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EX-32 - EXHIBIT 32-2, CFO CERTIFICATION - TRINITY CAPITAL CORPexhibit32-2.htm
EX-32 - EXHIBIT 32-1, CEO CERTIFICATION - TRINITY CAPITAL CORPexhibit32-1.htm
EX-31 - EXHIBIT 31-1, CEO CERTIFICATION - TRINITY CAPITAL CORPexhibit31-1.htm
EX-31 - EXHIBIT 31-2, CFO CERTIFICATION - TRINITY CAPITAL CORPexhibit31-2.htm
 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

 

[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

 

 

for the quarterly period ended September 30, 2009.

 

Or

 

 

 

oTransition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

for the transition period from                                                       to                                                

 

 

 

Commission File Number 000-50266

 

 

 


 

TRINITY CAPITAL CORPORATION

(Exact name of registrant as specified in its charter)

 

New Mexico

 

85-0242376

(State of incorporation)

 

(I.R.S. Employer Identification Number)

 

 

 

1200 Trinity Drive, Los Alamos, New Mexico 87544

(Address of principal executive offices)

 

 

 

(505) 662-5171

Telephone number

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

 

 

Indicate by check mark whether the registrant is a large accelerated filed, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer,” “large accelerated filer” and “Smaller Reporting Company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer  o

Accelerated Filer  [ X ]

 

Non-Accelerated Filer  o

Smaller Reporting Companyo

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act)

o  Yes  [ X ]  No

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 6,440,784 shares of common stock, no par value, outstanding as of November 9, 2009.

 

TRINITY CAPITAL CORPORATION AND SUBSIDIARIES

 

 

 

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

TRINITY CAPITAL CORPORATION & SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

September 30, 2009 and December 31, 2008

(Amounts in thousands, except share data)

 

 

 

September 30,
2009

 

 

 

December 31,
2008

 

 

 

(Unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

17,866

 

 

 

$

18,259

 

Interest-bearing deposits with banks

 

 

163,381

 

 

 

 

6,800

 

Federal funds sold and securities purchased under resell agreements

 

 

487

 

 

 

 

203

 

Cash and cash equivalents

 

 

181,734

 

 

 

 

25,262

 

Investment securities available for sale

 

 

104,536

 

 

 

 

103,007

 

Investment securities held to maturity, at amortized cost (fair value of $9,032 at September 30, 2009 and $9,780 at December 31, 2008)

 

 

8,747

 

 

 

 

8,927

 

Other investments

 

 

7,601

 

 

 

 

5,643

 

Loans (net of allowance for loan losses of $24,878 at September 30, 2009 and $15,230 at December 31, 2008)

 

 

1,204,590

 

 

 

 

1,215,304

 

Loans held for sale

 

 

8,050

 

 

 

 

8,603

 

Premises and equipment, net

 

 

31,730

 

 

 

 

24,406

 

Leased property under capital leases, net

 

 

2,211

 

 

 

 

2,211

 

Accrued interest receivable

 

 

7,016

 

 

 

 

7,889

 

Mortgage servicing rights, net

 

 

7,038

 

 

 

 

5,271

 

Other intangible assets

 

 

559

 

 

 

 

759

 

Other real estate owned

 

 

9,028

 

 

 

 

2,354

 

Other assets

 

 

12,081

 

 

 

 

8,091

 

Total assets

 

$

1,584,921

 

 

 

$

1,417,727

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

Noninterest-bearing

 

$

87,908

 

 

 

$

84,038

 

Interest-bearing

 

 

1,288,040

 

 

 

 

1,167,556

 

Total deposits

 

 

1,375,948

 

 

 

 

1,251,594

 

Short-term borrowings

 

 

20,000

 

 

 

 

 

Long-term borrowings

 

 

13,503

 

 

 

 

23,532

 

Long-term capital lease obligations

 

 

2,211

 

 

 

 

2,211

 

Junior subordinated debt owed to unconsolidated trusts

 

 

37,116

 

 

 

 

37,116

 

Accrued interest payable

 

 

5,399

 

 

 

 

5,821

 

Other liabilities

 

 

4,822

 

 

 

 

6,168

 

Total liabilities

 

 

1,458,999

 

 

 

 

1,326,442

 

 

(Continued on following page)

 

1

 

 

TRINITY CAPITAL CORPORATION & SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

September 30, 2009 and December 31, 2008

(Amounts in thousands, except share data)

(Continued from prior page)

 

 

 

September 30, 2009

 

 

 

December 31, 2008

 

 

 

(Unaudited)

 

 

 

 

 

Stock owned by Employee Stock Ownership Plan (ESOP) participants; 614,982 shares and 602,514 shares at September 30, 2009 and December 31, 2008, respectively, at fair value

 

$

13,837

 

 

 

$

13,105

 

Commitments and contingencies (Note 11)

 

 

 

 

 

 

 

 

 

Stockholders' equity

 

 

 

 

 

 

 

 

 

Preferred stock, no par, authorized 1,000,000 shares

 

 

 

 

 

 

 

 

 

Series A, 5% cumulative perpetual, 35,539 shares issued and outstanding at September 30, 2009, $1,000.00 liquidation value, at amortized cost

 

 

33,545

 

 

 

 

 

Series B, 9% cumulative perpetual, 1,777 shares issued and outstanding at September 30, 2009, $1,000.00 liquidation value, at amortized cost

 

 

2,085

 

 

 

 

 

Common stock, no par, authorized 20,000,000 shares; issued 6,856,800 shares, shares outstanding 6,440,784 and 6,448,548 at September 30, 2009 and December 31, 2008, respectively

 

 

6,836

 

 

 

 

6,836

 

Additional paid-in capital

 

 

1,832

 

 

 

 

1,797

 

Retained earnings

 

 

77,592

 

 

 

 

79,233

 

Accumulated other comprehensive gain

 

 

1,409

 

 

 

 

1,419

 

Total stockholders' equity before treasury stock

 

 

123,299

 

 

 

 

89,285

 

Treasury stock, at cost, 416,016 shares and 408,252 shares at September 30, 2009 and December 31, 2008, respectively

 

 

(11,214

)

 

 

 

(11,105

)

Total stockholders' equity

 

 

112,085

 

 

 

 

78,180

 

Total liabilities and stockholders' equity

 

$

1,584,921

 

 

 

$

1,417,727

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

2

 

 

TRINITY CAPITAL CORPORATION & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

For the Three and Nine Months Ended September 30, 2009 and 2008

(Amounts in thousands except share and per share data)

(Unaudited)

 

 

 

Three Months Ended September 30,

 

 

 

Nine Months Ended September 30,

 

 

 

2009

 

 

 

2008

 

 

 

2009

 

 

 

2008

 

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

17,758

 

 

 

$

19,313

 

 

 

$

55,748

 

 

 

$

59,510

 

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

960

 

 

 

 

597

 

 

 

 

2,104

 

 

 

 

2,274

 

Nontaxable

 

 

280

 

 

 

 

181

 

 

 

 

760

 

 

 

 

572

 

Federal funds sold

 

 

 

 

 

 

20

 

 

 

 

1

 

 

 

 

131

 

Other interest-bearing deposits

 

 

107

 

 

 

 

111

 

 

 

 

193

 

 

 

 

551

 

Investment in unconsolidated trusts

 

 

26

 

 

 

 

22

 

 

 

 

68

 

 

 

 

66

 

Total interest income

 

 

19,131

 

 

 

 

20,244

 

 

 

 

58,874

 

 

 

 

63,104

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

4,953

 

 

 

 

7,428

 

 

 

 

14,886

 

 

 

 

24,479

 

Short-term borrowings

 

 

250

 

 

 

 

62

 

 

 

 

502

 

 

 

 

707

 

Long-term borrowings

 

 

120

 

 

 

 

287

 

 

 

 

644

 

 

 

 

865

 

Long-term capital lease obligations

 

 

67

 

 

 

 

67

 

 

 

 

201

 

 

 

 

201

 

Junior subordinated debt owed to unconsolidated trusts

 

 

689

 

 

 

 

722

 

 

 

 

2,095

 

 

 

 

2,198

 

Total interest expense

 

 

6,079

 

 

 

 

8,566

 

 

 

 

18,328

 

 

 

 

28,450

 

Net interest income

 

 

13,052

 

 

 

 

11,678

 

 

 

 

40,546

 

 

 

 

34,654

 

Provision for loan losses

 

 

4,000

 

 

 

 

1,840

 

 

 

 

20,793

 

 

 

 

4,090

 

Net interest income after provision for loan losses

 

 

9,052

 

 

 

 

9,838

 

 

 

 

19,753

 

 

 

 

30,564

 

Other income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage loan servicing fees

 

 

643

 

 

 

 

607

 

 

 

 

1,865

 

 

 

 

1,838

 

Trust fees

 

 

383

 

 

 

 

270

 

 

 

 

1,088

 

 

 

 

763

 

Loan and other fees

 

 

704

 

 

 

 

668

 

 

 

 

2,023

 

 

 

 

1,957

 

Service charges on deposits

 

 

424

 

 

 

 

438

 

 

 

 

1,284

 

 

 

 

1,301

 

Gain on sale of loans

 

 

1,553

 

 

 

 

356

 

 

 

 

7,048

 

 

 

 

1,722

 

Gain on sale of securities

 

 

208

 

 

 

 

 

 

 

 

942

 

 

 

 

555

 

Title insurance premiums

 

 

256

 

 

 

 

187

 

 

 

 

1,121

 

 

 

 

661

 

Other operating income

 

 

68

 

 

 

 

32

 

 

 

 

323

 

 

 

 

230

 

Total other income

 

 

4,239

 

 

 

 

2,558

 

 

 

 

15,694

 

 

 

 

9,027

 

 

(Continued on following page)

3

 

 

TRINITY CAPITAL CORPORATION & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

For the Three and Nine Months Ended September 30, 2009 and 2008

(Amounts in thousands except share and per share data)

(Unaudited)

(Continued from prior page)

 

 

 

Three Months Ended September 30,

 

 

 

Nine Months Ended September 30,

 

 

 

2009

 

 

 

2008

 

 

 

2009

 

 

 

2008

 

Other expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

$

4,967

 

 

 

$

4,522

 

 

 

$

14,669

 

 

 

$

14,169

 

Occupancy

 

 

811

 

 

 

 

854

 

 

 

 

2,424

 

 

 

 

2,481

 

Data processing

 

 

718

 

 

 

 

606

 

 

 

 

2,042

 

 

 

 

1,730

 

Marketing

 

 

310

 

 

 

 

357

 

 

 

 

1,198

 

 

 

 

1,543

 

Amortization and valuation of mortgage servicing rights

 

 

909

 

 

 

 

675

 

 

 

 

1,796

 

 

 

 

1,915

 

Amortization and valuation of other intangible assets

 

 

67

 

 

 

 

 

 

 

 

200

 

 

 

 

 

Supplies

 

 

93

 

 

 

 

81

 

 

 

 

445

 

 

 

 

390

 

Loss on sale of other real estate owned

 

 

86

 

 

 

 

77

 

 

 

 

617

 

 

 

 

95

 

Postage

 

 

142

 

 

 

 

165

 

 

 

 

426

 

 

 

 

465

 

Bankcard and ATM network fees

 

 

371

 

 

 

 

264

 

 

 

 

1,025

 

 

 

 

924

 

Legal, professional and accounting fees

 

 

724

 

 

 

 

393

 

 

 

 

1,705

 

 

 

 

984

 

FDIC insurance premiums

 

 

477

 

 

 

 

203

 

 

 

 

1,661

 

 

 

 

441

 

Other

 

 

1,178

 

 

 

 

544

 

 

 

 

2,781

 

 

 

 

1,930

 

Total other expense

 

 

10,853

 

 

 

 

8,741

 

 

 

 

30,989

 

 

 

 

27,067

 

Income before income taxes

 

 

2,438

 

 

 

 

3,655

 

 

 

 

4,458

 

 

 

 

12,524

 

Income taxes

 

 

1,116

 

 

 

 

1,359

 

 

 

 

1,709

 

 

 

 

4,647

 

Net income

 

$

1,322

 

 

 

$

2,296

 

 

 

$

2,749

 

 

 

$

7,877

 

Dividends and discount accretion on preferred shares

 

 

529

 

 

 

 

 

 

 

 

1,081

 

 

 

 

 

Net income available to common shareholders

 

$

793

 

 

 

$

2,296

 

 

 

$

1,668

 

 

 

$

7,877

 

Basic earnings per common share

 

$

0.12

 

 

 

$

0.35

 

 

 

$

0.26

 

 

 

$

1.21

 

Diluted earnings per common share

 

$

0.12

 

 

 

$

0.35

 

 

 

$

0.26

 

 

 

$

1.21

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

4

 

 

TRINITY CAPITAL CORPORATION & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Nine Months Ended September 30, 2009 and 2008

(Amounts in thousands)

(Unaudited)

 

 

 

Nine Months Ended September 30,

 

 

 

2009

 

 

 

2008

 

Cash Flows From Operating Activities

 

 

 

 

 

 

 

 

 

Net income

 

$

2,749

 

 

 

$

7,877

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,880

 

 

 

 

1,807

 

Net amortization of:

 

 

 

 

 

 

 

 

 

Mortgage servicing rights

 

 

1,928

 

 

 

 

2,099

 

Other intangible assets

 

 

200

 

 

 

 

 

Premium and discounts on investment securities, net

 

 

(56

)

 

 

 

805

 

Junior subordinated debt owed to unconsolidated trusts issuance costs

 

 

10

 

 

 

 

10

 

Provision for loan losses

 

 

20,793

 

 

 

 

4,090

 

Change in mortgage servicing rights valuation allowance

 

 

(132

)

 

 

 

(184

)

Loss on disposal of premises and equipment

 

 

3

 

 

 

 

1

 

(Gain) loss on sale of investment securities

 

 

(942

)

 

 

 

(555

)

Federal Home Loan Bank (FHLB) stock dividends received

 

 

(5

)

 

 

 

(91

)

Loss on venture capital investments

 

 

286

 

 

 

 

113

 

Gain on sale of loans

 

 

(7,048

)

 

 

 

(1,722

)

Loss on disposal of other real estate owned

 

 

347

 

 

 

 

80

 

Write-down of value of other real estate owned

 

 

283

 

 

 

 

30

 

(Increase) in other assets

 

 

(3,125

)

 

 

 

(521

)

Increase in other liabilities

 

 

564

 

 

 

 

(302

)

Release of Employee Stock Ownership Plan (ESOP) shares

 

 

 

 

 

 

324

 

Stock options and stock appreciation rights expenses

 

 

110

 

 

 

 

163

 

Tax benefit recognized for exercise of stock options

 

 

(10

)

 

 

 

(43

)

Net cash provided by operating activities before originations and gross sales of loans

 

 

17,835

 

 

 

 

13,981

 

Gross sales of loans held for sale

 

 

347,487

 

 

 

 

118,585

 

Origination of loans held for sale

 

 

(343,449

)

 

 

 

(108,819

)

Net cash provided by operating activities

 

 

21,873

 

 

 

 

23,747

 

 

(Continued on following page)

 

5

 

 

TRINITY CAPITAL CORPORATION & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Nine Months Ended September 30, 2009 and 2008

(Amounts in thousands)

(Unaudited)

(Continued from prior page)

 

 

 

Nine Months Ended September 30,

 

 

 

2009

 

 

 

2008

 

Cash Flows From Investing Activities

 

 

 

 

 

 

 

 

 

Proceeds from maturities and paydowns of investment securities, available for sale

 

$

8,842

 

 

 

$

66,793

 

Proceeds from maturities and paydowns of investment securities, held to maturity

 

 

180

 

 

 

 

165

 

Proceeds from maturities and paydowns of investment securities, other

 

 

378

 

 

 

 

1,829

 

Proceeds from sale of investment securities, available for sale

 

 

45,004

 

 

 

 

48,980

 

Purchase of investment securities available for sale

 

 

(54,389

)

 

 

 

(110,083

)

Purchase of investment securities other

 

 

(2,617

)

 

 

 

(91

)

Proceeds from sale of other real estate owned

 

 

4,715

 

 

 

 

835

 

Loans funded, net of repayments

 

 

(20,997

)

 

 

 

(47,331

)

Purchases of loans

 

 

(1,101

)

 

 

 

 

Purchases of premises and equipment

 

 

(9,207

)

 

 

 

(2,159

)

Net cash (used in) investing activities

 

 

(29,192

)

 

 

 

(41,062

)

Cash Flows From Financing Activities

 

 

 

 

 

 

 

 

 

Net increase in demand deposits, NOW accounts and savings accounts

 

 

16,048

 

 

 

 

100,448

 

Net increase (decrease) in time deposits

 

 

108,306

 

 

 

 

(22,695

)

Proceeds from issuances of borrowings

 

 

30,000

 

 

 

 

 

Repayment of borrowings

 

 

(20,029

)

 

 

 

(40,027

)

Repayment of ESOP debt

 

 

 

 

 

 

(271

)

Purchase of treasury stock

 

 

(473

)

 

 

 

(1,077

)

Issuance of common stock for stock option plan

 

 

290

 

 

 

 

323

 

Issuance of preferred stock

 

 

35,539

 

 

 

 

 

Common shares dividend payments

 

 

(5,157

)

 

 

 

(5,190

)

Preferred shares dividend payments

 

 

(743

)

 

 

 

 

Tax benefit recognized for exercise of stock options

 

 

10

 

 

 

 

43

 

Net cash provided by financing activities

 

 

163,791

 

 

 

 

31,554

 

Net increase in cash and cash equivalents

 

 

156,472

 

 

 

 

14,239

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

Beginning of period

 

 

25,262

 

 

 

 

45,524

 

End of period

 

$

181,734

 

 

 

$

59,763

 

 

(Continued on following page)

 

6

 

 

TRINITY CAPITAL CORPORATION & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Nine Months Ended September 30, 2009 and 2008

(Amounts in thousands)

(Unaudited)

(Continued from prior page)

 

 

 

Nine Months Ended September 30,

 

 

 

2009

 

 

 

2008

 

Supplemental Disclosures of Cash Flow Information

 

 

 

 

 

 

 

 

 

Cash payments for:

 

 

 

 

 

 

 

 

 

Interest

 

$

18,750

 

 

 

$

28,400

 

Income taxes

 

 

5,150

 

 

 

 

5,947

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

 

Transfers from loans to other real estate owned

 

 

12,019

 

 

 

 

1,821

 

Dividends declared, not yet paid

 

 

247

 

 

 

 

 

Change in unrealized gain on investment securities, net of taxes

 

 

(10

)

 

 

 

(1,176

)

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

7

 

 

TRINITY CAPITAL CORPORATION & SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1. Basis of Presentation

 

The accompanying unaudited consolidated financial statements include the consolidated balances and results of operations of Trinity Capital Corporation (“Trinity”) and its wholly owned subsidiaries: Los Alamos National Bank (the “Bank”), Title Guaranty & Insurance Company (“Title Guaranty”), TCC Advisors Corporation (“TCC Advisors”) and TCC Funds, collectively referred to as the “Company.” Trinity Capital Trust I (“Trust I”), Trinity Capital Trust III (“Trust III”), Trinity Capital Trust IV (“Trust IV”) and Trinity Capital Trust V (“Trust V”), collectively referred to as the “Trusts,” are trust subsidiaries of Trinity but are not consolidated in these financial statements (see “Consolidation” accounting policy below). Trinity sold the assets of TCC Appraisals as of May 1, 2008 and terminated the business of TCC Appraisals in January 2009. Termination of TCC Appraisals has had an immaterial effect on Trinity’s financial results. In August 2008, the Bank obtained a 26% interest in Cottonwood Technology Group, LLC (“Cottonwood”) and on July 13, 2009 the Bank assigned 2% of its interests to the other members of the company. This entity is owned by the Bank, the Los Alamos Commerce & Development Corporation and an individual not otherwise associated with Trinity or the Bank. Cottonwood completed the initial close on a pre-seed and seed stage investment fund in October 2009 and is focused on assisting new technologies, primarily those developed at New Mexico’s research and educational institutions, reach the market by providing management advice and capital consulting. The Bank’s full capital investment of $150 thousand was made in July 2009 and is reflected in these financial statements. In October 2008, the Bank purchased the assets of Allocca & Brunett, Inc., an investment advisory company in Santa Fe, New Mexico. Management expects to continue to transfer the assets of Allocca & Brunett to the Bank over the next three months.

