Attached files
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 March 31, 2010.
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||
Or
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||
[
]Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
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||
for
the transition period
from
to
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Commission
File Number 000-50266
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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)
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(505) 662-5171
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||
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 [
]
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 [ ] No [ ]
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 [ ]
|
Accelerated
Filer [ X ]
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|
Non-Accelerated
Filer [ ]
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Smaller
Reporting Company[ ]
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act)
[
] 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 May 7,
2010.
TRINITY
CAPITAL CORPORATION AND SUBSIDIARIES
PART
I. FINANCIAL INFORMATION
|
|
Item
1.
|
Financial
Statements
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
Item
4.
|
Controls
and Procedures
|
PART
II. OTHER INFORMATION
|
|
Item
1.
|
Legal
Proceedings
|
Item
1A.
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Risk
Factors
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
Item
3.
|
Defaults
Upon Senior Securities
|
Item
4.
|
Removed
and Reserved
|
Item
5.
|
Other
Information
|
Item
6.
|
Exhibits
|
SIGNATURES
|
|
CERTIFICATIONS
|
PART I
– FINANCIAL INFORMATION
Item
1. Financial Statements
TRINITY
CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
March
31, 2010 and December 31, 2009
(Amounts
in thousands, except share data)
March
31, 2010
|
December
31,
2009
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|||||||
(Unaudited)
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||||||||
ASSETS
|
||||||||
Cash
and due from banks
|
$
|
20,275
|
$
|
18,761
|
||||
Interest-bearing
deposits with banks
|
143,709
|
188,114
|
||||||
Federal
funds sold and securities purchased under resell
agreements
|
403
|
620
|
||||||
Cash
and cash equivalents
|
164,387
|
207,495
|
||||||
Investment
securities available for sale
|
124,231
|
136,756
|
||||||
Investment
securities held to maturity, at amortized cost (fair value of $10,792 at
March 31, 2010 and $10,808 at December 31,
2009)
|
11,353
|
11,436
|
||||||
Other
investments
|
9,336
|
9,568
|
||||||
Loans
(net of allowance for loan losses of $24,822 at March 31, 2010 and $24,504
at December 31, 2009)
|
1,196,698
|
1,215,282
|
||||||
Loans
held for sale
|
7,893
|
9,245
|
||||||
Premises
and equipment, net
|
31,401
|
31,949
|
||||||
Leased
property under capital leases, net
|
2,211
|
2,211
|
||||||
Accrued
interest receivable
|
6,871
|
6,840
|
||||||
Mortgage
servicing rights, net
|
7,645
|
7,647
|
||||||
Other
intangible assets
|
705
|
830
|
||||||
Other
real estate owned
|
20,025
|
16,750
|
||||||
Prepaid
expenses
|
8,003
|
8,648
|
||||||
Net
deferred tax assets
|
5,074
|
4,979
|
||||||
Other
assets
|
7,292
|
7,105
|
||||||
Total
assets
|
$
|
1,603,125
|
$
|
1,676,741
|
(Continued
on following page)
TRINITY
CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
March
31, 2010 and December 31, 2009
(Amounts
in thousands, except share data)
(Continued
from prior page)
March
31, 2010
|
December
31,
2009
|
|||||||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
Liabilities
|
||||||||
Deposits:
|
||||||||
Noninterest-bearing
|
$
|
90,234
|
$
|
87,238
|
||||
Interest-bearing
|
1,307,219
|
1,381,207
|
||||||
Total
deposits
|
1,397,453
|
1,468,445
|
||||||
Short-term
borrowings
|
1,183
|
20,000
|
||||||
Long-term
borrowings
|
32,300
|
13,493
|
||||||
Long-term
capital lease obligations
|
2,211
|
2,211
|
||||||
Junior
subordinated debt owed to unconsolidated trusts
|
37,116
|
37,116
|
||||||
Accrued
interest payable
|
4,514
|
5,038
|
||||||
Other
liabilities
|
5,734
|
7,536
|
||||||
Total
liabilities
|
1,480,511
|
1,553,839
|
||||||
Stock
owned by Employee Stock Ownership Plan (ESOP) participants; 627,030 shares
at March 31, 2010 and December 31, 2009, at fair
value
|
11,192
|
12,541
|
||||||
Commitments
