Federal Deposit
Insurance Corporation

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   [¶11,556] In the Matter of First Alliance Bank and Trust Company, Manchester, New Hampshire, Docket No. 98-066b (9-28-98)

   A cease and desist order was issued, based on findings by the FDIC that it had reason to believe that respondent had engaged in unsafe and unsound practices. (This order was terminated by order of the FDIC dated 8-27-99; see ¶16,240.)

   [.1] Management—Qualifications Specified
   [.2] Loan Loss Reserve—Establishment of or Increase Required
   [.3] Capital—Increase Required
   [.4] Profit Plan—Preparation of Plan Required
   [.5] Funds Management and Liquidity—Preparation or Revision of Funds Management Policy Required
   [.6] Strategic Plan—Preparation of Required
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   [.7] Investments and Investment Policy—Investment Policy Preparation or Revision Required
   [.8] Bank Operations—Internal Routine and Control Procedures— Establish
   [.9] Violations of Law—Correction of Violations Required
   [.10] Year 2000 Plan—Preparation of Required
   [.11] Dividends—Dividends Restricted
   [.12] Shareholders—Disclosure of Cease and Desist Order Required

In the Matter of

FIRST ALLIANCE BANK
and TRUST COMPANY
MANCHESTER, NEW HAMPSHIRE
(Insured State Nonmember Bank)
ORDER TO CEASE
AND DESIST
FDIC-98-066b
   First Alliance Bank and Trust Company, Manchester, New Hampshire ("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 and/or regulations alleged to have been committed by the Bank and of its right to a hearing on such alleged charges under section 8(b)(1) of the Federal Deposit Insurance Act ("Act"), 12 U.S.C. § 1818(b)(1), 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 September 23, 1998, whereby solely for the purpose of this proceeding and without admitting or denying any unsafe or unsound banking practices or violations of law and/or 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 had violated laws and/or regulations. The FDIC, therefore, accepted the CONSENT AGREEMENT and issued the following:

   IT IS HEREBY ORDERED that the Bank and its institution-affiliated parties, as that term is 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/or regulations:
   (a) operating with management whose policies and practices are detrimental to the Bank and jeopardize the safety of its deposits, including, but not limited, policies and practices with respect to Bank Information Systems (as that term is defined in paragraph (i) below);
   (b) engaging in violations of applicable laws and regulations;
   (c) engaging in practices which produce inadequate operating income;
   (d) engaging in policies and practices that deplete the Bank's capital at a hazardous rate and threaten to reduce the Bank's capital position to an unacceptable level;
   (e) failing to provide adequate supervision and direction over the affairs of the Bank to prevent unsafe or unsound practices and violations of law and/or regulations;
   (f) failing to submit Reports of Condition and Income in accordance with prevailing instructions;
   (g) operating with inadequate liquidity;
   (h) operating without proper internal routine and controls and risk management policies and procedures;
   (i) operating with a Board of Directors which has failed to provide adequate supervision and direction to prevent unsafe and unsound practices with respect to the Bank's electronic information systems and other automated systems that are used by the Bank, or upon which the Bank depends for the conduct of its business ("Bank Information Systems"); and
   (j) failing to take appropriate measures to ensure that the Bank Information Systems are able to perform correctly all automated processing operations, including interactions and interdependencies with other {{11-30-98 p.C-4624}}automated systems, involving dates later than December 31, 1999 ("Year 2000 compliant").
   IT IS FURTHER ORDERED that the Bank and its institution-affiliated parties take affirmative action as follows:

   [.1] 1. (a) Within sixty (60) days from the effective date of this ORDER, the Bank shall have and retain qualified management. At a minimum, such management shall include a Chief Executive Officer with proven ability in managing a bank of comparable size. Such person shall be provided the necessary written authority to implement the provisions of this ORDER. The qualifications of Bank management shall be assessed on its ability to:

(i) comply with the requirements of this ORDER;
(ii) ascertain that the Bank Information Systems are fully Year 2000 compliant and are appropriately tested to demonstrate such compliance;
(iii) operate the Bank in a safe and sound manner;
(iv) comply with applicable laws and regulations; and
(v) restore all aspects of the Bank to a safe and sound condition.

(i) identification of both the type and number of officer positions needed to manage and supervise properly 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 each Bank officer and staff member 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 maintenance of the Bank in a safe and sound condition; and
(iv) a plan of action to recruit and hire any additional or replacement personnel with the requisite ability, experience and other qualifications, which the Board of Directors determines are necessary to fill Bank officer or staff member positions consistent with the Board's analysis, evaluation and assessment as provided in paragraphs 1(e)(i) and 1(e)(iii) of this ORDER.