 

The business activities of the Company consist solely of the operations of its wholly owned subsidiaries. All significant inter-company balances and transactions have been eliminated in consolidation. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods have been made. The results of operations for the three and nine months ended September 30, 2009, are not necessarily indicative of the results to be expected for the entire fiscal year.

 

The unaudited consolidated interim financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and industry practice. Certain information in footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America and industry practice has been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s December 31, 2008 audited financial statements in its Form 10-K (as amended) filed with the SEC on March 16, 2009.

 

The consolidated financial statements include the accounts of the Company. The accounting and reporting policies of the Company conform to generally accepted accounting principles (GAAP) in the United States of America and general practices within the financial services industry. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the year. Actual results could differ from those estimates. Areas involving the use of management’s estimates and assumptions, and which are more susceptible to change in the near term include the allowance for loan losses and initial recording and subsequent valuation for impairment of mortgage servicing rights.

 

Certain items have been reclassified from prior period presentations in conformity with the current classification. These reclassifications did not result in any changes to previously reported net income or stockholders’ equity. In preparing these financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through November 9, 2009, the date the financial statements were issued.

 

8

 

 

Note 2. Comprehensive Income

 

Comprehensive income includes net income, as well as the change in net unrealized gain on investment securities available for sale, net of tax. Comprehensive income is presented in the following table:

 

 

 

Three Months Ended September 30,

 

 

 

Nine Months Ended September 30,

 

 

 

2009

 

 

 

2008

 

 

 

2009

 

 

 

2008

 

 

 

(Unaudited; in thousands)

 

Net income

 

$

1,322

 

 

 

$

2,296

 

 

 

$

2,749

 

 

 

$

7,877

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change in unrealized gains (losses)

 

 

2,131

 

 

 

 

465

 

 

 

 

930

 

 

 

 

(622

)

Related income tax (expense) benefit

 

 

(856

)

 

 

 

(183

)

 

 

 

(359

)

 

 

 

261

 

Net securities gains reclassified into earnings

 

 

(208

)

 

 

 

 

 

 

 

(942

)

 

 

 

(555

)

Related income tax benefit

 

 

95

 

 

 

 

 

 

 

 

361

 

 

 

 

206

 

Net effect on other comprehensive income for the period

 

 

1,162

 

 

 

 

282

 

 

 

 

(10

)

 

 

 

(710

)

Comprehensive income

 

$

2,484

 

 

 

$

2,578

 

 

 

$

2,739

 

 

 

$

7,167

 

 

Note 3. Earnings Per Share Data

 

The following table sets forth the computation of basic and diluted earnings per share for the periods indicated:

 

 

 

Three Months Ended September 30,

 

 

 

Nine Months Ended September 30,

 

 

 

2009

 

 

 

2008

 

 

 

2009

 

 

 

2008

 

 

 

(Unaudited; in thousands, except share and per share data)

 

Net income

 

$

1,322

 

 

 

$

2,296

 

 

 

$

2,749

 

 

 

$

7,877

 

Dividends and discount accretion on preferred shares

 

 

529

 

 

 

 

 

 

 

 

1,081

 

 

 

 

 

Net income available to common shareholders

 

$

793

 

 

 

$

2,296

 

 

 

$

1,668

 

 

 

$

7,877

 

Weighted average common shares issued

 

 

6,856,800

 

 

 

 

6,856,800

 

 

 

 

6,856,800

 

 

 

 

6,856,800

 

LESS: Weighted average treasury stock shares

 

 

(416,017

)

 

 

 

(381,819

)

 

 

 

(411,358

)

 

 

 

(368,494

)

LESS: Weighted average unearned Employee Stock Ownership Plan (ESOP) stock shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(804

)

Weighted average common shares outstanding, net

 

 

6,440,783

 

 

 

 

6,474,981

 

 

 

 

6,445,442

 

 

 

 

6,487,502

 

Basic earnings per common share

 

$

0.12

 

 

 

$

0.35

 

 

 

$

0.26

 

 

 

$

1.21

 

Weighted average dilutive shares from stock option plan

 

 

10,455

 

 

 

 

20,573

 

 

 

 

8,776

 

 

 

 

22,443

 

Weighted average common shares outstanding including derivative shares

 

 

6,451,238

 

 

 

 

6,495,554

 

 

 

 

6,454,218

 

 

 

 

6,509,945

 

Diluted earnings per common share

 

$

0.12

 

 

 

$

0.35

 

 

 

$

0.26

 

 

 

$

1.21

 

 

 

9

 

 

Certain stock options were not included in the above calculation, as these stock options would have an anti-dilutive effect as the exercise price is greater than current market prices. The total number of shares excluded was 315,500 and 262,500 as of September 30, 2009 and September 30, 2008, respectively.

 

Note 4. Recent Accounting Pronouncements and Regulatory Developments

 

ASC Topic 105, "Accounting Standards Codification." On July 1, 2009, the FASB issued Accounting Standards Codification (ASC) 105. This Statement establishes the ASCas the single source of authoritative U.S. generally accepted accounting principles (U.S. GAAP) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. The Statement and the Codification are effective for financial statements issued for interim and annual periods ending after September 15, 2009.

 

The Codification supersedes all existing non-SEC accounting and reporting standards. All other nongrandfathered non-SEC accounting literature not included in the Codification has become non-authoritative. Following SFAS 168, the FASB will not issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts. Instead, the FASB will issue Accounting Standards Updates, which will serve only to: (a) update the Codification; (b) provide background information about the guidance; and (c) provide the bases for conclusions on the change(s) in the Codification. Management has implemented SFAS 168 as of September 30, 2009 and adoption did not have a significant impact on the Company's financial statements.

 

In June 2009, the FASB issued FASB Accounting Standards Update 2009-01, Topic 105-Generally Accepted Accounting Principles amendments based on Statement of Financial Accounting Standards No. 168-The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles (SFAS 168). FASB Accounting Standards Update 2009-01 amends the Codification for the issuance of Statement 168. Also in June 2009, the FASB issued FASB Accounting Standards Update 2009-02, Omnibus Update-Amendments to Various Topics for Technical Corrections. FASB Accounting Standards Update 2009-02 makes a number of technical corrections to various topics in the Codification.

 

ASC Topic 320, Investments – Debt and Equity Securities. In April 2009, the FASB issued FSP SFAS 115-2 and SFAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments which amends FASB ASC 320-10, "Investments - Debt and Equity Securities."This new guidance (i) changes existing guidance for determining whether an impairment is other than temporary to debt securities and (ii) replaces the existing requirement that the entity’s management assert it has both the intent and ability to hold an impaired security until recovery with a requirement that management assert: (a) it does not have the intent to sell the security; and (b) it is more likely than not it will not have to sell the security before recovery of its cost basis. Under the new guidance, declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses. The amount of the impairment related to other factors is recognized in other comprehensive income. The new guidance is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The adoption of the new guidance did not have a material impact on the Company’s financial statements.

 

ASC 820, "Fair Value Measurements and Disclosures." Also in April 2009, the FASB issued FSP SFAS 157-4, Determining Fair value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Indentifying Transactions That Are Not Orderly, which amends FASB ASC 820. This new guidance relates to determining fair values when there is no active market or where the price inputs being used represent distressed sales. It reaffirms the pre-existing statement of the objective of fair value measurement—to reflect how much an asset would be sold for in an orderly transaction (as opposed to a distressed or forced transaction) at the date of the financial statements under current market conditions. Specifically, it reaffirms the need to use judgment to ascertain if a formerly active market has become inactive and in determining fair values when markets have become inactive. The new guidance is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The adoption of the new provisions did not have a material impact on the Company’s financial statements.

 

10

 

 

ASC Topic 825, "Financial Instruments." Also in April 2009, the FASB issued FSP SFAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments, which amends FASB ASC 825. This new authoritative accounting guidance requires an entity to provide disclosures about fair value of financial instruments in interim financial information and amends guidance, to require those disclosures in summarized financial information at interim reporting periods. Under the new guidance, a publicly traded company shall include disclosures about the fair value of its financial instruments whenever it issues summarized financial information for interim reporting periods. In addition, entities must disclose, in the body or in the accompanying notes of its summarized financial information for interim reporting periods and in its financial statements for annual reporting periods, the fair value of all financial instruments for which it is practicable to estimate that value, whether recognized or not recognized in the statement of financial position. The new interim disclosures required are included in the Company’s interim financial statements beginning with the second quarter of 2009. Since this change only resulted in the additional disclosure of information, adoption did not have a significant impact on the Company’s financial statements.

 

ASC Topic 855, "Subsequent Events." In May 2009, the FASB issued FASB Statement No. 165, Subsequent Events (SFAS 165), which amends FASB ASC 855-10. The new guidance establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. Specifically, the guidance provides:

 

 

The period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements;

 

The circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and

 

The disclosures that an entity should make about events or transactions that occurred after the balance sheet date.

 

The guidance became effective for the Company on June 30, 2009 and did not have a significant impact on the Company’s financial statements.

 

ASC Topic 860, "Transfers and Servicing" and ASC Topic 810, "Accounting Consolidation of Variable Interest Entities." In June 2009 the FASB issued the following two standards, both of which amend FASB ASC 860-10 and 810-10, which change the way entities account for securitizations and special-purpose entities:

 

 

FASB Statement No. 166, Accounting for Transfers of Financial Assets (SFAS 166);

 

FASB Statement No. 167, Amendments to FASB Interpretation No. 46(R) (SFAS 167).

 

SFAS 166 is a revision to FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, and will require more information about transfers of financial assets, including securitization transactions, and where entities have continuing exposure to the risks related to transferred financial assets. It eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets, and requires additional disclosures.

 

SFAS 167 is a revision to FASB Interpretation No. 46 (Revised December 2003), Consolidation of Variable Interest Entities, and changes how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a reporting entity is required to consolidate another entity is based on, among other things, the other entity’s purpose and design and the reporting entity’s ability to direct the activities of the other entity that most significantly impact the other entity’s economic performance.

 

The new standards will require a number of new disclosures. SFAS 167 will require a reporting entity to provide additional disclosures about its involvement with variable interest entities and any significant changes in risk exposure due to that involvement. A reporting entity will be required to disclose how its involvement with a variable interest entity affects the reporting entity’s financial statements. SFAS 166 enhances information reported to users of financial statements by providing greater transparency about transfers of financial assets and an entity’s continuing involvement in transferred financial assets.

 

11

 

 

The guidance will be effective at the start of a reporting entity’s first fiscal year beginning after November 15, 2009, or January 1, 2010, for a calendar year-end entity. Early application is not permitted. Management is currently evaluating the provisions of the new guidance and their potential effect on its financial statements.

 

Note 5. Investment Securities

 

Carrying amounts and fair values of investment securities are summarized as follows:

 

AVAILABLE FOR SALE

 

Amortized
Cost

 

 

 

Gross
Unrealized
Gains

 

 

 

Gross
Unrealized
Losses

 

 

 

Fair
Value

 

 

 

(In thousands)

 

September 30, 2009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government sponsored agencies

 

$

48,058

 

 

 

$

1,548

 

 

 

$

 

 

 

$

49,606

 

States and political subdivisions

 

 

26,144

 

 

 

 

631

 

 

 

 

(34

)

 

 

 

26,741

 

Mortgage-backed securities

 

 

28,001

 

 

 

 

486

 

 

 

 

(298

)

 

 

 

28,189

 

Totals

 

$

102,203

 

 

 

$

2,665

 

 

 

$

(332

)

 

 

$

104,536

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government sponsored agencies

 

$

87,890

 

 

 

$

2,297

 

 

 

$

 

 

 

$

90,187

 

States and political subdivisions

 

 

12,771

 

 

 

 

86

 

 

 

 

(37

)

 

 

 

12,820

 

Equity securities

 

 

1

 

 

 

 

 

 

 

 

(1

)

 

 

 

 

Totals

 

$

100,662

 

 

 

$

2,383

 

 

 

$

(38

)

 

 

$

103,007

 

 

HELD TO MATURITY

 

Amortized
Cost

 

 

 

Gross
Unrealized
Gains

 

 

 

Gross
Unrealized
Losses

 

 

 

Fair
Value

 

 

 

(In thousands)

 

September 30, 2009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

States and political subdivisions

 

$

8,747

 

 

 

$

616

 

 

 

$

(331

)

 

 

$

9,032

 

Totals

 

$

8,747

 

 

 

$

616

 

 

 

$

(331

)

 

 

$

9,032

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

States and political subdivisions

 

$

8,927

 

 

 

$

1,179

 

 

 

$

(326

)

 

 

$

9,780

 

Totals

 

$

8,927

 

 

 

$

1,179

 

 

 

$

(326

)

 

 

$

9,780

 

 

 

12

 

 

OTHER INVESTMENTS

 

Amortized
Cost

 

 

 

Gross
Unrealized
Gains

 

 

 

Gross
Unrealized
Losses

 

 

 

Fair
Value

 

 

 

(In thousands)

 

September 30, 2009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-marketable equity securities (including FRB and FHLB stock)

 

$

6,485

 

 

 

$

 

 

 

$

 

 

 

$

6,485

 

Investment in unconsolidated trusts

 

 

1,116

 

 

 

 

 

 

 

 

 

 

 

 

1,116

 

Totals

 

$

7,601

 

 

 

$

 

 

 

$

 

 

 

$

7,601

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-marketable equity securities (including FRB and FHLB stock)

 

$

4,527

 

 

 

$

 

 

 

$

 

 

 

$

4,527

 

Investment in unconsolidated trusts

 

 

1,116

 

 

 

 

 

 

 

 

 

 

 

 

1,116

 

Totals

 

$

5,643

 

 

 

$

 

 

 

$

 

 

 

$

5,643

 

 

Realized net gains on sale of securities available for sale are summarized as follows:

 

 

 

Three Months Ended
September 30,

 

 

 

Nine Months Ended
September 30,

 

 

 

2009

 

 

 

2008

 

 

 

2009

 

 

 

2008

 

 

 

(In thousands)

 

Gross realized gains

 

$

208

 

 

 

$

 

 

 

$

942

 

 

 

$

555

 

Gross realized losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net gains

 

$

208

 

 

 

$

 

 

 

$

942

 

 

 

$

555

 

 

A summary of unrealized loss information for investment securities, categorized by security type, at September 30, 2009 and December 31, 2008 is as follows:

 

 

 

Less than 12 Months

 

 

 

12 Months or Longer

 

 

 

Total

 

AVAILABLE FOR SALE

 

Fair
Value

 

 

 

Unrealized
Losses

 

 

 

Fair
Value

 

 

 

Unrealized
Losses

 

 

 

Fair
Value

 

 

 

Unrealized
Losses

 

 

 

(In thousands)

 

September 30, 2009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government sponsored agencies

 

$

 

 

 

$

 

 

 

$

 

 

 

$

 

 

 

$

 

 

 

$

 

States and political subdivisions

 

 

4,257

 

 

 

 

(34

)

 

 

 

 

 

 

 

 

 

 

 

4,257

 

 

 

 

(34

)

Mortgage-backed securities

 

 

12,282

 

 

 

 

(298

)

 

 

 

 

 

 

 

 

 

 

 

12,282

 

 

 

 

(298

)

Equity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Totals

 

$

16,539

 

 

 

$

(332

)

 

 

$

 

 

 

$

 

 

 

$

16,539

 

 

 

$

(332

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government sponsored agencies

 

$

 

 

 

$

 

 

 

$

 

 

 

$

 

 

 

$

 

 

 

$

 

States and political subdivisions

 

 

 

 

 

 

 

 

 

 

947

 

 

 

 

(37

)

 

 

 

947

 

 

 

 

(37

)

Equity securities

 

 

1

 

 

 

 

(1

)

 

 

 

 

 

 

 

 

 

 

 

1

 

 

 

 

(1

)

Totals

 

$

1

 

 

 

$

(1

)

 

 

$

947

 

 

 

$

(37

)

 

 

$

948

 

 

 

$

(38

)

 

 

13

 

 

No securities held as of September 30, 2009 had unrealized losses for twelve months or longer. The $37 thousand unrealized losses in available for sale securities twelve months or longer as of December 31, 2008 relates to unrealized losses on securities issued by local municipal issues with an S&P quality rating of AAA. The Company has the ability to hold these securities until they mature and it is unlikely that the Company will be required to sell these securities before recovery of its amortized cost.