and contingencies (Note 13)
|
||||||||
Stockholders'
equity
|
||||||||
Preferred
stock, no par, authorized 1,000,000 shares
|
||||||||
Series
A, 5% cumulative perpetual, 35,539 shares issued and outstanding at March
31, 2010 and December 31, 2009, $1,000.00 liquidation value, at amortized
cost
|
33,650
|
33,597
|
||||||
Series
B, 9% cumulative perpetual, 1,777 shares issued and outstanding at March
31, 2010 and December 31, 2009, $1,000.00 liquidation value, at amortized
cost
|
2,069
|
2,077
|
||||||
Common
stock, no par, authorized 20,000,000 shares; issued 6,856,800 shares,
outstanding 6,440,784 shares at March 31, 2010 and December 31,
2009
|
6,836
|
6,836
|
||||||
Additional
paid-in capital
|
1,905
|
1,869
|
||||||
Retained
earnings
|
78,308
|
77,054
|
||||||
Accumulated
other comprehensive (loss) income
|
(132
|
)
|
142
|
|||||
Total
stockholders' equity before treasury stock
|
122,636
|
121,575
|
||||||
Treasury
stock, at cost, 416,016 shares at March 31, 2010 and December 31,
2009
|
(11,214
|
)
|
(11,214
|
)
|
||||
Total
stockholders' equity
|
111,422
|
110,361
|
||||||
Total
liabilities and stockholders' equity
|
$
|
1,603,125
|
$
|
1,676,741
|
The
accompanying notes are an integral part of these unaudited consolidated
financial statements.
TRINITY
CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME
For
the Three Months Ended March 31, 2010 and 2009
(Amounts
in thousands except share and per share data)
(Unaudited)
Three
Months Ended March 31,
|
||||||||
2010
|
2009
|
|||||||
Interest
income:
|
||||||||
Loans,
including fees
|
$
|
17,272
|
$
|
18,992
|
||||
Investment
securities:
|
||||||||
Taxable
|
633
|
198
|
||||||
Nontaxable
|
298
|
217
|
||||||
Federal
funds sold
|
-
|
1
|
||||||
Other
interest-bearing deposits
|
105
|
9
|
||||||
Investment
in unconsolidated trusts
|
20
|
21
|
||||||
Total
interest income
|
18,328
|
19,438
|
||||||
Interest
expense:
|
||||||||
Deposits
|
3,963
|
4,916
|
||||||
Short-term
borrowings
|
216
|
63
|
||||||
Long-term
borrowings
|
128
|
311
|
||||||
Long-term
capital lease obligations
|
67
|
67
|
||||||
Junior
subordinated debt owed to unconsolidated trusts
|
683
|
709
|
||||||
Total
interest expense
|
5,057
|
6,066
|
||||||
Net
interest income
|
13,271
|
13,372
|
||||||
Provision
for loan losses
|
4,257
|
4,161
|
||||||
Net
interest income after provision for loan losses
|
9,014
|
9,211
|
||||||
Other
income:
|
||||||||
Mortgage
loan servicing fees
|
646
|
787
|
||||||
Trust
fees
|
355
|
376
|
||||||
Loan
and other fees
|
666
|
613
|
||||||
Service
charges on deposits
|
408
|
407
|
||||||
Gain
on sale of loans
|
720
|
3,069
|
||||||
Gain
on sale of securities
|
47
|
698
|
||||||
Title
insurance premiums
|
188
|
441
|
||||||
Other
operating income
|
26
|
103
|
||||||
Total
other income
|
3,056
|
6,494
|
(Continued
on following page)
TRINITY
CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME
For
the Three Months Ended March 31, 2010 and 2009
(Amounts
in thousands except share and per share data)
(Unaudited)
(Continued
from prior page)
Three
months ended March 31,
|
||||||||
2010
|
2009
|
|||||||
Other
expenses:
|
||||||||
Salaries
and employee benefits
|
$
|
5,078
|
$
|
5,044
|
||||
Occupancy
|
977
|
824
|
||||||
Data
processing
|
724
|
631
|
||||||
Marketing
|
356
|
448
|
||||||
Amortization
and valuation of mortgage servicing rights
|
309
|
986
|
||||||
Amortization
and valuation of other intangible assets
|
125
|
123
|
||||||
Supplies
|
91
|
186
|
||||||
Loss
on sale of other real estate owned
|
432
|
218
|
||||||
Postage
|
161
|
167
|
||||||
Bankcard
and ATM network fees
|
163
|
330
|
||||||
Legal,
professional and accounting fees
|
753
|
368
|
||||||
FDIC
insurance premiums
|
898
|
247
|
||||||
Collection
expenses
|
380
|
122
|
||||||
Other
|
538
|
795
|
||||||
Total
other expense
|
10,985
|
10,489
|
||||||
Income
before provision for income taxes
|
1,085
|
5,216
|
||||||
Provision
for income taxes
|
649
|
1,985
|
||||||
Net
income
|
$
|
436
|
$
|
3,231
|
||||
Dividends
and discount accretion on preferred shares
|
529
|
23
|
||||||
Net
(loss) income available to common shareholders
|
$
|
(93
|
)
|
$
|
3,208
|
|||
Basic
earnings (loss) per common share
|
$
|
(0.01
|
)
|
$
|
0.50
|
|||
Diluted
earnings (loss) per common share
|
$
|
(0.01
|
)
|
$
|
0.50
|
The
accompanying notes are an integral part of these unaudited consolidated
financial statements.
