Federal Reserve Release, Press Release; image with eagle logo links to home page
Release Date: March 24, 1997

For immediate release

The Federal Reserve Board today announced its approval of the application of First Alamogordo Bancorp of Nevada, Inc., Alamogordo, to merge with First Alamogordo Bancorp, Inc., Alamogordo ("First New Mexico"), and thereby acquire First New Mexico's subsidiary banks, First National Bank of Alamogordo, Alamogordo, and First National Bank of Ruidoso, Ruidoso, all in New Mexico.

Attached is the Board's Order relating to this action.

First Alamogordo Bancorp of Nevada, Inc.
Alamogordo, New Mexico

Order Approving the Formation of a Bank Holding Company

First Alamogordo Bancorp of Nevada, Inc., Alamogordo ("First Nevada" or "Applicant"), has requested the Board's approval under section 3 of the Bank Holding Company Act ("BHC Act") (12 U.S.C. § 1842) to become a bank holding company by merging with First Alamogordo Bancorp, Inc., Alamogordo ("First New Mexico"), and thereby acquiring its subsidiary banks, First National Bank of Alamogordo, Alamogordo, and First National Bank of Ruidoso, Ruidoso, all in New Mexico.

Notice of the proposal, affording interested persons an opportunity to submit comments, has been published (61 Federal Register 67,833 (1996)). The time for filing comments has expired, and the Board has considered the proposal and all comments received in light of the factors set forth in section 3 of the BHC Act.

First Nevada is a nonoperating company formed to acquire First New Mexico in a corporate reorganization, whereby First New Mexico would be reincorporated in the state of Nevada. First New Mexico is the 14th largest commercial banking organization in New Mexico, controlling $147 million in deposits, representing approximately 1 percent of total deposits in commercial banking organizations in the state.1 The proposal would not result in the acquisition of any additional banking assets. Based on all the facts of record, the Board concludes that the proposal would not have any significantly adverse effects on competition or on the concentration of banking resources in any relevant banking market.

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The BHC Act also requires the Board to consider the financial and managerial resources and future prospects of the companies and banks involved in a proposal, and certain other supervisory factors. The Board has carefully considered these factors in light of all the facts of record, including comments from certain minority shareholders of First New Mexico ("Protestants") objecting to the proposal. Under the proposal, all minority shareholders' interests in First New Mexico, including Protestants' 24.4 percent shareholding interest, would be redeemed for cash.2

Protestants contend that management of First New Mexico has underestimated the cost of "cashing out" the minority shareholders and that the proposal would have a negative impact on the financial resources of the institutions involved. The Board has carefully reviewed all the financial information provided by Applicant and Protestants regarding the proposal, including formal appraisals, evidence of prior sales, the affidavit of a banking consultant, and the assessment of the financial resources of the institutions made in confidential reports of examination by their primary federal supervisors. Under the proposal submitted by Applicant, the projected financial condition of First Nevada and its subsidiary banks and the projected debt-service obligation of First Nevada are reasonable and consistent with the Board's guidelines.3 Based on all the facts of record, and subject to the condition that First Nevada not exceed certain limitations that are designed to ensure that the bank holding company and its subsidiary banks continue to be strongly capitalized after the shares of the minority shareholders are redeemed, the Board concludes that financial considerations are consistent with approval.

Protestants allege that First New Mexico's directors have refused to pay dividends to shareholders since its formation in 1982, despite the profitable performance of the bank holding company's subsidiary banks. In addition, Protestants assert that First New Mexico's directors, who also serve as directors of First New Mexico's subsidiary banks, are paid fees that are significantly higher than fees paid at institutions with comparable operations.4 Applicant responds that New Mexico corporate law gives directors broad discretion to decide whether to declare dividends, that retained earnings have been used to improve and expand facilities and pay existing debts, and that the fees paid do not violate any federal banking law. Applicant also contends that the directors of First New Mexico's subsidiary banks meet frequently and perform the functions as a committee that are normally performed by a chief executive officer.

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Protestants also maintain that actions by management in connection with the preparation of the proposal and its presentation to shareholders and the Board raise adverse managerial considerations. For example, Protestants allege that proxy materials relating to the proposal are insufficient and misleading and do not disclose Protestants' pending action in state court challenging the actions of management.5 The Board has provided a copy of Protestants' comments to New Mexico state securities regulators for their review and consideration.6 The Board also notes that Protestants intend to pursue their pending legal action against management, and that the court in their case has the authority to provide Protestants with an adequate remedy if their allegations can be substantiated.7

Finally, Protestants contend that the proposed merger serves no legitimate business purpose and is only designed to eliminate the minority shareholders. Protestants maintain that the management of First New Mexico has a special responsibility to deal fairly with minority shareholders, and that the elimination of minority shareholders under the circumstances in this case violates this responsibility. As noted above, Protestants also consider the offering price for their shares to be inadequate. Applicant responds that the proposal would enable the company to operate more efficiently and with greater certainty under Nevada law and thereby increase its profitability. Applicant also notes that New Mexico law permits dissenting shareholders the opportunity to have a state court establish the fair value of their shares.8