 

 

 

Less than 12 Months

 

 

 

12 Months or Longer

 

 

 

Total

 

HELD TO MATURITY

 

Fair
Value

 

 

 

Unrealized
Losses

 

 

 

Fair
Value

 

 

 

Unrealized
Losses

 

 

 

Fair
Value

 

 

 

Unrealized
Losses

 

 

 

(In thousands)

 

September 30, 2009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

States and political subdivisions

 

$

1,212

 

 

 

$

(331

)

 

 

$

 

 

 

$

 

 

 

$

1,212

 

 

 

$

(331

)

Totals

 

$

1,212

 

 

 

$

(331

)

 

 

$

 

 

 

$

 

 

 

$

1,212

 

 

 

$

(331

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

States and political subdivisions

 

$

1,315

 

 

 

$

(326

)

 

 

$

 

 

 

$

 

 

 

$

1,315

 

 

 

$

(326

)

Totals

 

$

1,315

 

 

 

$

(326

)

 

 

$

 

 

 

$

 

 

 

$

1,315

 

 

 

$

(326

)

 

No securities held as of September 30, 2009 or December 31, 2009 had unrealized losses for twelve months or longer.

 

The amortized cost and fair value of investment securities as of September 30, 3009 by contractual maturity are shown below. Maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties.

 

 

 

 

 

Available for Sale

 

 

 

Held to Maturity

 

 

 

Other Investments

 

 

 

 

 

Amortized
Cost

 

 

 

Fair
Value

 

 

 

Amortized
Cost

 

 

 

Fair
Value

 

 

 

Amortized
Cost

 

 

 

Fair
Value

 

 

 

 

 

(In thousands)

 

One year or less

 

 

 

$

6,305

 

 

 

$

6,340

 

 

 

$

 

 

 

$

 

 

 

$

100

 

 

 

$

100

 

One to five years

 

 

 

 

56,734

 

 

 

 

58,467

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Five to ten years

 

 

 

 

9,172

 

 

 

 

9,486

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Over ten years

 

 

 

 

29,992

 

 

 

 

30,243

 

 

 

 

8,747

 

 

 

 

9,032

 

 

 

 

1,116

 

 

 

 

1,116

 

Equity investments with no stated maturity

 

 

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,427

 

 

 

 

4,427

 

Totals

 

 

 

$

102,203

 

 

 

$

104,536

 

 

 

$

8,747

 

 

 

$

9,032

 

 

 

$

5,643

 

 

 

$

5,643

 

 

Securities with carrying amounts of $26.2 million and $26.5 million at September 30, 2009 and September 30, 2008, respectively, were pledged as collateral on public deposits and for other purposes as required or permitted by law.

 

14

 

 

Note 6. Stock Option Plan

 

The Company’s 1998 Stock Option Plan (“1998 Plan”) and Trinity Capital Corporation 2005 Stock Incentive Plan (“2005 Plan”) were created for the benefit of key management and select employees. Under the 1998 Plan, 400,000 shares (as adjusted for the stock split of December 19, 2002) from shares held in treasury or authorized but unissued common stock are reserved for granting options. Under the 2005 Plan, 500,000 shares from shares held in treasury or authorized but unissued common stock are reserved for granting stock-based incentive awards. Both of these plans were approved by the Company’s shareholders. The Board of Directors determine vesting and pricing of the awards. All stock options granted through December 31, 2005 were granted at or above the market value of the stock at the date of the grant, with the exception of the July 1998 stock option grant which was granted at $0.25 below the last reported sale price on the date of grant. All stock options vest in equal amounts over a three year period and must be exercised within ten years of the date of grant. Stock appreciation rights granted through December 31, 2008 were also granted at or above the market value of the stock at the date of the grant, with the exception of the January 1, 2006 stock appreciation right grants which were approved on December 15, 2005 and granted at the December 31, 2005 closing price to take advantage of accounting changes favorable to Trinity. All stock appreciation rights vest and mature at five years.

 

The Company is required by FASB ASC Topic 718, "Compensation" to recognize compensation expense for share-based compensation. The Company uses the Black-Scholes model to value the stock options and stock appreciation rights on the date of the grant, and recognizes this expense over the remaining vesting term for the stock options or stock appreciation rights. Key assumptions used in this valuation method (detailed below) are the volatility of the Company’s stock price, a risk-free rate of return (using the U.S. Treasury yield curve) based on the expected term from grant date to exercise date and an annual dividend rate based upon the current market price. Expected term from grant date is based upon the historical time from grant to exercise experienced by the Company. Because share-based compensation vesting in the current periods was granted on a variety of dates, the assumptions are presented as weighted averages in those assumptions.

 

There were no stock incentives granted during the three or nine months ended September 30, 2009 or 2008.

 

A summary of stock option and stock appreciation right activity under the 1998 Plan and the 2005 Plan as of September 30, 2009, and changes during the year is presented below:

 

 

 

Shares

 

 

 

Weighted-Average
Exercise Price

 

 

 

Weighted-Average
Remaining
Contractual Term,
in years

 

 

 

Aggregate Intrinsic
Value (in thousands)

 

Outstanding at January 1, 2009

 

435,395

 

 

 

$

26.58

 

 

 

 

 

 

 

 

 

 

Granted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercised

 

(14,000

)

 

 

 

20.00

 

 

 

 

 

 

 

 

 

 

Forfeited or expired

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at September 30, 2009

 

421,395

 

 

 

$

26.80

 

 

 

3.00

 

 

 

$

1,780

 

Exercisable at September 30, 2009

 

237,895

 

 

 

$

26.37

 

 

 

3.70

 

 

 

$

1,047

 

 

There were no stock options exercised during the three months ended September 30, 2009. Steve W. Wells exercised 14,000 non-qualified stock options at $20.00 per share during the nine months ended September 30, 2009. The total intrinsic value of options exercised during the nine months ended September 30, 2009 and September 30, 2008 was $52 thousand and $62 thousand, respectively.

 

As of September 30, 2009, there was $294 thousand of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the 2005 Plan. There was no unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the 1998 Plan. The unrecognized compensation cost is expected to be recognized over a weighted-average vesting period of 2.10 years. In the three month period ended September 30, 2009, $37 thousand was expensed for stock appreciation rights that will vest in 2011 and 2012.

 

15

 

 

Certain restrictions on future grants of share based compensation have been imposed by the U. S. Treasury as part of its Capital Purchase Program (“CPP”). These limitations include restrictions on the amount that may be granted (no more than 1/3 of the executive's annual compensation), the type (restricted stock only may be granted to executives) and vesting (such grants may not vest prior to the repayment of the CPP funds). Interim Final Rules were issued by the Treasury on June 10, 2009, and were made immediately effective. Because Trinity historically granted stock options and stock appreciation rights to certain of its executive officers and the rules as presented will prohibit continuing those grants, Trinity is evaluating its incentive compensation for executive officers and it is likely that Trinity will change its program during the time Trinity retains CPP funds.

 

Note 7. Short-Term Borrowings

 

The Company had Federal Home Loan Bank (FHLB) advances with maturity dates of less than one year of $20.0 million as of September 30, 2009. There were no such advances outstanding as of December 31, 2008. As of September 30, 2009, the advances had a fixed interest rate of 4.67%.

 

Note 8. Long-Term Borrowings

 

The Company had FHLB advances with maturity dates greater than one year of $13.5 million as of September 30, 2009 and $23.5 million as of December 31, 2008. As of September 30, 2009, the advances had fixed interest rates ranging from 2.57% to 6.34%.

 

Note 9. Long-term Capital Lease Obligations

 

The Company is leasing land in Santa Fe and has completed building a Bank office on the site. In July of 2009, Trinity sold the improvements to the Bank and entered into a sublease with the Bank. The construction of the office was completed in October of 2009, and the new office opened on October 19, 2009. The ground lease has an 8 year term, expiring in 2014, and contains an option to purchase the land for a price certain at the termination of the initial term of the lease. The ground lease is classified as a capital lease. The Company also holds a note and mortgage on this land, and the interest payments received on the note are approximately equal to the payments made on the lease. The principal due on the note at maturity (simultaneous with the lease maturity) will largely offset the option purchase price. Lease payments for each of the three months ended September 30, 2009 and 2008 were $46 thousand. Lease payments for each of the nine months ended September 30, 2009 and 2008 were $139 thousand.

 

Note 10. Junior Subordinated Debt Owed to Unconsolidated Trusts

 

The following table presents details on the junior subordinated debt owed to unconsolidated trusts as of September 30, 2009.

 

 

 

Trust I

 

Trust III

 

Trust IV

 

Trust V

 

 

 

(Dollars in thousands)

 

 

Date of issue

 

March 23, 2000

 

May 11, 2004

 

June 29, 2005

 

September 21, 2006

 

Amount of trust preferred securities issued

 

$

10,000

 

$

6,000

 

$

10,000

 

$

10,000

 

Rate on trust preferred securities

 

10.875

%

3.05% (variable

)

6.88

%

6.83

%

 

Maturity

 

March 8, 2030

 

September 8, 2034

 

November 23, 2035

 

December 15, 2036

 

 

Date of first redemption

 

March 8, 2010

 

September 8, 2009

 

August 23, 2010

 

September 15, 2011

 

Common equity securities issued

 

$

310

 

$

186

 

$

310

 

$

310

 

Junior subordinated deferrable interest debentures owed

 

$

10,310

 

$

6,186

 

$

10,310

 

$

10,310

 

Rate on junior subordinated deferrable interest debentures

 

10.875

%

3.05% (variable

)

6.88

%

6.83

%

 

 

16

 

 

On the dates of issue indicated above, the Trusts, being Delaware statutory business trusts, issued trust preferred securities (the “trust preferred securities”) in the amount and at the rate indicated above. These securities represent preferred beneficial interests in the assets of the Trusts. The trust preferred securities will mature on the dates indicated, and are redeemable in whole or in part at the option of Trinity at any time after the date of first redemption indicated above, with the approval of the Federal Reserve Board and in whole at any time upon the occurrence of certain events affecting their tax or regulatory capital treatment. The Trusts also issued common equity securities to Trinity in the amounts indicated above. The Trusts used the proceeds of the offering of the trust preferred securities to purchase junior subordinated deferrable interest debentures (the “debentures”) issued by Trinity, which have terms substantially similar to the trust preferred securities. Trinity has the right to defer payments of interest on the debentures at any time or from time to time for a period of up to ten consecutive semi-annual periods with respect to each interest payment deferred. Under the terms of the debentures, under certain circumstances of default or if Trinity has elected to defer interest on the debentures, Trinity may not, with certain exceptions, declare or pay any dividends or distributions on its capital stock or purchase or acquire any of its capital stock. Trinity used the majority of the proceeds from the sale of the debentures to add to Tier 1 and Tier 2 capital in order to support the Bank's growth and to purchase treasury stock.

 

Trinity owns all of the outstanding common securities of the Trusts. The Trusts are considered variable interest entities (VIEs) under FASB ASC Topic 810, "Consolidation." Because Trinity is not the primary beneficiary of the Trusts, the financial statements of the Trusts are not included in the consolidated financial statements of the Company.

 

In March 2005, the Board of Governors of the Federal Reserve System issued a final rule allowing bank holding companies to continue to include qualifying trust preferred securities in their Tier 1 Capital for regulatory capital purposes, subject to a 25% limitation to all core (Tier I) capital elements, net of goodwill less any associated deferred tax liability. The final rule provides a five-year transition period, ending March 31, 2009, for application of the aforementioned quantitative limitation. In April 2009, this five-year transition period was extended for an additional year. As of September 30, 2009, 100% of the trust preferred securities noted in the table above qualified as Tier 1 capital under the final rule adopted in March 2005.

 

Payments of distributions on the trust preferred securities and payments on redemption of the trust preferred securities are guaranteed by Trinity on a limited basis. Trinity also entered into an agreement as to expenses and liabilities with the Trusts pursuant to which it agreed, on a subordinated basis, to pay any costs, expenses or liabilities of the Trusts other than those arising under the trust preferred securities. The obligations of Trinity under the junior subordinated debentures, the related indenture, the trust agreement establishing the Trusts, the guarantee and the agreement as to expenses and liabilities, in the aggregate, constitute a full and unconditional guarantee by Trinity of the Trusts’ obligations under the trust preferred securities.

 

Issuance costs of $406 thousand related to Trust I and Trust III were deferred and are being amortized over the period until mandatory redemption of the securities in March 2030 and September 2034, respectively. During each of the three month periods ended September 30, 2009 and 2008, $3 thousand of these issuance costs were amortized. During each of the nine month periods ended September 30, 2009 and 2008, $10 thousand of these issuance costs were amortized. Unamortized issuance costs were $287 thousand and $297 thousand at September 30, 2009 and December 31, 2008, respectively. There was no issuance costs associated with the other trust preferred security issues.

 

Dividends accrued and unpaid to securities holders totaled $197 thousand and $485 thousand on September 30, 2009 and December 31, 2008, respectively.

 

Note 11. Commitments, Contingencies and Off-Balance Sheet Activities

 

Credit-related financial instruments:  The Company is a party to credit-related commitments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These credit-related commitments include commitments to extend credit, standby letters of credit and commercial letters of credit. Such credit-related commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets.

 

17

 

 

The Company’s exposure to credit loss is represented by the contractual amount of these credit-related commitments. The Company follows the same credit policies in making credit-related commitments as it does for on-balance-sheet instruments.

 

At September 30, 2009 and December 31, 2008, the following credit-related commitments were outstanding:

 

 

 

Contract Amount

 

 

 

September 30, 2009

 

 

 

December 31, 2008

 

 

 

(In thousands)

 

Unfunded commitments under lines of credit

 

$

166,943

 

 

 

$

201,001

 

Commercial and standby letters of credit

 

 

17,682

 

 

 

 

20,468

 

 

Commitments to extend credit under lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require a payment of a fee. The commitments for lines of credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if deemed necessary by the Company, is based on management’s credit evaluation of the customer. Unfunded commitments under commercial lines of credit, revolving credit lines and overdraft protection agreements are commitments for possible future extensions of credit to existing customers. Overdraft protection agreements are uncollateralized, but most other unfunded commitments under lines of credit have collateral. These unfunded lines of credit usually do not contain a specified maturity date and may not necessarily be drawn upon to the total extent to which the Company is committed.

 

Commercial and standby letters of credit are conditional credit-related commitments issued by the Company to guarantee the performance of a customer to a third party. Letters of credit are primarily issued to support public and private borrowing arrangements. Typically, letters of credit issued have expiration dates within one year. The credit risk involved in issuing letters of credit is the same as that involved in extending loans to customers. The Company holds collateral supporting those credit-related commitments, if deemed necessary. In the event the customer does not perform in accordance with the terms of the agreement with the third party, the Company would be required to fund the credit-related commitment. The maximum potential amount of future payments the Company could be required to make is represented by the contractual amount shown in the summary above. If the credit-related commitment is funded, the Company would be entitled to seek recovery from the customer. At September 30, 2009 and December 31, 2008, no amounts have been recorded as liabilities for the Company’s potential obligations under these credit-related commitments. The fair value of these credit-related commitments is approximately equal to the fees collected when granting these letters of credit. These fees collected were $26 thousand and $38 thousand as of September 30, 2009 and December 31, 2008, respectively, and are included in “other liabilities” on the Company’s balance sheet.

 

Concentrations of credit risk:  The majority of the loans, commitments to extend credit, and standby letters of credit have been granted to customers in Los Alamos, Santa Fe and surrounding communities. Although the Company has a diversified loan portfolio, a substantial portion of its loans are made to businesses and individuals associated with, or employed by, Los Alamos National Laboratory (“the Laboratory”) as further discussed within Item 1A of Part I of Trinity’s Form 10-K (as amended) for the year ended December 31, 2008. The ability of such borrowers to honor their contracts is predominately dependent upon the continued operation and funding of the Laboratory. Investments in securities issued by states and political subdivisions involve governmental entities within the state of New Mexico. The distribution of commitments to extend credit approximates the distribution of loans outstanding. Standby letters of credit were granted primarily to commercial borrowers.

 

18

 

 

Note 12. Preferred Equity Issues

 

On March 27, 2009, the Company issued two series of preferred shares to the Treasury under the Capital Purchase Program (“CPP”). Below is a table disclosing the information on these two series:

 

 

 

Number of
shares issued

 

 

 

Dividend rate

 

 

Liquidation
value per share

 

 

 

Original cost,
in thousands

 

Series A cumulative perpetual preferred shares    

 

35,539

 

 

 

5 % for the first 5 years, thereafter 9%

 

 

$

1,000

 

 

 

$

33,437

 

Series B cumulative perpetual preferred shares    

 

1,777

 

 

 

9%

 

 

 

1,000

 

 

 

 

2,102

 

 

Dividends are paid quarterly to Treasury, and the amount of any unpaid dividends outstanding at the end of the quarter is an outstanding liability in “other liabilities” on the balance sheet. The amount of dividends accrued and unpaid as of September 30, 2009 was $247 thousand.

 

The difference between the liquidation value of the preferred shares and the original cost is accreted (for Series B) or amortized (for Series A) over 10 years. The net difference of this amortization and accretion is posted directly to capital. During the three months ended September 30, 2009, a net amount of $44 thousand was accreted to equity. During the nine months ended September 30, 2009, a net amount of $91 thousand was accreted to equity.

 

Both the dividends and net accretion on the preferred shares reduce the amount of net income available to common shareholders. During the three months ended September 30, 2009, the total of these two amounts was $529 thousand. During the nine months ended September 30, 2009, the total of these two amounts was $1.1 million.

 

Note 13. Litigation

 

Trinity, the Bank, Title Guaranty, TCC Advisors and TCC Funds were not involved in any pending legal proceedings, other than routine legal proceedings occurring in the normal course of business and those otherwise specifically stated herein, which, in the opinion of management, in the aggregate, were material to the Company’s consolidated financial condition.

 

Note 14. Fair Value Measurements

 

Effective January 1, 2008, the Company adopted the FASB ASC Topic 820 provisions regarding fair value measurements for financial assets and financial liabilities. The Company’s valuation techniques are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s assumptions about market value. These two types of inputs create the following fair value hierarchy:

 

 

Level 1 - Quoted prices for identical instruments in active markets.

 

Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable.

 

Level 3- Instruments whose significant value drivers are unobservable.