TRINITY CAPITAL CORPORATION
&
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
For
the Three Months Ended March 31, 2010 and 2009
(Amounts
in thousands)
(Unaudited)
Three
Months Ended March 31,
|
||||||||
2010
|
2009
|
|||||||
Cash
Flows From Operating Activities
|
||||||||
Net
income
|
$
|
436
|
$
|
3,231
|
||||
Adjustments
to reconcile net income to net cash provided by (used in) operating
activities:
|
||||||||
Depreciation
and amortization
|
778
|
604
|
||||||
Net
amortization of:
|
||||||||
Mortgage
servicing rights
|
502
|
642
|
||||||
Other
intangible assets
|
125
|
67
|
||||||
Premium
and discounts on investment securities, net
|
118
|
127
|
||||||
Junior
subordinated debt owed to unconsolidated trusts issuance
costs
|
3
|
3
|
||||||
Provision
for loan losses
|
4,257
|
4,161
|
||||||
Change
in mortgage servicing rights valuation allowance
|
(193
|
)
|
344
|
|||||
Impairment
of other intangible assets valuation allowance
|
-
|
56
|
||||||
Loss
on disposal of premises and equipment
|
9
|
-
|
||||||
(Gain)
on sale of investment securities
|
(47
|
)
|
(698
|
)
|
||||
Federal
Home Loan Bank (FHLB) stock dividends received
|
(3
|
)
|
(2
|
)
|
||||
Loss
on venture capital investments
|
90
|
273
|
||||||
Gain
on sale of loans
|
(720
|
)
|
(3,069
|
)
|
||||
Loss
on disposal of other real estate owned
|
103
|
71
|
||||||
Write-down
of value of other real estate owned
|
339
|
150
|
||||||
Decrease
in other assets
|
449
|
1,196
|
||||||
(Decrease)
increase in other liabilities
|
(585
|
)
|
1,108
|
|||||
Stock
options and stock appreciation rights expenses
|
36
|
37
|
||||||
Net
cash provided by operating activities before originations and gross sales
of loans
|
5,697
|
8,301
|
||||||
Gross
sales of loans held for sale
|
30,695
|
145,648
|
||||||
Origination
of loans held for sale
|
(28,930
|
)
|
(165,587
|
)
|
||||
Net
cash provided by (used in) operating activities
|
7,462
|
(11,638
|
)
|
(Continued
on following page)
TRINITY CAPITAL CORPORATION
&
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
For
the Three Months Ended March 31, 2010 and 2009
(Amounts
in thousands)
(Unaudited)
(Continued
from prior page)
Three
Months Ended March 31,
|
||||||||
2010
|
2009
|
|||||||
Cash
Flows From Investing Activities
|
||||||||
Proceeds
from maturities and paydowns of investment securities, available for
sale
|
$
|
19,505
|
$
|
486
|
||||
Proceeds
from maturities and paydowns of investment securities, held to
maturity
|
83
|
67
|
||||||
Proceeds
from maturities and paydowns of investment securities,
other
|
171
|
-
|
||||||
Proceeds
from sale of investment securities, available for
sale
|
3,422
|
42,082
|
||||||
Purchase
of investment securities, available for sale
|
(10,867
|
)
|
(7,763
|
)
|
||||
Purchase
of investment securities, other
|
(26
|
)
|
(1,242
|
)
|
||||
Proceeds
from sale of other real estate owned
|
1,698
|
711
|
||||||
Loans
funded, net of repayments
|
8,912
|
(1,350
|
)
|
|||||
Purchases
of premises and equipment
|
(239
|
)
|
(2,496
|
)
|
||||
Net
cash provided by investing activities
|
22,659
|
30,495
|
||||||
Cash
Flows From Financing Activities
|
||||||||
Net
(decrease) increase in demand deposits, NOW accounts and savings
accounts
|
(78,456
|
)
|
3,984
|
|||||
Net
increase in time deposits
|
7,464
|
39,758
|
||||||
Proceeds
from issuances of borrowings
|
20,000
|
30,000
|
||||||
Repayment
of borrowings
|
(20,010
|
)
|
(9
|
)
|
||||
Issuance
of preferred stock
|
-
|
35,539
|
||||||
Common
shares dividend payments
|
(1,739
|
)
|
(2,579
|
)
|
||||
Preferred
shares dividend payments
|
(488
|
)
|
-
|
|||||
Net
cash (used in) provided by financing