   [.2] 2. (a) The Bank shall maintain its allowance for loan and lease losses ("Reserve") in accordance with the prevailing requirements of the Instructions for the Reports of Condition and Income ("Instructions").
   (b) Prior to the submission of any Report of Condition or Report of Income required to be filed by the Bank after the effective date of this ORDER, the Board of Directors of the Bank shall: (1) review the adequacy of the Bank's Reserve, (2) provide for an adequate Reserve, and (3) accurately report the Reserve in any such Report of Condition and Income. The minutes of the Board meeting at which such review is undertaken shall indicate the results of the review, including any increases in the Reserve, and the basis for determining the amount of allowance provided.

   [.3] 3. (a) (i) The Bank shall continue to maintain its Tier 1 leverage capital ratio at or in excess of eight (8.0) percent of the Bank's total assets as calculated herein while this ORDER is in effect.
(ii) By October 30, 1998, the Bank shall develop a Capital Plan which will be submitted to the Regional Director and the Commissioner for approval. The Capital Plan should address both internal and external sources of capital augmentation, including capital infusions, retention of earnings, restrictions of asset growth and asset sales.
(iii) For 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, 12 C.F.R. Part 325.

(i) the sale of new offerings of common stock or perpetual preferred stock;
(ii) the direct contribution of cash by the directors of the Bank;
(iii) the collection in cash of assets previously charged off;
(iv) any combination of the above means; or
(v) any other means acceptable to the Regional Director and the Commissioner.

   [.4] 4. (a) Within ninety (90) days from the effective date of this ORDER, the Bank shall develop a written profit plan consisting of goals and strategies for improving the earnings of the Bank, which written profit plan shall include, at a minimum:

(i) identification of the major areas in, and means by, which the Board of Directors will seek to improve the Bank's operating performance;
(ii) realistic and comprehensive budgets;
(iii) a budget review process to monitor the income and expenses of the Bank to compare actual figures with budgetary projections; and
(iv) a description of the operating assumptions that form the basis for, and adequately support, major projected income and expense components.

   [.5] 5. (a) Within thirty (30) days from the effective date of this ORDER, the Bank shall develop a written funds management policy which shall include, at a minimum:

(i) the Bank's liquidity needs and plans for insuring that such needs are met on an ongoing basis;
(ii) goals and strategies for managing and/or improving the Bank's interest rate risk exposure;
(iii) monitoring of the interest rate sensitivity of present investments and deposits and projections of the types of investments and deposits to improve such liquidity position; and
(iv) coordination of the Bank's loan, investment, operating, and budget and profit planning policies with the written funds management policy.

   [.6] 6. (a) Within ninety (90) days from the effective date of this ORDER, the Bank shall develop a comprehensive strategic plan which shall address basic business concepts of the Bank's strengths, weaknesses, opportunities, and threats. The plan should also address lines of business and strategies.
   (b) The strategic plan shall be submitted to the Regional Director and the Commissioner for review and comment within ninety (90) days from the effective date of this ORDER. No sooner than thirty (30) days, but under no circumstances more than sixty (60) days after such submission, the Board of Directors shall approve the strategic plan, taking into consideration any regulatory comments, and such approval shall be recorded in the minutes of the Board of Directors. Subsequent material modifications to the strategic plan, i.e. new lines of business, may be made only after giving the Regional Director and the Commissioner written notice of the proposed modification, and after consideration of any responsive comments submitted by the Regional Director and/or the Commissioner within thirty (30) days from their receipt of the notice of proposed modification. No such modification shall become effective until approved by the Board of Directors, and such approval shall be recorded in the minutes of the Board of Directors. The Bank, its directors, officers, and employees shall follow the strategic plan and/or any subsequent modification thereto.

   [.7] 7. Within thirty (30) days from the effective date of this ORDER, the Bank shall review its written investment policy and shall {{11-30-98 p.C-4628}}record the results of such review in the Board of Director's minutes. Thereafter, the Bank, its directors, officers, and employees shall follow the written investment policy and/or any subsequent modification thereto.

   [.8] 8. Within thirty (30) days from the effective date of this ORDER, the Bank shall establish a system of internal controls and risk management practices.
   9. Within thirty (30) days from the effective date of this ORDER, the Bank shall correct all noted deficiencies in the areas of wire transfer, Bank Secrecy Act, electronic banking, and information systems.