 

19

 

 

The following table summarizes the Company’s financial instruments that were measured at fair value on a recurring basis at September 30, 2009:

 

 

Level 1 Inputs

 

Level 2 Inputs

 

Level 3 Inputs

 

Total Fair Value

 

(In thousands)

Foreign currency in vault

$

383

 

$

 

$

 

$

383

 

Securities available for sale

 

 

 

104,536

 

 

 

 

104,536

 

Derivative assets

 

 

 

149

 

 

 

 

149

 

Derivative liabilities

 

 

 

(357

)

 

 

 

(357

)

 

Foreign currency in vault is valued at current market values in actively traded currency markets. Changes in fair market values are recorded in other income.

 

Securities available for sale are valued based upon open-market quotes obtained from reputable third-party brokers. Market pricing is based upon specific CUSIP identification for each individual security. Changes in fair market value are recorded in other comprehensive income as the securities are available for sale.

 

Derivative assets and liabilities represent interest rate contracts between the Company and loan customers, and between the Company and outside parties to whom we have made a commitment to sell residential mortgage loans at a set interest rate. These are valued based upon the differential between the interest rates upon the inception of the contract and the current market interest rates for similar products. Changes in market value are recorded in current earnings.

 

Certain financial and non-financial assets and liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). These assets are recorded at the lower of amortized cost or current market value, and a valuation allowance reflects any unrealized market value losses, offset to an expense account. The following table summarizes the Company’s financial instruments that were measured at fair value on a non-recurring basis at September 30, 2009:

 

 

Level 1 Inputs

 

Level 2 Inputs

 

Level 3 Inputs

 

Total Fair Value

 

(In thousands)

Impaired loans

$

 

$

 

$

11,725

 

$

11,725

Loans held for sale

 

 

 

210

 

 

 

 

210

Mortgage servicing rights

 

 

 

 

 

2,872

 

 

2,872

Foreclosed assets

 

 

 

 

 

9,028

 

 

9,028

 

Fair value measurements for impaired loans are performed pursuant to FASB ASC Topic 310, "Loans" and are based upon one of three methods to measure impairment: the fair value of the collateral less disposition costs, the present value of expected future cash flows method, or the observable market price of a loan method. A loan may be considered impaired, but the value is considered sufficient to support a fair value equal to or greater than the carrying value of the loan, and no specific reserve is deemed necessary to record such impairment. In addition, impaired loans are generally written down to the impaired value rather than carrying a specific allocation in the reserve for loan losses. There were no allocations for specifically identified loans on September 30, 2009 or December 31, 2008. Adjustments to the estimated fair value of impaired loans may result in increases or decreases to the provision for loan losses recorded in current earnings. All other impaired loans included in the table above have been charged down to estimated fair value.

 

Loans held for sale are valued based upon open market quotes obtained from the Federal National Mortgage Association (FNMA). Market pricing is based upon mortgage loans with similar terms and interest rates. The change in market value (up to the amortized value of the loans held for sale) is recorded as an adjustment to the loans held for sale valuation allowance, with the offset being recorded as an addition or a reduction in current earnings.

 

20

 

 

Mortgage servicing rights (MSRs) are valued based upon the value of MSRs that are traded on the open market and a current market value for each risk tranche in our portfolio is assigned. We then compare that market value to the current amortized book value for each tranche. The change in market value (up to the amortized value of the MSR) is recorded as an adjustment to the MSR valuation allowance, with the offset being recorded as an addition or a reduction in current earnings. Only the tranches that are deemed impaired are included in the above table.

 

Non-Financial Assets and Non-Financial Liabilities: Certain non-financial assets measured at fair value on a non-recurring basis included foreclosed assets (upon initial recognition or subsequent impairment) and intangible assets measured at fair value for impairment assessment.

 

During the third quarter of 2009, certain foreclosed assets, upon initial recognition, were remeasured and reported at fair value through a charge-off to the allowance for loan losses based upon the fair value of the foreclosed asset, less estimated costs of disposal. The fair value of foreclosed asset, upon initial recognition, is estimated using Level 2 inputs based on observable market data or Level 3 inputs based on customized discounting criteria. Foreclosed assets measured at fair value (less estimated disposal costs) upon initial recognition totaled $2.3 million and $12.0 million (utilizing Level 3 valuation inputs) during the three and nine months ended September 30, 2009, respectively. In connection with the measurement and initial recognition of the foregoing foreclosed assets, the Company recognized charge-offs of the allowance for loan losses totaling $269 thousand and $2.2 million, in each respective period. Other than foreclosed assets measured at fair value (less estimated disposal costs) upon initial recognition, a total of $42 thousand and $1.8 million in foreclosed assets were remeasured at fair value during the three and nine months ended September 30, 2009, respectively, resulting in a charge of $13 thousand and $283 thousand to current earnings in each respective period.

 

21

 

 

In accordance with FASB ASC 820, "Fair Value Measurements," below is a table on fair values of financial instruments as of September 30, 2009 and December 31, 2008.

 

 

 

September 30,
2009

 

 

 

December 31,
2008

 

 

 

Carrying
Amount

 

 

 

Estimated
Fair Value

 

 

 

Carrying
Amount

 

 

 

Estimated
Fair Value

 

 

 

(In thousands)

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

17,866

 

 

 

$

17,866

 

 

 

$

18,259

 

 

 

$

18,259

 

Interest-bearing deposits with banks

 

 

163,381

 

 

 

 

163,165

 

 

 

 

6,800

 

 

 

 

6,800

 

Federal funds sold and securities purchased under resell agreements

 

 

487

 

 

 

 

487

 

 

 

 

203

 

 

 

 

203

 

Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available for sale

 

 

104,536

 

 

 

 

104,536

 

 

 

 

103,007

 

 

 

 

103,007

 

Held to maturity

 

 

8,747

 

 

 

 

9,032

 

 

 

 

8,927

 

 

 

 

9,780

 

Other investments

 

 

7,601

 

 

 

 

7,601

 

 

 

 

5,643

 

 

 

 

5,643

 

Loans, net

 

 

1,204,590

 

 

 

 

1,208,276

 

 

 

 

1,215,304

 

 

 

 

1,234,426

 

Loans held for sale

 

 

8,050

 

 

 

 

8,722

 

 

 

 

8,603

 

 

 

 

8,716

 

Accrued interest receivable

 

 

7,016

 

 

 

 

7,016

 

 

 

 

7,889

 

 

 

 

7,889

 

Mortgage servicing rights

 

 

7,038

 

 

 

 

7,574

 

 

 

 

5,271

 

 

 

 

5,730

 

Interest rate lock commitments, mandatory forward delivery commitments and pair offs, net asset

 

 

192

 

 

 

 

192

 

 

 

 

58

 

 

 

 

58

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest bearing deposits

 

$

87,908

 

 

 

$

87,908

 

 

 

$

84,038

 

 

 

$

84,038

 

Interest-bearing deposits

 

 

1,288,040

 

 

 

 

1,293,015

 

 

 

 

1,167,556

 

 

 

 

1,171,202

 

Short-term borrowings

 

 

20,000

 

 

 

 

20,402

 

 

 

 

 

 

 

 

 

Long-term borrowings

 

 

13,503

 

 

 

 

15,007

 

 

 

 

23,532

 

 

 

 

25,148

 

Junior subordinated debt owed to unconsolidated trusts

 

 

37,116

 

 

 

 

23,061

 

 

 

 

37,116

 

 

 

 

19,015

 

Accrued interest payable

 

 

5,399

 

 

 

 

5,399

 

 

 

 

5,821

 

 

 

 

5,821

 

Interest rate lock commitments, mandatory forward delivery commitments and pair offs, net liability

 

 

16

 

 

 

 

16

 

 

 

 

118

 

 

 

 

118

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Off-balance-sheet instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loan commitments and standby letters of credit

 

$

 

 

 

$

26

 

 

 

$

 

 

 

$

38

 

 

 

22

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

This discussion is intended to focus on certain financial information regarding the Company and is written to provide the reader with a more thorough understanding of its financial statements. The following discussion and analysis of the Company’s financial position and results of operations should be read in conjunction with the information set forth in Item 3, Quantitative and Qualitative Disclosures about Market Risk and the annual audited consolidated financial statements filed on Form 10-K (as amended) for the year ended December 31, 2008.

 

This report contains certain financial information determined by methods other than in accordance with GAAP. These measures include net operating income before provision for loan losses, income taxes and dividends and discount accretion on preferred shares; net interest margin on a fully tax-equivalent basis and net interest income on a fully tax-equivalent basis. Management uses these non-GAAP measures in its analysis of the Company’s performance. Net operating income before provision for loan losses, income taxes and dividends and discount accretion on preferred shares represent net income on the core operations of the Company. The tax-equivalent adjustment to net interest margin and net interest income recognizes the income tax savings when comparing taxable and tax-exempt assets and adjusting for federal and state exemption of interest income and certain other permanent income tax differences. Management believes that it is a standard practice in the banking industry to present net interest income and net interest margin on a fully tax-equivalent basis, and accordingly believes the presentation of the financial measures may be useful for peer comparison purposes. This disclosure should not be viewed as a substitute for the results determined to be in accordance with GAAP, nor is it necessarily comparable to non-GAAP performance measures that may be presented by other companies. Reconciliations of net interest income on a fully tax-equivalent basis to net interest income and net interest margin on a fully tax-equivalent basis to net interest margin are contained in tables under “Net Interest Income.”

 

Special Note Concerning Forward-Looking Statements

 

This document (including information incorporated by reference) contains, and future oral and written statements of the Company and its management may contain, forward-looking statements, within the meaning of such term in the Private Securities Litigation Reform Act of 1995, with respect to the financial condition, results of operations, plans, objectives, future performance and business of the Company. Forward-looking statements, which may be based upon beliefs, expectations and assumptions of the Company’s management and on information currently available to management, are generally identifiable by the use of words such as “believe,” “expect,” “anticipate,” “plan,” “intend,” “estimate,” “may,” “will,” “would,” “could,” “should” or other similar expressions. Additionally, all statements in this document, including forward-looking statements, speak only as of the date they are made, and the Company undertakes no obligation to update any statement in light of new information or future events.

 

The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. The factors, which could have a material adverse effect on the operations and future prospects of the Company and its subsidiaries are detailed in the “Risk Factors” section included under Item 1A of Part I of the Company’s Form 10-K (as amended) for the year ended December 31, 2008. In addition to the risk factors described in that section, there are other factors that may impact any public company, including ours, which could have a material adverse effect on the operations and future prospects of the Company and its subsidiaries. These additional factors include, but are not limited to, the following:

 

23

 

 

These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.

 

Critical Accounting Policies

 

Allowance for Loan Losses:  The allowance for loan losses is that amount which, in management’s judgment, is considered appropriate to provide for probable losses in the loan portfolio. In analyzing the adequacy of the allowance for loan losses, management uses a comprehensive loan grading system to determine risk potential in the portfolio, and considers the results of periodic internal and external loan reviews. Historical loss experience factors and specific reserves for impaired loans, combined with other considerations, such as delinquency, non-accrual, trends on criticized and classified loans, economic conditions, concentrations of credit risk, and experience and abilities of lending personnel, are also considered in analyzing the adequacy of the allowance. Management uses a systematic methodology, which is applied at least quarterly, to determine the amount of allowance for loan losses and the resultant provisions for loan losses it considers adequate to provide for anticipated loan losses. This methodology includes a periodic detailed analysis of the loan portfolio, a systematic loan grading system and a periodic review of the summary of the allowance for loan and lease loss balance. In the event that different assumptions or conditions were to prevail, and depending upon the severity of such changes, the possibility of materially different financial condition or results of operations is a reasonable likelihood.

 

Three methods are used to evaluate the adequacy of the allowance for loan losses: (1) specific identification, based on management’s assessment of loans in our portfolio and the probability that a charge-off will occur in the upcoming quarter; (2) losses probable in the loan portfolio besides those specifically identified, based upon a migration analysis of the percentage of loans currently performing that have probable losses; and (3) qualitative adjustments based on management’s assessment of certain risks such as delinquency trends, watch-list and classified trends, changes in concentrations, economic trends, industry trends, non-accrual trends, exceptions and loan-to-value guidelines, management and staff changes and policy or procedure changes.

 

While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions. In addition, as an integral part of their examination process regulatory agencies periodically review our allowance for loan losses and may require us to make additions to the allowance based on their evaluation of information available at the time of their examinations.

 

During the three and nine month period ending September 30, 2009, the Company has experienced continued deterioration in asset quality, as measured by non-performing assets and classified loans that are still performing. As the Company has consistently maintained a high percentage of real-estate loans, the weak real estate market in the areas of the Company’s operations has resulted in a significant number of loans being downgraded or placed on non-accrual status. Management remains concerned about possible losses in its real estate loan portfolio. Management deemed the additional allocations during 2009 to be a necessary and prudent step to reserve against probable losses indicated by the continued deterioration in asset quality. Management will continue to closely monitor asset quality in general and real estate loan quality in particular and is committed to act aggressively to minimize further losses.

 

24

 

 

Mortgage Servicing Right (MSR) Assets:  Servicing residential mortgage loans for third-party investors represents a significant business activity of the Bank. As of September 30, 2009, mortgage loans serviced for others totaled $1.0 billion. The net carrying amount of the MSRs on these loans total $7.0 million as of September 30, 2009. The expected and actual rates of mortgage loan prepayments are the most significant factors driving the value of MSRs. Increases in mortgage loan prepayments reduce estimated future net servicing cash flows because the life of the underlying loan is reduced. In determining the fair value of the MSRs, mortgage interest rates, which are used to determine prepayment rates and discount rates, are held constant over the estimated life of the portfolio. Fair values of the MSRs are calculated on a monthly basis. The values are based upon current market conditions and assumptions, which incorporate the expected life of the loans, estimated costs to service the loans, servicing fees to be received and other factors. MSRs are carried at the lower of the initial capitalized amount, net of accumulated amortization, or fair value.

 

The fair value of the MSRs is driven primarily by the effect current mortgage interest rates have on the likelihood borrowers will prepay the underlying mortgages by refinancing at a lower rate. Accordingly, higher interest rates decrease the likelihood of prepayment, extending the life of the MSRs and increasing the value of these assets. Lower interest rates increase the likelihood of prepayment, contracting the life of the MSRs and decreasing the value of these assets. This can have a significant impact on our income. There is no certainty on the direction and amount of interest rate changes looking forward, and therefore, there is no certainty on the amount or direction of the change in valuation.

 

An analysis of changes in mortgage servicing rights asset follows:

 

 

 

Three Months Ended
September 30,

 

 

 

Nine Months Ended
September 30,

 

 

 

2009

 

 

 

2008

 

 

 

2009

 

 

 

2008

 

 

 

(In thousands)

 

Balance at beginning of period

 

$

8,305

 

 

 

$

7,824

 

 

 

$

6,908

 

 

 

$

8,250

 

Servicing rights originated and capitalized

 

 

877

 

 

 

 

252

 

 

 

 

3,563

 

 

 

 

1,247

 

Amortization

 

 

(639

)

 

 

 

(678

)

 

 

 

(1,928

)

 

 

 

(2,099

)

 

 

$

8,543

 

 

 

$

7,398

 

 

 

$

8,543

 

 

 

$

7,398

 

 

Below is an analysis of changes in the mortgage servicing right asset valuation allowance:

 

 

 

Three Months Ended
September 30,

 

 

 

Nine Months Ended
September 30,

 

 

 

2009

 

 

 

2008

 

 

 

2009

 

 

 

2008

 

 

 

(In thousands)

 

Balance at beginning of period

 

$

(1,235

)

 

 

$

(3

)

 

 

$

(1,637

)

 

 

$

(184

)

Aggregate reductions credited to operations

 

 

 

 

 

 

3

 

 

 

 

1,250

 

 

 

 

1,347

 

Aggregate additions charged to operations

 

 

(270

)

 

 

 

 

 

 

 

(1,118

)

 

 

 

(1,163

)

 

 

$

(1,505

)

 

 

$

 

 

 

$

(1,505

)

 

 

$

 

 

The fair values of the MSRs were $7.6 million and $5.7 million on September 30, 2009 and December 31, 2008, respectively.

 

The primary risk characteristics of the underlying loans used to stratify the servicing assets for the purposes of measuring impairment are interest rate and original term.

 

Our valuation allowance is used to recognize impairments of our MSRs. An MSR is considered impaired when the market value of the MSR is below the amortized book value of the MSR. The MSRs are accounted by risk tranche, with the interest rate and term of the underlying loan being the primary strata used in distinguishing the tranches. Each tranche is evaluated separately for impairment.

 

25

 

 

We have our MSRs analyzed for impairment on a monthly basis. The underlying loans on all serviced loans are analyzed and, based upon the value of MSRs that are traded on the open market, a current market value for each risk tranche in our portfolio is assigned. We then compare that market value to the current amortized book value for each tranche. The change in market value (up to the amortized value of the MSR) is recorded as an adjustment to the MSR valuation allowance, with the offset being recorded as an addition or a reduction to income.

 

The impairment is analyzed for other than temporary impairment on a quarterly basis. The MSRs would be considered other than temporarily impaired if there is likelihood that the impairment would not be recovered before the expected maturity of the asset. If the underlying mortgage loans have been amortized at a rate greater than the amortization of the MSR, the MSR may be other than temporarily impaired. As of September 30, 2009, none of the MSRs were considered other than temporarily impaired.

 

The following assumptions were used to calculate the market value of the MSRs as of September 30, 2009, December 31, 2008 and September 30, 2008:

 

 

 

September 30,
2009

 

 

 

December 31,
2008

 

 

 

September 30,
2008

 

Prepayment Standard Assumption (PSA) speed

 

297.00

%

 

 

390.00

%

 

 

181.00

%

Discount rate

 

10.76

 

 

 

10.76

 

 

 

10.26

 

Earnings rate

 

2.75

 

 

 

3.50

 

 

 

4.00

 

 

Overview

 

The Company’s net income available to common shareholders increased by $3.1 million (134.0%) from the quarter ended June 30, 2009 to the quarter ended September 30, 2009. In addition, the Company’s net income available to common shareholders decreased $1.5 million (65.5%) from the third quarter of 2008 to the third quarter of 2009. The increase from the second quarter of 2009 was mainly due to a decrease in the provision for loan losses. The decrease from the third quarter of 2008 was primarily due to an increase in non-interest expense and an increase in the provision for loan losses, which was partially offset by an increase in non-interest income and an increase in net interest income. Total assets grew $167.2 million (11.8%) from December 31, 2008 to September 30, 2009.