activities
|
(73,229
|
)
|
106,693
|
|||||
Net
(decrease) increase in cash and cash equivalents
|
(43,108
|
)
|
125,550
|
|||||
Cash
and cash equivalents:
|
||||||||
Beginning
of period
|
207,495
|
25,262
|
||||||
End
of period
|
$
|
164,387
|
$
|
150,812
|
||||
Supplemental
Disclosures of Cash Flow Information
|
||||||||
Cash
payments for:
|
||||||||
Interest
|
$
|
5,581
|
$
|
6,657
|
||||
Income
taxes
|
72
|
-
|
||||||
Non-cash
investing and financing activities:
|
||||||||
Transfers
from loans to other real estate owned
|
5,415
|
2,721
|
||||||
Dividends
declared, not yet paid
|
240
|
-
|
||||||
Change
in unrealized gain on investment securities, net of
taxes
|
(274
|
)
|
(983
|
)
|
The
accompanying notes are an integral part of these unaudited consolidated
financial statements.
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. The Bank holds a 24% interest in Cottonwood
Technology Group, LLC (“Cottonwood”). Cottonwood 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 several months. In 2009, the Bank created Finance New Mexico Investment
Fund IV, LLC (“FNM Investment Fund IV”) and is the only member. FNM Investment
Fund IV, was created to acquire a 99.99% interest in FNM Investor Series IV, LLC
(“FNM Investor Series IV”), 0.01% interest in which is held by Finance New
Mexico, a governmental instrumentality. These entities were both created to
enable the funding of loans to and investments in a New Market Tax Credit
project.
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 months ended March 31, 2010, 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, 2009 audited financial statements in its
Form 10-K, filed with the SEC on March 16, 2010.
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, valuation of other real estate owned, valuation
of deferred tax assets 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.
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 March 31,
|
||||||||
2010
|
2009
|
|||||||
(Unaudited;
in thousands)
|
||||||||
Net
income
|
$
|
436
|
$
|
3,231
|
||||
Securities
available for sale:
|
||||||||
Net
change in unrealized (losses)
|
(395
|
)
|
(946
|
)
|
||||
Related
income tax expense
|
140
|
676
|
||||||
Net
securities gains reclassified into earnings
|
(47
|
)
|
(698
|
)
|
||||
Related
income tax benefit
|
28
|
266
|
||||||
Net
effect on other comprehensive income for the period
|
(274
|
)
|
(702
|
)
|
||||
Comprehensive
income
|
$
|
162
|
$
|
2,529
|
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 March 31,
|
||||||||
2010
|
2009
|
|||||||
(Unaudited;
in thousands, except share and per share data)
|
||||||||
Net
income
|
$
|
436
|
$
|
3,231
|
||||
Dividends
and discount accretion on preferred shares
|
529
|
23
|
||||||
Net
(loss) income available to common shareholders
|
$
|
(93
|
)
|
$
|
3,208
|
|||
Weighted
average common shares issued
|
6,856,800
|
6,856,800
|
||||||
LESS:
Weighted average treasury stock shares
|
(416,016
|
)
|
(408,252
|
)
|
||||
LESS:
Weighted average unearned Employee Stock Ownership Plan (ESOP) stock
shares
|
-
|
-
|
||||||
Weighted
average common shares outstanding, net
|
6,440,784
|
6,448,548
|
||||||
Basic
(loss) earnings per common share
|
$
|
(0.01
|
)
|
$
|
0.50
|
|||
Weighted
average dilutive shares from stock option plan
|
-
|
9,632
|
||||||
Weighted
average common shares outstanding including derivative
shares
|
6,440,784
|
6,458,180
|
||||||
Diluted
(loss) earnings per common share
|
$
|
(0.01
|
)
|
$
|
0.50
|
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 412,500 and 314,500 as
of March 31, 2010 and March 31, 2009, respectively.
