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SARC-2001-01 (May 22, 2001)

At its meeting held on May 1, 2001, the Supervision Appeals Review Committee (“Committee”) of the Federal Deposit Insurance Corporation (“�౦��Ϸ����”) considered the appeal filed by [Bank] (“Bank”). In its appeal the Bank contested certain material supervisory determinations contained in the safety and soundness examination dated October 2, 2000 (the “Report”) jointly prepared by the �౦��Ϸ���� and the Financial Institutions Division, Regulation and Licensing Department, State of New Mexico.

After carefully considering the issues raised in your appeal, the Committee has determined that the component and composite Uniform Financial Institution Ratings assigned at the examination were appropriate, as further discussed below. In addition, William J. Verant, Director of the New Mexico Financial Institutions Division, was provided with a copy of your letter of appeal. Director Verant has advised the �౦��Ϸ���� that the State concurs with the ratings and overall findings contained in the Report.

The Committee shares your concern that the unusually long period of time it has taken to examine your institution may inhibit or undercut the intended constructive nature of  the examination process. It is the �౦��Ϸ����’s goal that the examination process be as efficient as possible for financial institution management. It is the �౦��Ϸ����’s intent to minimize the amount of time that the examination staff spends at each financial institution, relative to the size and complexity of the institution under examination. The Division of Supervision’s recently appointed Dallas Regional Director, John F. Carter, will be contacting you in the near future to arrange a meeting to discuss this process with you.

As required by the Guidelines for Appeals of Material Supervisory Determinations, the reasons for the Committee’s decision are presented below.

Discussion

Management Rating
Several management weaknesses were noted in the Report. These included but are not limited to, a potential conflict of interest involving the chairman of the board, the improper transfer of a deferred tax asset from the Bank’s holding company to the Bank’s wholly owned subsidiary, an uncorrected violation of law, and deficiencies in electronic banking activities and internal routines and controls. Management oversight is still considered in need of improvement, and management should establish a stronger control environment. These weaknesses and others noted in the Report, resulted in assignment of a component rating of “3” for management.

Earnings Rating
Earnings are satisfactory. Despite the decline in average assets that resulted primarily from the transfer of other real estate owned, the Bank’s net income after taxes divided by average assets as of June 30, 2000, was less than peer levels. In addition, the Bank is reliant on a nontraditional income source, namely the income from the Bank’s subsidiary. To meet the definition of a “1” rating, earnings performance should be “strong” and generally “well above peer group averages.” Although the Bank’s earnings are improving, the Bank’s June 30, 2000, earnings performance warrants a “2” rating.

Sensitivity to Market Risk Rating
The Bank is exposed to moderate market risk exposure. Mortgage-backed securities, comprising 39 percent of total assets, contain embedded option risk which expose the Bank to greater than normal interest rate risk. The Bank’s exposure to commodity price risk has increased given the sustained regional drought conditions and low commodity prices. The “2” rating for sensitivity to market risk is supported.

Asset Quality Rating
The Committee acknowledges improvement in asset quality, as reflected in the upgrade of the Bank’s asset quality rating from a “3” at the last examination to a “2” at this examination. However, asset quality cannot yet be described as strong. The volume of adversely classified assets is moderate at 37.51 percent of Tier 1 capital plus the allowance for loan and lease losses. In addition, the Report refers to situations that are reducing the loan demand and, as a result, the Bank has extended credit to borrowers outside of its area. These loan relationships will likely present new monitoring and other challenges. The Risk profile of the Bank’s assets is considered satisfactory and warrants a component rating of “2.”

Composite Rating
The Report describes the asset portfolio as having a moderate level of risk; earnings performance that is not strong, albeit satisfactory, as of the examination date; a moderate sensitivity to market risk; and several less than satisfactory management practices. Given the foregoing, the Report findings comport with the definition of a composite “2.”

Summary
In accordance with Guidelines for Appeals of Material Supervisory Determinations, the scope of this review was limited to the facts and circumstances as they existed at the time of the examination; no consideration was given to any facts or circumstances that occurred after that date or to any subsequent corrective action.

The decision is considered a final supervisory decision of the Federal Deposit Insurance Corporation.

By direction of the Supervision Appeals Review Committee of the Federal Deposit Insurance Corporation.