 

26

 

 

Results of Operations

 

General. The Company experienced net operating income before income taxes, provision for loan losses and dividends and discount accretion on preferred shares of $6.4 million during the third quarter of 2009, compared to net operating income of $5.5 million during the same period in 2008. This represented an increase of $943 thousand (17.2%). However, net income available to common shareholders for the third quarter of 2009 decreased to $793 thousand or $0.12 diluted earnings per share, compared to $2.3 million or $0.35 diluted earnings per share for the same period in 2008, a decrease of $1.5 million (65.5%) in net income and a decrease in earnings per share of $0.23 (65.7%). This decrease in net income was primarily due to an increase in the provision for loan losses of $2.2 million (117.4%) and an increase in non-interest expense of $2.1 million (24.2%). The provision for loan losses increased pursuant to management’s loan loss reserve analysis, which indicated that it would be prudent to increase the allowance to help insure that probable losses inherent in the Bank’s loan portfolio are adequately covered. The increased provision for loan losses was indicated based upon the continued deterioration of the Bank’s asset quality and the general economic conditions nationally and locally. For further information on the provision for loan losses, please see discussion in “Critical Accounting Policies –Allowance for Loan Losses” above. The increase in non-interest expense was mainly due to an increase in salaries and employee benefits expenses, due to an increase in the number of employees and normal annual raises. Also in non-interest expenses there was a decrease in the valuation of interest rate lock commitment contracts associated with commitments to sell mortgage loans to FNMA. This expense was mainly due to an increase in interest rate contracts expenses associated with mortgage loan refinancing, due to a lower market value of these contracts at the end of the third quarter of 2009 compared to the end of the third quarter of 2008. These items were partially offset by an increase in non-interest income of $1.7 million (65.7%) and an increase in net interest income of $1.4 million (11.8%). The increase in non-interest income was primarily due to an increase in the gain on sale of loans, caused by a large volume of mortgage loan sales due to heavy refinancing volume in the lower interest rate environment. The increase in net interest income was primarily due to a decline in interest expense due to a lower interest rate environment. Income tax expenses decreased $243 thousand (17.9%) due to lower pre-tax income. Additionally, during the third quarter of 2009 there were dividends and discount accretion on preferred shares issued to the Treasury as part of Trinity’s participation in the Capital Purchase Program (“CPP”) of $529 thousand; there were no such dividends and discount accretion in the third quarter of 2008.

 

The Company experienced net operating income before income taxes, provision for loan losses and dividends and discount accretion on preferred shares of $25.3 million during the first nine months of 2009, compared to $16.6 million during the same period in 2008. This represented an increase of $8.6 million (52.0%), However, net income available to common shareholders for the first nine months of 2009 decreased to $1.7 million or $0.26 diluted earnings per share, compared to $7.9 million or $1.21 diluted earnings per share for the same period in 2008, a decrease of $6.2 million (78.8%) in net income and a decrease in earnings per share of $0.95 (78.5%). This decrease in net income was primarily due to an increase in the provision for loan losses of $16.7 million (408.4%) and an increase in non-interest expense of $3.9 million (14.5%). For further information on the provision for loan losses, please see discussion in “Critical Accounting Policies –Allowance for Loan Losses” above. In addition to the factors that affected the Company in the third quarter discussed above, the increase in non-interest expense was also affected by an increase in FDIC insurance premiums which was experienced industry-wide and which we expect to continue into the future. Partially offsetting these items was an increase in non-interest income of $6.7 million (73.9%) and an increase in net interest income of $5.9 million (17.0%). The increase in non-interest income was primarily due to an increase in the gain on sale of loans, and the increase in net interest income was primarily due to a decline in interest expense due to a lower interest rate environment. Income tax expenses decreased $2.9 million (63.2%) due to lower pre-tax income. Additionally, during the first nine months of 2009 there were dividends and discount accretion on preferred shares issued to the Treasury as part of Trinity’s participation in the CPP of $1.1 million; there were no such dividends and discount accretion in the first nine months of 2008.

 

27

 

 

The profitability of the Company’s operations depends primarily on its net interest income, which is the difference between total interest earned on interest-earning assets and total interest paid on interest-bearing liabilities. The Company’s net income is also affected by its provision for loan losses as well as other income and other expenses. The provision for loan losses reflects the amount management believes to be adequate to cover probable credit losses in the loan portfolio. Non-interest income or other income consists of mortgage loan servicing fees, trust fees, loan and other fees, service charges on deposits, gain on sale of loans, gain on sale of securities, title insurance premiums and other operating income. Other expenses include salaries and employee benefits, occupancy expenses, data processing expenses, marketing, amortization and valuation of mortgage servicing rights, amortization and valuation of other intangible assets, supplies expense, loss on other real estate owned, postage, bankcard and ATM network fees, legal, professional and accounting fees, FDIC insurance premiums and other expenses.

 

The amount of net interest income is affected by changes in the volume and mix of interest-earning assets, the level of interest rates earned on those assets, the volume and mix of interest-bearing liabilities, and the level of interest rates paid on those interest-bearing liabilities. The provision for loan losses is dependent on changes in the loan portfolio and management’s assessment of the collectability of the loan portfolio, as well as economic and market conditions. Other income and other expenses are impacted by growth of operations and growth in the number of accounts through both acquisitions and core banking business growth. Growth in operations affects other expenses as a result of additional employees, branch facilities and promotional marketing expenses. Growth in the number of accounts affects other income including service fees as well as other expenses such as computer services, supplies, postage, telecommunications and other miscellaneous expenses.

 

28

 

 

Net Interest Income. The following tables present, for the periods indicated, the total dollar amount of interest income from average interest-earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities, and the resultant costs, expressed both in dollars and rates:

 

 

 

Three Months Ended September 30,

 

 

 

2009

 

 

 

2008

 

 

 

Average
Balance

 

 

 

Interest

 

 

 

Yield/
Rate

 

 

 

Average
Balance

 

 

 

Interest

 

 

 

Yield/
Rate

 

 

 

(Dollars in thousands)

 

Interest-earning Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans(1)

 

$

1,249,540

 

 

 

$

17,758

 

 

 

5.64

%

 

 

$

1,202,478

 

 

 

$

19,313

 

 

 

6.39

%

Taxable investment securities

 

 

84,581

 

 

 

 

960

 

 

 

4.50

 

 

 

 

95,045

 

 

 

 

597

 

 

 

2.50

 

Investment securities exempt from federal income taxes (2)

 

 

36,010

 

 

 

 

446

 

 

 

4.91

 

 

 

 

14,124

 

 

 

 

290

 

 

 

8.17

 

Federal funds sold

 

 

473

 

 

 

 

 

 

 

 

 

 

 

4,645

 

 

 

 

20

 

 

 

1.71

 

Other interest-bearing deposits

 

 

151,758

 

 

 

 

107

 

 

 

0.28

 

 

 

 

23,096

 

 

 

 

111

 

 

 

1.91

 

Investment in unconsolidated trust subsidiaries

 

 

1,116

 

 

 

 

26

 

 

 

9.24

 

 

 

 

1,116

 

 

 

 

22

 

 

 

7.84

 

Total interest-earning assets

 

 

1,523,478

 

 

 

 

19,297

 

 

 

5.03

 

 

 

 

1,340,504

 

 

 

 

20,353

 

 

 

6.04

 

Non-interest-earning assets

 

 

64,730

 

 

 

 

 

 

 

 

 

 

 

 

 

62,169

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

1,588,208

 

 

 

 

 

 

 

 

 

 

 

 

$

1,402,673

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW deposits

 

$

110,161

 

 

 

$

102

 

 

 

0.37

%

 

 

$

95,691

 

 

 

$

262

 

 

 

1.09

%

Money market deposits

 

 

187,555

 

 

 

 

185

 

 

 

0.39

 

 

 

 

194,382

 

 

 

 

556

 

 

 

1.14

 

Savings deposits

 

 

349,147

 

 

 

 

370

 

 

 

0.42

 

 

 

 

323,848

 

 

 

 

1,342

 

 

 

1.65

 

Time deposits over $100,000

 

 

423,492

 

 

 

 

2,922

 

 

 

2.74

 

 

 

 

313,260

 

 

 

 

3,243

 

 

 

4.12

 

Time deposits under $100,000

 

 

213,648

 

 

 

 

1,374

 

 

 

2.55

 

 

 

 

212,286

 

 

 

 

2,025

 

 

 

3.79

 

Short-term borrowings, including ESOP borrowings under 1 year

 

 

26,315

 

 

 

 

250

 

 

 

3.77

 

 

 

 

7,391

 

 

 

 

62

 

 

 

3.34

 

Long-term borrowings, including ESOP borrowings over 1 year

 

 

13,507

 

 

 

 

120

 

 

 

3.52

 

 

 

 

23,545

 

 

 

 

287

 

 

 

4.85

 

Long-term capital lease obligations

 

 

2,211

 

 

 

 

67

 

 

 

12.02

 

 

 

 

2,211

 

 

 

 

67

 

 

 

12.06

 

Junior subordinated debt owed to unconsolidated trusts

 

 

37,116

 

 

 

 

689

 

 

 

7.36

 

 

 

 

37,116

 

 

 

 

722

 

 

 

7.74

 

Total interest-bearing liabilities

 

 

1,363,152

 

 

 

 

6,079

 

 

 

1.77

 

 

 

 

1,209,730

 

 

 

 

8,566

 

 

 

2.82

 

 

(Continued on following page)

29

 

 

(Continued from prior page)

 

 

 

Three Months Ended September 30,

 

 

 

2009

 

 

 

2008

 

 

 

Average
Balance

 

 

 

Interest

 

 

 

Yield/
Rate

 

 

 

Average
Balance

 

 

 

Interest

 

 

 

Yield/
Rate

 

 

 

(Dollars in thousands)

 

Demand deposits--non-interest-bearing

 

$

40,200

 

 

 

 

 

 

 

 

 

 

 

 

$

45,491

 

 

 

 

 

 

 

 

 

 

Other non-interest-bearing liabilities

 

 

59,477

 

 

 

 

 

 

 

 

 

 

 

 

 

56,076

 

 

 

 

 

 

 

 

 

 

Stockholders' equity, including stock owned by ESOP

 

 

125,379

 

 

 

 

 

 

 

 

 

 

 

 

 

91,376

 

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders equity

 

$

1,588,208

 

 

 

 

 

 

 

 

 

 

 

 

$

1,402,673

 

 

 

 

 

 

 

 

 

 

Net interest income on a fully tax-equivalent basis/interest rate Spread(3)

 

 

 

 

 

 

$

13,218

 

 

 

3.26

%

 

 

 

 

 

 

 

$

11,787

 

 

 

3.22

%

Net interest margin on a fully tax-equivalent basis(4)

 

 

 

 

 

 

 

 

 

 

 

3.44

%

 

 

 

 

 

 

 

 

 

 

 

 

3.50

%

Net interest margin(4)

 

 

 

 

 

 

 

 

 

 

 

3.40

%

 

 

 

 

 

 

 

 

 

 

 

 

3.47

%

 

________________

 

(1)

Average loans include non-accrual loans of $64.8 million and $34.0 million for September 30, 2009 and 2008, respectively. Interest income includes loan origination fees of $528 thousand and $683 thousand for the three months ended September 30, 2009 and 2008, respectively.

(2)

Non-taxable investment income is presented on a fully tax-equivalent basis, adjusting for federal and state exemption of interest income and certain other permanent tax differences.

(3)

Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities and is presented on a fully tax-equivalent basis.

(4)

Net interest margin represents net interest income as a percentage of average interest-earning assets.

 

For the third quarter of 2009, net interest income on a fully tax-equivalent basis increased $1.4 million (12.1%) to $13.2 million from $11.8 million for the third quarter of 2008. The increase in net interest income on a fully tax-equivalent basis resulted from a decrease in interest expense of $2.5 million (29.0%), which was partially offset by a decrease in interest income on a fully tax-equivalent basis of $1.1 million (5.2%). Interest expense decreased mainly due to a decrease in the cost on interest-bearing liabilities of 105 basis points, which accounted for a decrease in interest expense of $3.6 million. This was partially offset by an increase in average interest-bearing liabilities of $153.4 million (12.7%), which accounted for an increase of $1.1 million in interest expense. Interest income on a fully tax-equivalent basis decreased due to a decrease in the yield of interest-earning assets of 101 basis points, which accounted for $2.2 million of the decrease. This was partially offset by an increase in average total interest-earning assets of $183.0 million (13.6%), accounting for an increase in $1.1 million in interest income on a fully tax-equivalent basis. The net interest margin expressed on a fully tax-equivalent basis decreased 6 basis points to 3.44% for the quarter ended September 30, 2009 from 3.50% for the quarter ended September 30, 2008.

 

30

 

 

 

 

Nine Months Ended September 30,

 

 

 

2009

 

 

 

2008

 

 

 

Average
Balance

 

 

 

Interest

 

 

 

Yield/
Rate

 

 

 

Average
Balance

 

 

 

Interest

 

 

 

Yield/
Rate

 

 

 

(Dollars in thousands)

 

Interest-earning Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans(1)

 

$

1,251,785

 

 

 

$

55,748

 

 

 

5.95

%

 

 

$

1,188,528

 

 

 

$

59,510

 

 

 

6.69

%

Taxable investment securities

 

 

74,860

 

 

 

 

2,104

 

 

 

3.76

 

 

 

 

97,495

 

 

 

 

2,274

 

 

 

3.12

 

Investment securities exempt from federal income taxes (2)

 

 

29,609

 

 

 

 

1,214

 

 

 

5.48

 

 

 

 

15,031

 

 

 

 

911

 

 

 

8.10

 

Federal funds sold

 

 

1,018

 

 

 

 

1

 

 

 

0.13

 

 

 

 

6,736

 

 

 

 

131

 

 

 

2.60

 

Other interest-bearing deposits

 

 

109,563

 

 

 

 

193

 

 

 

0.24

 

 

 

 

29,543

 

 

 

 

551

 

 

 

2.49

 

Investment in unconsolidated trust subsidiaries

 

 

1,116

 

 

 

 

68

 

 

 

8.15

 

 

 

 

1,116

 

 

 

 

66

 

 

 

7.90

 

Total interest-earning assets

 

 

1,467,951

 

 

 

 

59,328

 

 

 

5.40

 

 

 

 

1,338,449

 

 

 

 

63,443

 

 

 

6.33

 

Non-interest-earning assets

 

 

60,966

 

 

 

 

 

 

 

 

 

 

 

 

 

62,532

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

1,528,917

 

 

 

 

 

 

 

 

 

 

 

 

$

1,400,981

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW deposits

 

$

108,650

 

 

 

$

339

 

 

 

0.42

 

 

 

$

94,416

 

 

 

$

933

 

 

 

1.32

%

Money market deposits

 

 

191,498

 

 

 

 

635

 

 

 

0.44

 

 

 

 

196,580

 

 

 

 

2,027

 

 

 

1.38

 

Savings deposits

 

 

329,700

 

 

 

 

1,031

 

 

 

0.42

 

 

 

 

294,058

 

 

 

 

4,035

 

 

 

1.83

 

Time deposits over $100,000

 

 

386,755

 

 

 

 

8,550

 

 

 

2.96

 

 

 

 

320,584

 

 

 

 

10,723

 

 

 

4.47

 

Time deposits under $100,000

 

 

210,584

 

 

 

 

4,331

 

 

 

2.75

 

 

 

 

215,262

 

 

 

 

6,761

 

 

 

4.20

 

Short-term borrowings, including ESOP borrowings under 1 year

 

 

28,717

 

 

 

 

502

 

 

 

2.34

 

 

 

 

29,073

 

 

 

 

707

 

 

 

3.25

 

Long-term borrowings, including ESOP borrowings over 1 year

 

 

18,461

 

 

 

 

644

 

 

 

4.66

 

 

 

 

23,554

 

 

 

 

865

 

 

 

4.91

 

Long-term capital lease obligations

 

 

2,211

 

 

 

 

201

 

 

 

12.15

 

 

 

 

2,211

 

 

 

 

201

 

 

 

12.14

 

Junior subordinated debt owed to unconsolidated trusts

 

 

37,116

 

 

 

 

2,095

 

 

 

7.55

 

 

 

 

37,116

 

 

 

 

2,198

 

 

 

7.91

 

Total interest-bearing liabilities

 

 

1,313,692

 

 

 

 

18,328

 

 

 

1.87

 

 

 

 

1,212,854

 

 

 

 

28,450

 

 

 

3.13

 

 

(Continued on following page)

31

 

 

(Continued from prior page)

 

 

 

Nine Months Ended September 30,

 

 

 

2009

 

 

 

2008

 

 

 

Average
Balance

 

 

 

Interest

 

 

 

Yield/
Rate

 

 

 

Average
Balance

 

 

 

Interest

 

 

 

Yield/
Rate

 

 

 

(Dollars in thousands)

 

Demand deposits-non-interest-bearing

 

$

43,421

 

 

 

 

 

 

 

 

 

 

 

 

$

42,663

 

 

 

 

 

 

 

 

 

 

Other non-interest-bearing liabilities

 

 

51,739

 

 

 

 

 

 

 

 

 

 

 

 

 

54,524

 

 

 

 

 

 

 

 

 

 

Stockholders' equity, including stock owned by ESOP

 

 

120,065

 

 

 

 

 

 

 

 

 

 

 

 

 

90,940

 

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders equity

 

$

1,528,917

 

 

 

 

 

 

 

 

 

 

 

 

$

1,400,981

 

 

 

 

 

 

 

 

 

 

Net interest income on a fully tax-equivalent basis/interest rate Spread(3)

 

 

 

 

 

 

$

41,000

 

 

 

3.54

%

 

 

 

 

 

 

 

$

34,993

 

 

 

3.20

%

Net interest margin on a fully tax-equivalent basis(4)

 

 

 

 

 

 

 

 

 

 

 

3.73

%

 

 

 

 

 

 

 

 

 

 

 

 

3.49

%

Net interest margin(4)

 

 

 

 

 

 

 

 

 

 

 

3.69

%

 

 

 

 

 

 

 

 

 

 

 

 

3.46

%

 

________________

 

(1)

Average loans include non-accrual loans of $48.1 million and $23.0 million for September 30, 2009 and 2008, respectively. Interest income includes loan origination fees of $2.4 million and $2.0 million for the nine months ended September 30, 2009 and 2008, respectively.