   [.9] 10. Within sixty (60) days from the effective date of this ORDER, the Bank shall eliminate and/or correct all violations of law and regulations committed by the Bank as described on pages 36 through 39 of the Examination.
   11. Within thirty (30) days from the effective date of this ORDER, the Bank shall establish and maintain an accurate general ledger system.

   [.10] 12. (a) Within forty-five (45) days from the effective date of this ORDER, the Bank shall develop and adopt a plan which details how the Bank shall assess, renovate, and test all Bank Information Systems to establish that they are fully Year 2000 compliant ("Year 2000 Plan"). At a minimum, the Bank's Year 2000 Plan shall contain provisions to address all of the requirements of this ORDER and shall be in accordance with the Federal Financial Institutions Examination Council's ("FFIEC's") May 5, 1997, Interagency Statement on Year 2000 Project Management Awareness and all other statements and guidelines by the FFIEC regarding Year 2000 readiness and contingency planning ("FFIEC issuances").
   (b) The Year 2000 Plan shall be reviewed and approved by the Bank's Board of Directors prior to adoption, and such review and approval shall be recorded in the minutes of the Bank's Board of Directors meeting. Immediately following the adoption of the Bank's Year 2000 Plan, the Bank shall submit a copy of the plan to the Regional Director and the Commissioner. The Bank's Board of Directors shall consider any comments on the Year 2000 Plan from the FDIC or the Commissioner, and shall amend the Year 2000 Plan as necessary.
   (c) Thereafter, the Bank shall implement the Year 2000 Plan.
   13. No later than sixty (60) days from the effective date of this ORDER, and in accordance with the FFIEC issuances, the Bank shall perform a review of the extent of the Bank's Year 2000 noncompliance and the need for the Bank Information Systems to be fully Year 2000 compliant. In performing this review, the Bank shall consult with: Bank personnel; electronic information systems service providers or providers of services to the Bank that involve embedded microprocessors or telecommunications links; software vendors; other entities with which the Bank regularly exchanges data electronically; and material Bank customers, including loan customers, deposit customers, and capital markets counterparties, and all customers whose own Year 2000 compliance status may pose a risk to the Bank, in accordance with the FFIEC issuances.
   14. Within sixty (60) days of the effective date of this ORDER, the Bank shall develop a written assessment of the extent of the actual and potential Year 2000 problems that are posed by the Bank Information Systems. The Bank shall amend its Year 2000 Plan as appropriate based on this written assessment. The Bank's written assessment shall be reviewed and approved by the Bank's Board of Directors, and such review and approval shall be recorded in the minutes of the Bank's Board of Directors meeting. Immediately thereafter, a copy of such written assessment and the amended Year 2000 Plan shall be provided to the Regional Director and to the Commissioner. Such assessment shall:

(a) Identify all information systems hardware, operating systems software, application software, data files, automated teller machines, telecommunications technologies, environmental systems, and other automated systems that are used by the Bank;
(b) Identify all interdependencies between the Bank Information Systems and those of its service providers, software vendors, other entities with which the Bank regularly exchanges data electronically, and material Bank customers;
(c) Conduct due diligence of the Bank's service providers, any service provider that is used by the Bank's service providers, and software vendors, in accordance with the FFIEC issuances, to determine such service provider's or software vendor's awareness of, and ability to correct, any Year 2000 compliance problems;
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(d) Evaluate the effect of implementation of the Year 2000 Plan on data exchange between the Bank and its service providers and other entities with which the Bank regularly exchanges data;
(e) Establish priorities for renovation, validation, and implementation of Bank Information Systems which are most critical to the Bank's operations, as discussed in the FFIEC issuances ("Internal Mission Critical Systems");
(f) Identify the resources that will be needed to correct any Year 2000 problems that are identified in the Bank Information Systems, and establish a budget and time frames for correcting such problems;
(g) Evaluate the potential Year 2000 problems that mergers & acquisitions, major systems development, and corporate alliances may have on existing Bank Information Systems and the potential Year 2000 compliance issues that may arise from acquired systems; and
(h) Address each of the potential Year 2000 problem issues that are identified in the FFIEC issuances.

(i) Testing of all changes to hardware and software that occur in the renovation phase of the Bank's Year 2000 Plan;
(ii) Testing of all aspects of interconnectivity and interoperation of the Bank Information Systems with other systems; and
(iii) Determinations by internal and external users that at the completion of the renovation phase of the Bank's Year 2000 Plan, the Internal Mission Critical Systems are fully Year 2000 compliant.

   [.11] 26. The Bank shall not pay or declare any dividends without the prior written consent of the Regional Director and the Commissioner.