Note
4. Recent Accounting Pronouncements and Regulatory Developments
On July
1, 2009, the Accounting Standards Codification became FASB’s officially
recognized source of authoritative U.S. generally accepted accounting principles
applicable to all public and non-public non-governmental entities, superseding
existing FASB, AICPA, EITF and related literature. Rules and interpretive
releases of the SEC under the authority of federal securities laws are also
sources of authoritative GAAP for SEC registrants. All other accounting
literature is considered non-authoritative. The switch to the ASC affects the
way companies refer to U.S. GAAP in financial statements and accounting
policies. Citing particular content in the ASC involves specifying the unique
numeric path to the content through the Topic, Subtopic, Section and Paragraph
structure.
ASC Topic 810,
“Consolidation.” New authoritative accounting guidance under ASC Topic
810, “Consolidation,” amended prior guidance to change how a company 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 company is required to consolidate an entity is based on, among
other things, an entity’s purpose and design and a company’s ability to direct
the activities of the entity that most significantly impact the entity’s
economic performance. The new authoritative accounting guidance
requires additional disclosures about the reporting entity’s involvement with
variable-interest entities and any significant changes in risk exposure due to
that involvement as well as its effect on the entity’s financial
statements. The new authoritative accounting guidance under ASC Topic
810 became effective for the Company on January 1, 2010, and did not have an
impact on the Company’s financial statements.
ASC Topic 820, “Fair Value
Measurements and Disclosures.” New authoritative accounting guidance
under ASC Topic 820, “Fair Value Measurements and Disclosures,” amends prior
accounting guidance to amend and expand disclosure requirements about transfers
in and out of Levels 1 and 2, clarified existing fair value disclosure
requirements about the appropriate level of disaggregation, and clarified that a
description of valuation techniques and inputs used to measure fair value was
required for recurring and nonrecurring Level 2 and 3 fair value
measurements. The new authoritative accounting guidance under ASC
Topic 860 became effective for the Company on January 1, 2010, except for the
disclosures about purchases, sales, issuances, and settlements in the roll
forward of activity in Level 3 fair value measurements. Those
disclosures are effective for fiscal years beginning after December 15, 2010,
and for interim periods within those fiscal years. The new required
disclosures are included in Note 17 – Fair Value Measurements.
ASC Topic 860, “Transfers and
Servicing.” New authoritative accounting guidance under ASC Topic 860,
“Transfers and Servicing,” amends prior accounting guidance to enhance reporting
about transfers of financial assets, including securitizations, and where
companies have continuing exposure to the risks related to transferred financial
assets. The new authoritative accounting guidance eliminates the concept of a
“qualifying special-purpose entity” and changes the requirements for
derecognizing financial assets. The new authoritative accounting guidance also
requires additional disclosures about all continuing involvements with
transferred financial assets including information about gains and losses