The BHC Act requires the Board to consider the affect of a proposed transaction on the institutions involved by taking into account specific considerations.9 The Board has carefully considered Protestants' comments and all other facts of record, including the responses by Applicant and the reports of examination by the institutions' primary federal supervisors. The facts of record indicate that First New Mexico and its subsidiary banks have long records of being operated by current management in a safe and sound manner and support a finding that managerial resources are satisfactory. Many of Protestants' specific allegations do not relate to the operations of the banking organizations but rather to Protestants' contention that they have been denied a fair return on their investment in the past and would not receive the fair value of their investment under the proposal.10

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Disputes between shareholders and management regarding the value of shares, the adequacy of dividends paid to shareholders, and the sufficiency of disclosures to shareholders are matters of state and federal securities law and state corporate law. Many of these issues already have been raised in a pending legal action by Protestants before a court with the authority to provide them with adequate relief. As previously noted, moreover, the supervisory record of First New Mexico and its subsidiary banks indicates that managerial operations have been and are satisfactory.

In this light, and based on all the facts of record, the Board concludes that the managerial resources and future prospects of the institutions involved, and other supervisory factors, are consistent with approval. The Board also concludes that considerations relating to the convenience and needs of the community are consistent with approval.

Based on the foregoing and all the facts of record, the Board has determined that the application should be, and hereby is, approved. The Board's approval is expressly conditioned on compliance with all the commitments made by First Nevada in connection with this application and the conditions referenced in this order. The commitments and conditions relied on by the Board in reaching this decision are deemed to be conditions imposed in writing by the Board in connection with its findings and decision, and, as such, may be enforced in proceedings under applicable law.

This transaction shall not be consummated before the fifteenth calendar day following the effective date of this order or later than three months after the effective date of this order, unless such period is extended for good cause by the Board or by the Federal Reserve Bank of Dallas, acting pursuant to delegated authority.

By order of the Board of Governors,11 effective March 24, 1997.

(signed) Jennifer J. Johnson

Jennifer J. Johnson

Deputy Secretary of the Board

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1 Deposit data are as of June 30, 1996, and have been adjusted to reflect mergers and acquisitions since that date.

2 The directors and senior officers of First New Mexico currently hold their shares in a voting trust that controls approximately 70 percent of First New Mexico's voting shares and would own all the voting shares of First Nevada on consummation of the proposal. The remaining shareholders of First New Mexico, including Protestants, currently control approximately 30 percent of the shares as minority shareholders.

3 Protestants assert that if Applicant is required to pay the minority shareholders a higher-than-offered value for their shares, which Protestants contend is substantially higher than the price used in Applicant's projections, the proposal could adversely affect the financial condition of First Nevada and its subsidiary banks. The Board has reviewed the application in light of all the share pricing information provided by Protestants and Applicant.

4 Protestants have filed an action in New Mexico state court to recover these fees and have them redistributed to all shareholders as constructive dividends. This action is in its preliminary stages.

5 The court proceedings and Protestants' dispute with management were disclosed in the record of the application. Protestants also allege that the appraisals referred to in the proxy materials did not exist at the time the materials were distributed and have been improperly withheld from shareholders. Applicant denies the allegations, and has disclosed the appraisals in the record of the application. Applicant also contends it was not required to provide shareholders with a copy of the appraisals.

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6 Securities of First New Mexico are not registered with the Securities and Exchange Commission ("SEC"), and the SEC has informally indicated to the Board that it will not address Protestants' allegations.

7 A request by Protestants for a temporary restraining order to postpone the shareholder meeting of First New Mexico was denied by a state court. Protestants indicate that they intend to file an amended complaint contesting the legality of the proxy solicitation and the merger under state law.

8 See N.M. Stat. Ann. §§  53-15-3 and 53-15-4.

9 Western Bancshares, Inc. v. Board of Governors, 480 F.2d 749 (10th Cir. 1973).

10 Protestants argue that the Board has adopted a requirement that the management of a bank holding company deal fairly with its shareholders. Benson Bancshares, Inc., 63 Federal Reserve Bulletin 1009 (1977) ("Benson"). In Benson, the Board did not find that the BHC Act imposed any duties on the management in its relations with shareholders. In that case, the Board considered the manner is which the management priced the shares of minority shareholders, and, although the stock purchases by management were for significantly less than the book value of the stock, the Board found managerial resources to be satisfactory and approved the application. Unlike the minority shareholders in Benson, who appeared to have no means of protecting their interests, Protestants in this case have obtained their own professional valuation for their shares and have the right and the ability under state law to adjudicate the fair value of their shares. In addition, the offering price in this case is supported by two independent appraisals and a prior transaction.

11 Voting for this action: Chairman Greenspan, Vice Chair Rivlin, and Governors Kelley, Phillips, and Meyer.

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