to delegated authority.