(2)

Non-taxable investment income is presented on a fully tax-equivalent basis, adjusting for federal and state exemption of interest income and certain other permanent tax differences.

(3)

Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities and is presented on a fully tax-equivalent basis.

(4)

Net interest margin represents net interest income as a percentage of average interest-earning assets.

 

For the first nine months of 2009, net interest income on a fully tax-equivalent basis increased $6.0 million (17.2%) to $41.0 million from $35.0 million for the first nine months of 2008. The increase in net interest income on a fully tax-equivalent basis resulted from a decrease in interest expense of $10.1 million (35.6%), which was partially offset by a decrease in interest income on a fully tax-equivalent basis of $4.1 million (6.5%). Interest expense decreased mainly due to a decrease in the cost on interest-bearing liabilities of 126 basis points, which accounted for a decrease in interest expense of $12.2 million. This was partially offset by an increase in average interest-bearing liabilities of $100.8 million (8.3%), which accounted for an increase of $2.1 million in interest expense. Interest income on a fully tax-equivalent basis decreased due to a decrease in the yield of interest-earning assets of 93 basis points, which accounted for $7.7 million of the decrease. This was partially offset by an increase in average total interest-earning assets of $129.5 million (9.7%), accounting for an increase in $3.6 million in interest income on a fully tax-equivalent basis. The net interest margin expressed on a fully tax-equivalent basis increased 24 basis points to 3.73% for the nine months ended September 30, 2009 from 3.49% for the six months ended September 30, 2008.

 

32

 

 

The following table reconciles net interest income on a fully tax-equivalent basis for the periods presented:

 

 

 

Three Months Ended
September 30,

 

 

 

Nine Months Ended
September 30,

 

 

 

2009

 

 

 

2008

 

 

 

2009

 

 

 

2008

 

 

 

(In thousands)

 

Net interest income

 

$

13,052

 

 

 

$

11,678

 

 

 

$

40,546

 

 

 

$

34,654

 

Tax-equivalent adjustment to net interest income

 

 

166

 

 

 

 

109

 

 

 

 

454

 

 

 

 

339

 

Net interest income, fully tax-equivalent basis

 

$

13,218

 

 

 

$

11,787

 

 

 

$

41,000

 

 

 

$

34,993

 

 

 

33

 

 

Volume, Mix and Rate Analysis of Net Interest Income. The following tables present the extent to which changes in volume, changes in interest rates, and changes in the interest rates times the changes in volume of interest-earning assets and interest-bearing liabilities have affected the Company’s interest income and interest expense during the periods indicated. Information is provided on changes in each category due to (i) changes attributable to changes in volume (change in volume times the prior period interest rate), (ii) changes attributable to changes in interest rate (changes in rate times the prior period volume) and (iii) changes attributable to changes in rate/volume (changes in interest rate times changes in volume). Changes attributable to the combined impact of volume and rate have been allocated proportionally to the changes due to volume and the changes due to rate.

 

 

 

Three Months Ended
September 30,

 

 

 

Nine Months Ended
September 30,

 

 

 

2009 Compared to 2008

 

 

 

2009 Compared to 2008

 

 

 

Change
Due to
Volume

 

 

 

Change
Due to
Rate

 

 

 

Total
Change

 

 

 

Change
Due to
Volume

 

 

 

Change
Due to
Rate

 

 

 

Total
Change

 

 

 

(In thousands)

 

Interest-earning Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

$

734

 

 

 

$

(2,289

)

 

 

$

(1,555

)

 

 

$

3,053

 

 

 

$

(6,815

)

 

 

$

(3,762

)

Taxable investment securities

 

 

(72

)

 

 

 

435

 

 

 

 

363

 

 

 

 

(585

)

 

 

 

415

 

 

 

 

(170

)

Investment securities exempt from federal income taxes(1)

 

 

307

 

 

 

 

(151

)

 

 

 

156

 

 

 

 

670

 

 

 

 

(367

)

 

 

 

303

 

Federal funds sold

 

 

(9

)

 

 

 

(11

)

 

 

 

(20

)

 

 

 

(61

)

 

 

 

(69

)

 

 

 

(130

)

Other interest bearing deposits

 

 

160

 

 

 

 

(164

)

 

 

 

(4

)

 

 

 

480

 

 

 

 

(838

)

 

 

 

(358

)

Investment in unconsolidated trust subsidiaries

 

 

 

 

 

 

4

 

 

 

 

4

 

 

 

 

 

 

 

 

2

 

 

 

 

2

 

Total increase (decrease) in interest income

 

$

1,120

 

 

 

$

(2,176

)

 

 

$

(1,056

)

 

 

$

3,556

 

 

 

$

(7,671

)

 

 

$

(4,115

)

Interest-bearing Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Now deposits

 

$

35

 

 

 

$

(195

)

 

 

$

(160

)

 

 

$

124

 

 

 

$

(718

)

 

 

$

(594

)

Money market deposits

 

 

(19

)

 

 

 

(352

)

 

 

 

(371

)

 

 

 

(51

)

 

 

 

(1,341

)

 

 

 

(1,392

)

Savings deposits

 

 

98

 

 

 

 

(1,070

)

 

 

 

(972

)

 

 

 

438

 

 

 

 

(3,442

)

 

 

 

(3,004

)

Time deposits over $100,000

 

 

945

 

 

 

 

(1,266

)

 

 

 

(321

)

 

 

 

1,929

 

 

 

 

(4,102

)

 

 

 

(2,173

)

Time deposits under $100,000

 

 

13

 

 

 

 

(664

)

 

 

 

(651

)

 

 

 

(144

)

 

 

 

(2,286

)

 

 

 

(2,430

)

Short-term borrowings, including ESOP borrowings under 1 year

 

 

179

 

 

 

 

9

 

 

 

 

188

 

 

 

 

(9

)

 

 

 

(196

)

 

 

 

(205

)

Long-term borrowings, including ESOP borrowings over 1 year

 

 

(102

)

 

 

 

(65

)

 

 

 

(167

)

 

 

 

(180

)

 

 

 

(41

)

 

 

 

(221

)

Long-term capital lease obligations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Junior subordinated debt owed to unconsolidated trusts

 

 

 

 

 

 

(33

)

 

 

 

(33

)

 

 

 

 

 

 

 

(103

)

 

 

 

(103

)

Total increase (decrease) in interest expense

 

$

1,149

 

 

 

$

(3,636

)

 

 

$

(2,487

)

 

 

$

2,107

 

 

 

$

(12,229

)

 

 

$

(10,122

)

Increase (decrease) in net interest income

 

$

(29

)

 

 

$

1,460

 

 

 

$

1,431

 

 

 

$

1,449

 

 

 

$

4,558

 

 

 

$

6,007

 

 

____________________

 

(1)

Non-taxable investment income is presented on a fully tax-equivalent basis, adjusting for federal and state exemption of interest income and certain other permanent income tax differences.

 

34

 

 

Other Income.  Changes in other income between the three and nine months ended September 30, 2009 and 2008 were as follows:

 

 

 

Three Months Ended
September 30,

 

 

 

 

 

 

 

Nine Months Ended
September 30,

 

 

 

 

 

 

 

2009

 

 

 

2008

 

 

 

Net
difference

 

 

 

2009

 

 

 

2008

 

 

 

Net 
difference

 

 

 

(In thousands)

 

Other income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage loan servicing fees

 

$

643

 

 

 

$

607

 

 

 

$

36

 

 

 

$

1,865

 

 

 

$

1,838

 

 

 

$

27

 

Trust fees

 

 

383

 

 

 

 

270

 

 

 

 

113

 

 

 

 

1,088

 

 

 

 

763

 

 

 

 

325

 

Loan and other fees

 

 

704

 

 

 

 

668

 

 

 

 

36

 

 

 

 

2,023

 

 

 

 

1,957

 

 

 

 

66

 

Service charges on deposits

 

 

424

 

 

 

 

438

 

 

 

 

(14

)

 

 

 

1,284

 

 

 

 

1,301

 

 

 

 

(17

)

Gain on sale of loans

 

 

1,553

 

 

 

 

356

 

 

 

 

1,197

 

 

 

 

7,048

 

 

 

 

1,722

 

 

 

 

5,326

 

Gain on sale of securities

 

 

208

 

 

 

 

 

 

 

 

208

 

 

 

 

942

 

 

 

 

555

 

 

 

 

387

 

Title insurance premiums

 

 

256

 

 

 

 

187

 

 

 

 

69

 

 

 

 

1,121

 

 

 

 

661

 

 

 

 

460

 

Other operating income

 

 

68

 

 

 

 

32

 

 

 

 

36

 

 

 

 

323

 

 

 

 

230

 

 

 

 

93

 

 

 

$

4,239

 

 

 

$

2,558

 

 

 

$

1,681

 

 

 

$

15,694

 

 

 

$

9,027

 

 

 

$

6,667

 

 

In the third quarter of 2009, other income increased from the third quarter of 2008 by $1.7 million (65.7%) from $2.6 million to $4.2 million. Gain on sale of loans increased $1.2 million (336.2%) from 2008 to 2009 due to a higher volume of loans sold between the two periods, as well as higher gains on each loan sold. This was influenced by a high volume of mortgage refinancing business due to historically low interest rates. Gain on sale of securities was $208 thousand in the third quarter of 2009; there were no such gains in the third quarter of 2008. Trust fees increased $113 thousand (41.9%) largely due to fees on additional assets under management obtained through the Allocca and Brunett acquisition (discussed in the notes to the financial statements above).

 

In the first nine months of 2009, other income increased from the first nine months of 2008 by $6.7 million (73.9%) from $9.0 million to $15.7 million. Gain on sale of loans increased $5.3 million (309.3%) from 2008 to 2009 due to a higher volume of loans sold between the two periods, as well as higher gains on each loan sold. Title insurance premiums increased $460 thousand (69.6%) due to a higher volume of policies written in the first nine months of 2009 compared to the same period in 2008. Both of these items were influenced by a high volume of mortgage refinancing business due to historically low interest rates. Gain on sale of securities increased $387 thousand (69.7%) due to higher gains on securities sold for each security, as the volume of securities sold was slightly lower in the first nine months of 2009 than in the same period in 2008. Trust fees increased $325 thousand (42.6%) largely due to fees on additional assets under management obtained through the Allocca and Brunett acquisition (discussed in the notes to the financial statements above).

 

35

 

 

Other Expenses.  Changes in other expenses between the three and nine months ended September 30, 2009 and 2008 were as follows:

 

 

 

Three Months Ended
September 30,

 

 

 

 

 

 

 

Nine Months Ended
September 30,

 

 

 

 

 

 

 

2009

 

 

 

2008

 

 

 

Net 
difference

 

 

 

2009

 

 

 

2008

 

 

 

Net 
difference

 

 

 

(In thousands)

 

Other expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

$

4,967

 

 

 

$

4,522

 

 

 

$

445

 

 

 

$

14,669

 

 

 

$

14,169

 

 

 

$

500

 

Occupancy

 

 

811

 

 

 

 

854

 

 

 

 

(43

)

 

 

 

2,424

 

 

 

 

2,481

 

 

 

 

(57

)

Data processing

 

 

718

 

 

 

 

606

 

 

 

 

112

 

 

 

 

2,042

 

 

 

 

1,730

 

 

 

 

312

 

Marketing

 

 

310

 

 

 

 

357

 

 

 

 

(47

)

 

 

 

1,198

 

 

 

 

1,543

 

 

 

 

(345

)

Amortization and valuation of mortgage servicing rights

 

 

909

 

 

 

 

675

 

 

 

 

234

 

 

 

 

1,796

 

 

 

 

1,915

 

 

 

 

(119

)

Amortization and valuation of other intangible assets

 

 

67

 

 

 

 

 

 

 

 

67

 

 

 

 

200

 

 

 

 

 

 

 

 

200

 

Supplies

 

 

93

 

 

 

 

81

 

 

 

 

12

 

 

 

 

445

 

 

 

 

390

 

 

 

 

55

 

Loss on sale of other real estate owned

 

 

86

 

 

 

 

77

 

 

 

 

9

 

 

 

 

617

 

 

 

 

95

 

 

 

 

522

 

Postage

 

 

142

 

 

 

 

165

 

 

 

 

(23

)

 

 

 

426

 

 

 

 

465

 

 

 

 

(39

)

Bankcard and ATM network fees

 

 

371

 

 

 

 

264

 

 

 

 

107

 

 

 

 

1,025

 

 

 

 

924

 

 

 

 

101

 

Legal, professional and accounting fees

 

 

724

 

 

 

 

393

 

 

 

 

331

 

 

 

 

1,705

 

 

 

 

984

 

 

 

 

721

 

FDIC insurance premiums

 

 

477

 

 

 

 

203

 

 

 

 

274

 

 

 

 

1,661

 

 

 

 

441

 

 

 

 

1,220

 

Other

 

 

1,178

 

 

 

 

544

 

 

 

 

634

 

 

 

 

2,781

 

 

 

 

1,930

 

 

 

 

851

 

 

 

$

10,853

 

 

 

$

8,741

 

 

 

$

2,112

 

 

 

$

30,989

 

 

 

$

27,067

 

 

 

$

3,922

 

 

For the third quarter of 2009, total other expenses increased $2.1 million (24.2%) to $10.9 million in 2009 from $8.7 million in the third quarter of 2008. Other expenses increased $634 thousand (116.5%) mainly due to an increase in interest rate contracts expenses associated with mortgage loan refinancing, due to a lower market value of these contracts at the end of the third quarter of 2009 compared to the end of the third quarter of 2008. Salaries and employee benefits increased $445 thousand (9.8%) due to an increase in full-time equivalent employees and normal increases in salaries and benefits. Legal, professional and accounting fees increased $331 thousand (84.2%) primarily due to higher legal expenses associated with collection efforts. FDIC insurance premiums increased $274 thousand (135.0%), reflecting an increase which was experienced industry-wide (see further discussion below). Amortization and valuation of mortgage servicing rights increased $234 thousand (34.7%) primarily due to the impairment on these servicing rights during the third quarter of 2009 due to the lower interest rate environment.

For the first nine months of 2009, total other expenses increased $3.9 million (14.5%) to $31.0 million in 2009 from $27.1 million in the first nine months of 2008. FDIC insurance premiums increased $1.2 million (276.6%), reflecting an increase which was experienced industry-wide (see further discussion below). Other expenses increased $851 thousand (44.1%) mainly due to additional provisions for probable losses in unfunded loans (which is accounted for separately from the provision for loan losses for funded loans), as well as an increase in interest rate contracts expenses as described above. Legal, professional and accounting fees increased $721 thousand (73.3%) primarily due to higher legal expenses associated with collection efforts. Loss on sale of other real estate owned increased $522 thousand (549.5%) due to a higher volume of other real estate owned transactions and at lower returns due to the slower real estate market. Salaries and employee benefits increased $500 thousand (3.5%) due to an increase in full-time equivalent employees and normal increases in salaries and benefits.

 

36

 

 

In February 2009, the FDIC issued final rules to amend the deposit insurance fund restoration plan, change the risk-based assessment system and set assessment rates for Risk Category 1 institutions to begin in the second quarter of 2009. The changes became effective April 1, 2009. Under these rules, for Risk Category 1 institutions, the methodology for establishing assessment rates for large institutions such as the Bank will determine the initial base assessment rate using an equally-weighted combination of weighted-average CAMELS component ratings, long-term debt issuer ratings (converted to numbers and averaged) and certain financial ratios. The new initial base assessment rates for Risk Category 1 institutions will range from 12 to 16 basis points, on an annualized basis, and from 7 to 24 basis points after the effect of potential base-rate adjustments, in each case depending upon various factors. Additionally, the FDIC issued an interim rule that resulted in an emergency special assessment equal to 5 basis points of total assets on June 30, 2009 with the potential for additional emergency special assessments of up to 10 basis points at the end of any calendar quarter thereafter. In accordance with this special assessment, the Company expensed an additional $685 thousand in FDIC insurance premiums.

On September 29, 2009, in response to the rapid depletion of liquid assets from the Deposit Insurance Fund (DIF) as a result of the failures of insured financial institutions across the country, the FDIC published a proposal to require insured financial institutions to prepay deposit insurance premium assessments to the FDIC, rather than impose additional special assessments during a period in which many financial institutions are financially unstable. Under the proposal, each insured financial institution would prepay its quarterly risk-based assessments for the fourth quarter of 2009, and for all of 2010, 2011, and 2012, on December 31, 2009, along with its regular quarterly risk-based assessment for the third quarter of 2009. The prepaid assessment rate for the fourth quarter of 2009 and for all of 2010 would be based on each institution’s total base assessment rate for the third quarter of 2009, but modified to assume that the assessment rate in effect on September 30, 2009 for that institution was in effect for the entirety of the third quarter of 2009. The prepaid assessment rate for 2011 and 2012 would be equal to each institution’s modified third quarter 2009 assessment rate plus 3 basis points. These prepaid deposit insurance premiums would be carried as a prepaid asset on each institution’s books as of December 30, 2009. At the end of each calendar quarter, beginning December 31, 2009, each institution would record an expense equal to the institution’s actual regular deposit insurance assessment for the quarter, with an offsetting credit to the prepaid asset account until this asset account is depleted. If and when the prepaid assessment account is depleted, the institution would record an expense payable at the end of each calendar quarter through December 2012, which would be paid to the FDIC at the end of the next calendar quarter. If an institution’s prepaid assessment is not depleted by December 30, 2014, the FDIC will return the remaining assessment to the institution. The prepayment of deposit insurance assessments would not preclude the FDIC from making changes to assessment rates or the assessment structure as a whole during the period for which assessments would be prepaid and thereafter. The comment period for the FDIC’s proposal to require prepayment of deposit insurance assessments ends on October 28, 2009.

 

Income Taxes. In the third quarter of 2009, income tax expense decreased $243 thousand (17.9%) from the third quarter of 2008, decreasing from $1.4 million in 2008 to $1.1 million in 2009. This was due to lower pretax income in the third quarter of 2009 compared to the third quarter of 2008. The effective tax rate increased from 37.2% to 45.8% between the two periods. The main reason for this increase in effective tax rate was due to greater non-taxable income in 2008 relative to 2009.

In the first nine months of 2009, income tax expense decreased $2.9 million (63.2%) from the first nine months, decreasing from $4.6 million in 2008 to $1.7 million in 2009. This was largely due to lower pretax income in the first nine months of 2009 compared to the same period in 2008. The effective tax rate increased from 37.1% in the first nine months of 2008 compared to 38.3% for the same period in 2009. The main reason for this increase in effective tax rate was due to greater non-taxable income in 2008 relative to 2009.

 

37

 

 

Financial Condition

General. Total assets at September 30, 2009 were $1.6 billion, an increase of $167.2 million (11.8%) from December 31, 2008. Cash and cash equivalents accounted for most of this change, increasing $156.5 million (619.4%) during the first nine months of 2009. Premises and equipment increased $7.3 million (30.0%) during the same period, due to construction of the Santa Fe Cerrillos office. Other real estate owned increased $6.7 million (283.5%) during the same period resulting from an increased volume in collection activity. A large portion of this increase was funded by the increase in deposits ($124.4 million) as well as the proceeds from the issuance of preferred shares under the CPP ($35.5 million). The increase in deposits was due to growth in both public and retail deposits. During the same period, total liabilities increased by $12.6 million (10.0%), increasing to $1.5 billion on September 30, 2009 from $1.3 billion on December 31, 2008. The increase in total liabilities was primarily due to an increase in deposits of $124.4 million (9.9%) and an increase in borrowings of $10.0 million (42.4%). Stockholders’ equity (including stock owned by the Employee Stock Ownership Plan) increased $34.6 million (37.9%) to $125.9 million on September 30, 2009 compared to $91.3 million on December 31, 2008. The increase was primarily due to the issuance of $35.5 million in preferred shares to the Treasury under the CPP.

 

Investment Securities. The primary purposes of the investment portfolio are to provide a source of earnings for the purpose of managing liquidity, to provide collateral to pledge against public deposits and to control interest rate risk. In managing the portfolio, the Company seeks to obtain the objectives of safety of principal, liquidity, diversification and maximized return on funds. For an additional discussion with respect to these matters, see “Liquidity and Sources of Capital” under Item 2 and “Asset Liability Management” under Item 3 below.

 

38

 

 

The following tables set forth the amortized cost and fair value of the Company’s securities by accounting classification category and by type of security as indicated:

 

 

 

At September 30,
2009

 

 

 

At December 31,
2008

 

 

 

At September 30,
2008

 

 

 

Amortized
Cost

 

 

 

Fair
Value

 

 

 

Amortized
Cost

 

 

 

Fair
Value

 

 

 

Amortized
Cost

 

 

 

Fair
Value

 

 

 

(In thousands)

 

Securities Available for Sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government sponsored agencies

 

$

48,058

 

 

 

$

49,606

 

 

 

$

87,890

 

 

 

$

90,187

 

 

 

$

88,779

 

 

 

$

87,755

 

States and political subdivisions

 

 

26,144

 

 

 

 

26,741

 

 

 

 

12,771

 

 

 

 

12,820

 

 

 

 

4,754

 

 

 

 

4,719

 

Mortgage-backed securities

 

 

28,001

 

 

 

 

28,189

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities

 

 

 

 

 

 

 

 

 

 

1

 

 

 

 

 

 

 

 

1

 

 

 

 

 

Total securities available for sale

 

$

102,203

 

 

 

$

104,536

 

 

 

$

100,662

 

 

 

$

103,007

 

 

 

$

93,534

 

 

 

$

92,474

 

Securities Held to Maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government sponsored agencies

 

$

 

 

 

$

 

 

 

$

 

 

 

$

 

 

 

$

 

 

 

$

 

States and political subdivisions

 

 

8,747

 

 

 

 

9,032

 

 

 

 

8,927

 

 

 

 

9,780

 

 

 

 

8,994

 

 

 

 

8,089

 

Total securities held to maturity

 

$

8,747

 

 

 

$

9,032

 

 

 

$

8,927

 

 

 

$

9,780

 

 

 

$

8,994

 

 

 

$

8,089

 

Other securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-marketable equity securities (including FRB and FHLB stock)

 

$

6,485

 

 

 

$

6,485

 

 

 

$

4,527

 

 

 

$

4,527

 

 

 

$

4,504

 

 

 

$

4,504

 

Investment in unconsolidated trusts

 

 

1,116

 

 

 

 

1,116

 

 

 

 

1,116

 

 

 

 

1,116

 

 

 

 

1,116

 

 

 

 

1,116

 

Total other securities

 

$

7,601

 

 

 

$

7,601

 

 

 

$

5,643

 

 

 

$

5,643

 

 

 

$

5,620

 

 

 

$

5,620

 

 

The Company had a total of $28.2 million in Collateralized Mortgage Obligations (“CMO”) as of September 30, 2009. All of these CMOs were private label issues and were considered “Investment Grade” (rating of “BBB” or higher). At the time of purchase, the ratings of these securities ranged from AAA to Aaa. As of September 30, 2009, the ratings of these securities ranged from AAA to Baa3. At the time of purchase and on a monthly basis the Company reviews these securities for impairment on an other than temporary basis. As of September 30, 2009, none of these securities were deemed to have other than temporary impairment. The Company continues to closely monitor the performance and ratings of these securities.

 

39

 

 

Loan Portfolio. The following tables set forth the composition of the loan portfolio:

 

 

 

At September 30,
2009

 

 

 

At December 31,
2008

 

 

 

At September 30,
2008

 

 

 

Amount

 

 

 

Percent

 

 

 

Amount

 

 

 

Percent

 

 

 

Amount

 

 

 

Percent

 

 

 

(Dollars in thousands)

 

Commercial

 

$

117,582

 

 

 

9.55

%

 

 

$

116,588

 

 

 

9.46

%

 

 

$

110,757

 

 

 

9.11

%

Commercial real estate

 

 

442,918

 

 

 

35.95

 

 

 

 

412,184

 

 

 

33.43

 

 

 

 

405,002

 

 

 

33.33

 

Residential real estate

 

 

402,776

 

 

 

32.70

 

 

 

 

388,776

 

 

 

31.54

 

 

 

 

381,440

 

 

 

31.39

 

Construction real estate

 

 

211,816

 

 

 

17.20

 

 

 

 

254,444

 

 

 

20.64

 

 

 

 

256,728

 

 

 

21.13

 

Installment and other

 

 

56,631

 

 

 

4.60

 

 

 

 

60,746

 

 

 

4.93

 

 

 

 

61,264

 

 

 

5.04

 

Total loans

 

 

1,231,723

 

 

 

100.00

 

 

 

 

1,232,738

 

 

 

100.00

 

 

 

 

1,215,191

 

 

 

100.00

 

Unearned income

 

 

(2,255

)

 

 

 

 

 

 

 

(2,204

)

 

 

 

 

 

 

 

(2,111

)

 

 

 

 

Gross loans

 

 

1,229,468

 

 

 

 

 

 

 

 

1,230,534

 

 

 

 

 

 

 

 

1,213,080

 

 

 

 

 

Allowance for loan losses

 

 

(24,878

)

 

 

 

 

 

 

 

(15,230

)

 

 

 

 

 

 

 

(14,087

)

 

 

 

 

Net loans

 

$

1,204,590

 

 

 

 

 

 

 

$

1,215,304

 

 

 

 

 

 

 

$

1,198,993

 

 

 

 

 

 

Total loans decreased $1.0 million (0.1%) from December 31, 2008 to September 30, 2009, remaining at $1.2 billion. The decrease was primarily in the construction real estate portfolio, and was partially offset by increases in the commercial and residential real estate portfolios. Specific risks inherent in the large concentrations of real estate loans are discussed in Item 1A of Part I of the Company’s Form 10-K (as amended) for the year ending December 31, 2008 filed with the SEC on March 16, 2009.

 

Asset Quality. The following table sets forth the amounts of non-performing loans and non-performing assets at the dates indicated:

 

 

 

At September 30,
2009

 

 

 

At December 31,
2008

 

 

 

At September 30,
2008

 

 

 

(Dollars in thousands)

 

Non-accruing loans

 

$

68,333

 

 

 

$

33,387

 

 

 

$

36,700

 

Loans 90 days or more past due, still accruing interest

 

 

 

 

 

 

 

 

 

 

1

 

Restructured loans, still accruing interest

 

 

2,586

 

 

 

 

940

 

 

 

 

1,326

 

Total non-performing loans

 

 

70,919

 

 

 

 

34,327

 

 

 

 

38,027

 

Other real estate owned

 

 

9,028

 

 

 

 

2,354

 

 

 

 

2,234

 

Other repossessed assets

 

 

428

 

 

 

 

692

 

 

 

 

709

 

Total non-performing assets

 

$

80,375

 

 

 

$

37,373

 

 

 

$

40,970

 

Total non-performing loans to total loans

 

 

5.76

%

 

 

 

2.78

%

 

 

 

3.13

%

Allowance for loan losses to non-performing loans

 

 

35.08

%

 

 

 

44.37

%

 

 

 

37.04

%

Total non-performing assets to total assets

 

 

5.07

%

 

 

 

2.64

%

 

 

 

2.89

%

 

At September 30, 2009, total non-performing assets increased $43.0 million (115.1%) to $80.4 million from $37.4 million at December 31, 2008, primarily due to an increase in non-accruing loans of $34.9 million (104.7%) and an increase in other real estate owned of $6.7 million (283.5%). Non-accruing loans increased mainly due to an increase in non-accruing construction real estate loans of $20.1 million, an increase in non-accruing residential real estate loans of $9.4 million and an increase in non-accruing commercial real estate loans of $5.8 million Other real estate owned increased mainly due to an increase in foreclosed construction real estate properties. There were no specifically identified losses that had not already been charged-off. As of September 30, 2009, all collateral-dependent impaired loans have been charged down to the collateral value, less selling costs. For further information, please see discussion in “Critical Accounting Policies –Allowance for Loan Losses” and “Results of Operations—Income Statement Analysis” above.

 

40

 

 

Restructured loans are defined as those loans whose terms have been modified, because of a deterioration in the financial condition of the borrower, to provide for a reduction of either interest or principal, regardless of whether such loans are secured or unsecured, regardless of whether such credits are guaranteed by the government or others, and regardless of the effective interest rate on such credits. Such a loan is considered restructured until paid in full. However, a loan that is restructured with an interest rate similar to current market interest rates and is in compliance with the modified terms need not be reported as restructured beginning the year after the year in which it was restructured. Total loans which were considered restructured (including both those considered performing and those considered non-performing) were $7.4 million and $4.3 million as of September 30, 2009 and December 31, 2008, respectively. Those restructured loans considered performing loans totaled $2.6 million and $940 thousand as of September 30, 2009 and December 31, 2008, respectively.

 

Allowance for Loan Losses. Management believes the allowance for loan losses accounting policy is critical to the portrayal and understanding of the Company’s financial condition and results of operations. As such, selection and application of this “critical accounting policy” involves judgments, estimates, and uncertainties that are susceptible to change. In the event that different assumptions or conditions were to prevail, and depending upon the severity of such changes, the possibility of materially different financial condition or results of operations is a reasonable likelihood.

The allowance for loan losses is maintained at an amount that management believes will be appropriate to absorb probable losses on existing loans, based on an evaluation of the collectability of loans and prior loss experience. This evaluation also takes into consideration such factors as changes in the nature and volume of the loan portfolio, the value of underlying collateral, overall portfolio quality, review of specific problem loans and current economic conditions that may affect the borrower’s ability to pay. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions. In addition, as an integral part of their examination process regulatory agencies periodically review the Company’s allowance for loan losses and may require the Company to make additions to the allowance based on their evaluation of information available at the time of their examinations.

The following table presents an analysis of the allowance for loan losses for the periods presented:

 

 

 

Three Months Ended
September 30,

 

 

 

Nine Months Ended
September 30,

 

 

 

2009

 

 

 

2008

 

 

 

2009

 

 

 

2008

 

 

 

(Dollars in thousands)

 

(Dollars in thousands)

 

Balance at beginning of period

 

$

24,864

 

 

 

$

13,866

 

 

 

$

15,230

 

 

 

$

13,533

 

Provision for loan losses

 

 

4,000

 

 

 

 

1,840

 

 

 

 

20,793

 

 

 

 

4,090

 

Total charge-offs

 

 

(4,167

)

 

 

 

(1,718

)

 

 

 

(11,477

)

 

 

 

(3,919

)

Total recoveries

 

 

181

 

 

 

 

99

 

 

 

 

332

 

 

 

 

383

 

Net charge-offs

 

 

(3,986

)

 

 

 

(1,619

)

 

 

 

(11,145

)

 

 

 

(3,536

)

Balance at end of period

 

$

24,878

 

 

 

$

14,087

 

 

 

$

24,878

 

 

 

$

14,087

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross loans at end of period

 

$

1,229,468

 

 

 

$

1,213,080

 

 

 

$

1,229,468

 

 

 

$

1,213,080

 

Ratio of allowance to total loans

 

 

2.02

%

 

 

 

1.16

%

 

 

 

2.02

%

 

 

 

1.16

%

Ratio of net charge-offs to average loans(1)

 

 

1.27

%

 

 

 

0.54

%

 

 

 

1.19

%

 

 

 

0.40

%

 

____________________

(1)

Net charge-offs are annualized for the purposes of this calculation.

 

41

 

 

Net charge-offs for the three months ended September 30, 2009 totaled $4.2 million, an increase of $2.4 million (146.2%), from $1.7 million for the three months ended September 30, 2008. The majority of the net charge-offs were commercial non-real estate ($1.4 million), residential real estate ($1.3 million) and construction real estate ($765 thousand). The increase in net charge-offs for the third quarter of 2009 compared to the same period in 2008 was primarily due to an increase in net charge-offs in the residential real estate and commercial non-real estate portfolios. The provision for loan losses increased $2.2 million (117.4%) based upon management’s estimate of the adequacy of the reserve for loan losses. For further information, please see discussion in “Critical Accounting Policies –Allowance for Loan Losses” and “Results of Operations—Income Statement Analysis” above.

 

Net charge-offs for the nine months ended September 30, 2009 totaled $11.1 million, an increase of $7.6 million (215.2%), from $3.5 million for the nine months ended September 30, 2008. The majority of the charge-offs were construction real estate ($4.1 million), commercial non-real estate ($3.3 million), residential real estate ($2.4 million) and installment and other ($1.1 million) loans. The increase in net charge-offs for the first nine months of 2009 was primarily due to an increase of charge-offs in the construction real estate, commercial non-real estate and residential real estate portfolios. The provision for loan losses increased $16.7 million (408.4%) based upon management’s estimate of the adequacy of the reserve for loan losses. For further information, please see discussion in “Critical Accounting Policies –Allowance for Loan Losses” and “Results of Operations—Income Statement Analysis” above.

 

The following table sets forth the allocation of the allowance for loan losses in each loan category for the periods presented and the percentage of loans in each category to total loans. An allocation for a loan classification is only for internal analysis of the adequacy of the allowance and is not an indication of expected or anticipated losses:

 

 

 

At
September 30,
2009

 

 

 

At
December 31,
2008

 

 

 

At
September 30,
2008

 

 

 

Amount

 

 

 

Percent

 

 

 

Amount

 

 

 

Percent

 

 

 

Amount

 

 

 

Percent

 

 

 

(Dollars in thousands)

 

Commercial

 

$

5,227

 

 

 

9.55

%

 

 

$

2,200

 

 

 

9.46

%

 

 

$

2,057

 

 

 

9.11

%

Commercial and residential real estate

 

 

8,519

 

 

 

68.65

 

 

 

 

5,215

 

 

 

64.97

 

 

 

 

4,777

 

 

 

64.72

 

Construction real estate

 

 

8,098

 

 

 

17.20

 

 

 

 

6,512

 

 

 

20.64

 

 

 

 

6,027

 

 

 

21.13

 

Installment and other

 

 

3,034

 

 

 

4.60

 

 

 

 

1,303

 

 

 

4.93

 

 

 

 

1,226

 

 

 

5.04

 

Total

 

$

24,878

 

 

 

100.00

%

 

 

$

15,230

 

 

 

100.00

%

 

 

$

14,087

 

 

 

100.00

%

 

_______________

 

N/A—not applicable

 

The allowance for loan losses increased $10.8 million (76.6%) from September 30, 2008 to September 30, 2009. This was mainly due to an increase in the allowance allocated to commercial and residential real estate and commercial non-real estate loans. The allocation for commercial and residential real estate loans increased $3.7 million (78.3%) mainly due to an increase in historical loss experience (based on regression analysis) of $2.4 million and an increase in the allocation for qualitative adjustments of $1.3 million. The allocation for commercial non-real estate loans increased $3.1 million (154.1%) from September 30, 2008 to September 30, 2009, mainly due to an increase in the allocation for historical loss experience (based on regression analysis) of $2.4 million and an increase in the allocation for qualitative adjustments of $700 thousand. In addition, the allocation for construction real estate loans increased $2 million (34.4%), mainly due to an increase in the allocation for historical loss experience (based on regression analysis) of $1.1 million and an increase in the allocation for qualitative adjustments of $707 thousand. Finally, the allocation for installment and other loans increased $1.8 million (147.5%), mainly due to an increase in the allocation for historical loss experience (based on regression analysis) of $1.2 million and an increase in the allocation for qualitative adjustments of $575 thousand. For further information, please see discussion in “Critical Accounting Policies—Allowance for Loan Losses” above.

 

42

 

 

A loan is considered impaired when, based on current information and events, it is probable that the bank will be unable to collect all amounts due according to the original contractual terms of the loan agreement, including both principal and interest. The impairment amount of the loan is equal to the recorded investment in the loan less the net fair value. The bank generally uses one of three methods to measure impairment; the fair value of the collateral less disposition costs, the present value of expected future cash flows method, or the observable market price of a loan method. The impairment amount above collateral value is normally charged to the allowance for loan and lease losses in the quarter it is identified. Total loans which were deemed to have been impaired as of September 30, 2009 were $69.7 million. Collateral associated with these impaired loans (less estimated selling costs) exceeded this amount, and therefore no specifically identified portion of reserve was allocated to these impaired loans.

 

The Bank anticipates the volume of outstanding commercial real estate and construction loans to continue to decline. Overall, management’s outlook for the New Mexico economy for the remainder of 2009 and the first half of 2010 is expected to be a recession less severe than experienced by much of the country followed by a moderate recovery in advance of other areas of the country. Nonfarm employment growth was -0.3% in 2008, and is expected to be -2.8% in 2009. Housing construction overall is expected to remain depressed throughout the remainder of 2009, but experience a modest recovery toward the middle of 2010.

 

Additions to the allowance for loan losses, which are charged to earnings through the provision for loan losses, are determined based on a variety of factors, as indicated above. Although the Company believes the allowance for loan losses is sufficient to cover probable losses inherent in the loan portfolio, there can be no assurance that the allowance will prove sufficient to cover actual loan losses.

 

Potential Problem Loans. The Company utilizes an internal asset classification system as a means of reporting problem and potential problem assets. At Board of Directors meetings each quarter, a list of total adversely classified assets is presented showing OREO, other repossessed assets, and all loans listed as “Substandard,” “Doubtful” and “Loss.”  All non-accrual loans are classed either as “Substandard” or “Doubtful” and are thus included in total adversely classified assets. A separate watch list of loans classified as “Special Mention” is also presented. An asset is classified Substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or by the collateral pledged, if any. Substandard assets have well-defined weaknesses that jeopardize liquidation of the debt and there is a distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Assets classified as Doubtful have all the weaknesses inherent in those classified Substandard, but weaknesses are so pronounced that collection or liquidation is highly questionable and improbable. Assets classified as Loss are those considered uncollectible and viewed as non-bankable assets worthy of charge-off. Special Mention Assets are those that have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Bank’s credit position at some future date.

 

The Company’s determinations as to the classification of its assets and the amount of its valuation allowances are subject to review by the Bank’s primary regulators, which can order the establishment of additional general or specific loss allowances. The OCC, in conjunction with the other federal banking agencies, has adopted an interagency policy statement on the allowance for loan losses. The policy statement provides guidance for financial institutions on both the responsibilities of management for the assessment and establishment of adequate allowances and guidance for banking agency examiners to use in determining the adequacy of general valuation guidelines. Generally, the policy statement recommends that (i) institutions have effective systems and controls to identify, monitor and address asset quality problems; (ii) management analyze all significant factors that affect the collectability of the portfolio in a reasonable manner; and (iii) management establish acceptable allowance evaluation processes that meet the objectives set forth in the policy statement. Management believes it has established an adequate allowance for probable loan losses. The Company analyzes its process regularly with modifications made as necessary and reports those results quarterly at Board of Directors meetings. However, there can be no assurance that regulators, in reviewing the Company’s loan portfolio, will not request the Company to materially increase its allowance for loan losses. Although management believes that adequate specific and general loan loss allowances have been established, actual losses are dependent upon future events and, as such, further additions to the level of specific and general loan loss allowances may become necessary.

 

43

 

 

The following table shows the amounts of adversely classified assets and special mention loans (not already counted in non-performing loans above) as of the periods indicated:

 

 

 

At
September 30,
2009

 

 

 

At
December 31,
2008

 

 

 

At
September 30,
2008

 

 

 

(Dollars in thousands)

 

Performing loans classified as:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Substandard

 

$

55,090

 

 

 

$

38,815

 

 

 

$

38,772

 

Doubtful

 

 

 

 

 

 

 

 

 

 

 

Total performing adversely classified loans

 

$

55,090

 

 

 

$

38,815

 

 

 

$

38,772

 

Special mention loans

 

$

10,338

 

 

 

$

24,836

 

 

 

$

25,514

 

 

Total performing adversely classified assets increased $16.3 million (42.1%) from September 30, 2008 to September 30, 2009. The reason for the increase was an increase of $16.3 million in substandard loans. This was primarily due to the downgrading of several borrowing relationships in the residential land development, residential construction, and raw land property (all included under “construction real estate” in the preceding tables) loan concentrations, as well as downgrading several loan relationships in the commercial real estate loan portfolio.Special mention loans decreased $15.2 million (59.5%) between September 30, 2008 and September 30, 2009, primarily due to downgrades of credits from the special mention grade to substandard in the residential development of infrastructure, construction of speculative housing and residential developed lots concentrations. All of these loans are collateralized by real estate, and in many cases the loans have personal guarantees and additional collateral. As of September 30, 2009, the underlying collateral was deemed adequate so that no impairment was recognized.

 

Management is carefully monitoring the adversely classified assets it has in its portfolio. Management believes the increase in classified assets is a result of current national and regional economic difficulties, particularly in the area of real estate sales. Although we do not have direct exposure from subprime mortgages, we have significant concentrations in real estate lending (through construction, residential and commercial loans). Though the New Mexico real estate environment is currently more favorable than most areas of the nation, there is still a concern that real estate values may continue to stagnate or fall within our market areas. As a result, we will continue to closely monitor market conditions, our loan portfolio and make any adjustments to our allowance for loan losses deemed necessary to adequately provide for our exposure in these areas.

 

Sources of Funds

 

Liquidity and Sources of Capital

 

The Company’s cash flows are comprised of three classifications: cash flows from operating activities, cash flows from investing activities and cash flows from financing activities. Net cash provided by operating activities was $21.9 million and $23.7 million for the nine months ended September 30, 2009 and September 30, 2008, respectively, a decrease of $1.8 million. This decrease was primarily due to an increase in cash used in the origination of loans held for sale of $234.6 million, which was largely offset by an increase in cash provided by the sale of these loans of $228.9 million. Net cash used in investing activities was ($29.2) million and ($41.1) million for the nine months ended September 30, 2009 and September 30, 2008, respectively. The $11.9 million decrease in cash used in investing activities was largely due to a decrease in the proceeds from the maturities and paydowns of investment securities of $59.4 million and an increase in cash used in the purchase of premises and equipment of $7.0 million. These items were partially offset by a decrease in cash used in the purchase of investment securities of $53.2 million and a decrease in cash used by loans funded, net of repayments of $26.3 million. Net cash provided by financing activities was $163.8 million and $31.6 million for the nine months ended September 30, 2009 and September 30, 2008, respectively. The $132.2 million increase in cash provided by financing activities was mainly due to an increase in cash provided by net growth of deposits of $46.6 million, the issuance of preferred stock of $35.5 million and an increase in cash provided by the issuance of borrowings (net of repayments) of $50.0 million.

 

The most significant growth in deposits from December 31, 2008 to September 30, 2009 occurred in time deposits over $100,000 ($98.6 million), with smaller growth in NOW accounts ($21.4 million), time deposits under $100,000 ($9.8 million) and savings accounts ($8.4 million). There was a decline in MMDA accounts ($11.5 million) and DDA accounts ($2.3 million).

 

44

 

 

In the event that additional short-term liquidity is needed, we have established relationships with several large regional banks to provide short-term borrowings in the form of federal funds purchases. We have borrowed at various points of time $99.5 million for a short period (15 to 60 days) from these banks on a collective basis. Management believes that we will be able to continue to borrow federal funds from our correspondent banks in the future. Additionally, we are a member of the FHLB and, as of September 30, 2009, we had the ability to borrow from the FHLB up to a total of $190.7 million in additional funds. We also may borrow through the Federal Reserve Bank’s discount window up to a total of $90.0 million on a short-term basis. As a contingency plan for significant funding needs, the Asset/Liability Management committee may also consider the sale of investment securities, selling securities under agreement to repurchase, sale of certain loans and/or the temporary curtailment of lending activities.

 

At September 30, 2009, Trinity’s total risk-based capital ratio was 14.68%, the Tier 1 capital to risk-weighted assets ratio was 13.42%, and the Tier 1 capital to average assets ratio was 10.09%. At December 31, 2008, Trinity’s total risk-based capital ratio was 11.80%, the Tier 1 capital to risk-weighted assets ratio was 10.08%, and the Tier 1 capital to average assets ratio was 8.35%.

 

At September 30, 2009, the Bank’s total risk-based capital ratio was 13.88%, the Tier 1 capital to risk-weighted assets ratio was 12.62%, and the Tier 1 capital to average assets ratio was 9.47%. At December 31, 2008, the Bank’s total risk-based capital ratio was 11.33%, the Tier 1 capital to risk-weighted assets ratio was 10.08%, and the Tier 1 capital to average assets ratio was 8.34%. The Bank exceeded the general minimum regulatory requirements to be considered “well-capitalized” under Federal Deposit Insurance Corporation regulations at September 30, 2009 and December 31, 2008.

 

At September 30, 2009 and December 31, 2008, Trinity’s book value per common share was $14.34 and $14.16, respectively.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Asset Liability Management

 

Our net interest income is subject to “interest rate risk” to the extent that it can vary based on changes in the general level of interest rates. It is our policy to maintain an acceptable level of interest rate risk over a range of possible changes in interest rates while remaining responsive to market demand for loan and deposit products. The strategy we employ to manage our interest rate risk is to measure our risk using an asset/liability simulation model and adjust the maturity of securities in its investment portfolio to manage that risk.

 

Interest rate risk can also be measured by analyzing the extent to which the repricing of assets and liabilities are mismatched to create an interest sensitivity “gap.” An asset or liability is considered to be interest rate sensitive within a specific time period if it will mature or reprice within that time period. The interest rate sensitivity gap is defined as the difference between the amount of interest earning assets maturing or repricing within a specific time period and the amount of interest bearing liabilities maturing or repricing within that same time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. During a period of rising interest rates, therefore, a negative gap would tend to adversely affect net interest income. Conversely, during a period of falling interest rates, a negative gap position would tend to result in an increase in net interest income.

 

45

 

 

The following tables set forth the amounts of interest earning assets and interest bearing liabilities outstanding at September 30, 2009, which we anticipate, based upon certain assumptions, to reprice or mature in each of the future time periods shown. Except as stated below, the amount of assets and liabilities shown which reprice or mature during a particular period were determined based on the earlier of the term to repricing or the term to repayment of the asset or liability. These tables are intended to provide an approximation of the projected repricing of assets and liabilities at September 30, 2009 on the basis of contractual maturities and scheduled rate adjustments within a three-month period and subsequent selected time intervals. The loan amounts in the table reflect principal balances expected to be reinvested and/or repriced as a result of contractual amortization and rate adjustments on adjustable-rate loans. The contractual maturities and amortization of loans and investment securities reflect modest prepayment assumptions. While NOW, money market and savings deposit accounts have adjustable rates, it is assumed that the interest rates on these accounts will not adjust immediately to changes in other interest rates. Therefore, the table is calculated assuming that these accounts will reprice based upon an historical analysis of decay rates of these particular accounts, with repricing assigned to these accounts from 1 to 10 months.

 

 

 

Time to Maturity or Repricing

 

As of September 30, 2009:

 

0-90 Days

 

 

 

91-365 Days

 

 

 

1-5 Years

 

 

 

Over 5 Years

 

 

 

Total

 

 

 

(Dollars in thousands)

 

Interest-earning Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

$

471,649

 

 

 

$

425,382

 

 

 

$

276,862

 

 

 

$

55,575

 

 

 

$

1,229,468

 

Loans held for sale

 

 

8,050

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8,050

 

Investment securities

 

 

12,283

 

 

 

 

15,497

 

 

 

 

65,844

 

 

 

 

26,144

 

 

 

 

119,768

 

Securities purchased under agreements to resell

 

 

487

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

487

 

Interest-bearing deposits with banks

 

 

153,686

 

 

 

 

9,695

 

 

 

 

 

 

 

 

 

 

 

 

163,381

 

Investment in unconsolidated trusts

 

 

186

 

 

 

 

 

 

 

 

 

 

 

 

930

 

 

 

 

1,116

 

Total interest-earning assets

 

$

646,341

 

 

 

$

450,574

 

 

 

$

342,706

 

 

 

$

82,649

 

 

 

$

1,522,270

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW deposits

 

$

52,430

 

 

 

$

90,837

 

 

 

$

 

 

 

$

 

 

 

$

143,267

 

Money market deposits

 

 

73,751

 

 

 

 

89,584

 

 

 

 

 

 

 

 

 

 

 

 

163,335

 

Savings deposits

 

 

149,013

 

 

 

 

195,473

 

 

 

 

 

 

 

 

 

 

 

 

344,486

 

Time deposits over $100,000

 

 

131,793

 

 

 

 

220,318

 

 

 

 

59,720

 

 

 

 

10,598

 

 

 

 

422,429

 

Time deposits under $100,000

 

 

63,524

 

 

 

 

123,396

 

 

 

 

23,552

 

 

 

 

4,051

 

 

 

 

214,523

 

Short-term borrowings

 

 

 

 

 

 

20,000

 

 

 

 

 

 

 

 

 

 

 

 

20,000

 

Long-term borrowings

 

 

9

 

 

 

 

27

 

 

 

 

11,091

 

 

 

 

2,376

 

 

 

 

13,503

 

Capital lease obligations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,211

 

 

 

 

2,211

 

Junior subordinated debt owed to unconsolidated trusts

 

 

6,186

 

 

 

 

 

 

 

 

 

 

 

 

30,930

 

 

 

 

37,116

 

Total interest-bearing liabilities

 

$

476,706

 

 

 

$

739,635

 

 

 

$

94,363

 

 

 

$

50,166

 

 

 

$

1,360,870

 

Rate sensitive assets (RSA)

 

$

646,341

 

 

 

$

1,096,915

 

 

 

$

1,439,621

 

 

 

$

1,522,270

 

 

 

 

1,522,270

 

Rate sensitive liabilities (RSL)

 

 

476,706

 

 

 

 

1,216,341

 

 

 

 

1,310,704

 

 

 

 

1,360,870

 

 

 

 

1,360,870

 

Cumulative GAP (GAP=RSA-RSL)

 

 

169,635

 

 

 

 

(119,426

)

 

 

 

128,917

 

 

 

 

161,400

 

 

 

 

161,400

 

RSA/Total assets

 

 

40.76

%

 

 

 

69.18

%

 

 

 

90.80

%

 

 

 

96.01

%

 

 

 

96.01

%

RSL/Total assets

 

 

30.07

%

 

 

 

76.71

%

 

 

 

82.67

%

 

 

 

85.83

%

 

 

 

85.83

%

GAP/Total assets

 

 

10.70

%

 

 

 

-7.53

%

 

 

 

8.13

%

 

 

 

10.18

%

 

 

 

10.18

%

GAP/RSA

 

 

26.25

%

 

 

 

-10.89

%

 

 

 

8.95

%

 

 

 

10.60

%

 

 

 

10.60

%

 

 

46

 

 

Certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types of assets may lag behind changes in market rates. Additionally, in the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating the table. Therefore, we do not rely solely on a gap analysis to manage our interest rate risk, but rather we use what we believe to be the more reliable simulation model relating to changes in net interest income.

 

Based on simulation modeling at September 30, 2009 and December 31, 2008, our net interest income would change over a one-year time period due to changes in interest rates as follows:

 

Change in Net Interest Income over One Year Horizon

 

Changes in

 

 

 

At September 30, 2009

 

 

 

At December 31, 2008

 

Levels of
Interest Rates

 

 

 

Dollar Change

 

 

 

Percent Change

 

 

 

Dollar Change

 

 

 

Percent Change

 

(Dollars in thousands)

 

+2.00%

 

 

 

$

(5,179

)

 

 

(9.64

)%

 

 

$

(1,084

)

 

 

(2.11

)%

+1.00

 

 

 

 

(2,772

)

 

 

(5.16

)

 

 

 

257

 

 

 

0.50

 

(1.00)

 

 

 

 

(747

)

 

 

(1.39

)

 

 

 

(627

)

 

 

(4.27

)

(2.00)

 

 

 

 

(1,537

)

 

 

(2.86

)

 

 

 

(1,177

)

 

 

(2.29

)

 

Our simulations used assume the following:

 

1.

Changes in interest rates are immediate.

 

2.

It is our policy that interest rate exposure due to a 2% interest rate rise or fall be limited to 15% of our annual net interest income, as forecasted by the simulation model. As demonstrated by the table above, our interest rate risk exposure was within this policy at September 30, 2009.

 

Changes in net interest income between the periods above reflect changes in the composition of interest earning assets and interest bearing liabilities, related interest rates, repricing frequencies, and the fixed or variable characteristics of the interest earning assets and interest bearing liabilities. Projections of income given by the model are not actual predictions, but rather show our relative interest rate risk. Actual interest income may vary from model projections.

 

Item 4. Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

We have established disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to the officers who certify our financial reports and to other members of senior management and the board of directors and to ensure that information that is required to be disclosed in reports we file with the SEC is properly and timely recorded, processed, summarized and reported. A review and evaluation was performed by our management, including the Company’s Chief Executive Officer (the “CEO”) and Chief Financial Officer (the “CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2009 pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934. Based upon and as of the date of that review and evaluation, the CEO and CFO have concluded that our current disclosure controls and procedures were effective as of September 30, 2009.

 

Changes in Internal Control over Financial Reporting.

 

There have been no changes to the Company’s internal control over financial reporting during the last fiscal quarter that have affected, or are reasonably likely to affect, its internal control over financial reporting.

 

47

 

 

PART II — OTHER INFORMATION

 

Item 1. Legal Proceedings

 

Trinity, the Bank, Title Guaranty, TCC Advisors and TCC Funds were not involved in any pending legal proceedings other than routine legal proceedings occurring in the normal course of business except as otherwise stated herein, which, in the opinion of management, in the aggregate, were material to the Company’s consolidated financial condition.

 

Item 1A. Risk Factors

 

In addition to the other information in this Quarterly Report on Form 10-Q, shareholders or prospective investors should carefully consider the risk factors disclosed in Item 1A to Part I of Trinity’s Form 10-K (as amended) for the year ended December 31, 2008 filed with the Securities and Exchange Commission on March 16, 2009.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

There were no repurchases of securities during the third quarter of 2009.

 

Item 3. Defaults Upon Senior Securities

 

None

 

Item 4. Submission of Matters to a Vote of Security Holders

 

None

 

Item 5. Other Information

 

None

 

Item 6. Exhibits

 

31.1

Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a)

31.2

Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a)

32.1

Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2

Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

TRINITY CAPITAL CORPORATION

 

 

Date: November 9, 2009

By:

/s/ WILLIAM C. ENLOE

 

 

William C. Enloe

 

 

President and Chief Executive Officer

 

 

 

Date: November 9, 2009

By:

/s/ DANIEL R. BARTHOLOMEW

 

 

Daniel R. Bartholomew

 

 

Chief Financial Officer

 

 

48