resulting from transfers during the period. The new authoritative accounting
guidance under ASC Topic 860 became effective January 1, 2010, and did not have
a significant impact on the Company’s 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)
|
||||||||||||||||
March
31, 2010
|
||||||||||||||||
Government
sponsored agencies
|
$
|
53,354
|
$
|
37
|
$
|
(25
|
)
|
$
|
53,366
|
|||||||
States
and political subdivisions
|
26,080
|
440
|
(93
|
)
|
26,427
|
|||||||||||
Residential
mortgage-backed securities
|
44,956
|
687
|
(1,205
|
)
|
44,438
|
|||||||||||
Totals
|
$
|
124,390
|
$
|
1,164
|
$
|
(1,323
|
)
|
$
|
124,231
|
|||||||
December
31, 2009
|
||||||||||||||||
Government
sponsored agencies
|
$
|
68,502
|
$
|
23
|
$
|
(143
|
)
|
$
|
68,382
|
|||||||
States
and political subdivisions
|
26,112
|
494
|
(87
|
)
|
26,519
|
|||||||||||
Residential
mortgage-backed securities
|
41,906
|
563
|
(614
|
)
|
41,855
|
|||||||||||
Equity
securities
|
-
|
-
|
-
|
-
|
||||||||||||
Totals
|
$
|
136,520
|
$
|
1,080
|
$
|
(844
|
)
|
$
|
136,756
|
HELD
TO MATURITY
|
Amortized
Cost
|
Gross
Unrealized Gains
|
Gross
Unrealized Losses
|
Fair
Value
|
||||||||||||
(In
thousands)
|
||||||||||||||||
March
31, 2010
|
||||||||||||||||
States
and political subdivisions
|
$
|
11,353
|
$
|
-
|
$
|
(561
|
)
|
$
|
10,792
|
|||||||
Totals
|
$
|
11,353
|
$
|
-
|
$
|
(561
|
)
|
$
|
10,792
|
|||||||
December
31, 2009
|
||||||||||||||||
States
and political subdivisions
|
$
|
11,436
|
$
|
-
|
$
|
(628
|
)
|
$
|
10,808
|
|||||||
Totals
|
$
|
11,436
|
$
|
-
|
$
|
(628
|
)
|
$
|
10,808
|
OTHER
INVESTMENTS
|
Amortized
Cost
|
Gross
Unrealized Gains
|
Gross
Unrealized Losses
|
Fair
Value
|
||||||||||||
(In
thousands)
|
||||||||||||||||
March
31, 2010
|
||||||||||||||||
Non-marketable
equity securities (including FRB and FHLB stock)
|
$
|
8,220
|
$
|
-
|
$
|
-
|
$
|
8,220
|
||||||||
Investment
in unconsolidated trusts
|
1,116
|
-
|
-
|
1,116
|
||||||||||||
Totals
|
$
|
9,336
|
$
|
-
|
$
|
-
|
$
|
9,336
|
||||||||
December
31, 2009
|
||||||||||||||||
Non-marketable
equity securities (including FRB and FHLB stock)
|
$
|
8,452
|
$
|
-
|
$
|
-
|
$
|
8,452
|
||||||||
Investment
in unconsolidated trusts
|
1,116
|
-
|
-
|
1,116
|
||||||||||||
Totals
|
$
|
9,568
|
$
|
-
|
$
|
-
|
$
|
9,568
|
Realized
net gains on sale of securities available for sale are summarized as
follows:
Three
Months Ended March 31,
|
||||||||
2010
|
2009
|
|||||||
(In
thousands)
|
||||||||
Gross
realized gains
|
$
|
47
|
$
|
698
|
||||
Gross
realized losses
|
-
|
-
|
||||||
Net
gains
|
$
|
47
|
$
|
698
|
A summary
of unrealized loss information for investment securities, categorized by
security type, at March 31, 2010 and December 31, 2009 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)
|
||||||||||||||||||||||||
March
31, 2010
|
||||||||||||||||||||||||
Government
sponsored agencies
|
$
|
30,437
|
$
|
(25
|
)
|
$
|
-
|
$
|
-
|
$
|
30,437
|
$
|
(25
|
)
|
||||||||||
States
and political subdivisions
|
4,533
|
(93
|
)
|
-
|
-
|
4,533
|
(93
|
)
|
||||||||||||||||
Residential
mortgage-backed securities
|
19,212
|
(1,122
|
)
|
1,439
|
(83
|
)
|
20,651
|
(1,205
|
)
|
|||||||||||||||
Totals
|
$
|
54,182
|
$
|
(1,240
|
)
|
$
|
1,439
|
$
|
(83
|
)
|
$
|
55,621
|
$
|
(1,323
|
)
|
|||||||||
December
31, 2009
|
||||||||||||||||||||||||
Government
sponsored agencies
|
$
|
25,855
|
$
|
(143
|
)
|
$
|
-
|
$
|
-
|
$
|
25,855
|
$
|
(143
|
)
|
||||||||||
States
and political subdivisions
|
4,540
|
(87
|
)
|
-
|
-
|
4,540
|
(87
|
)
|
||||||||||||||||
Residential
mortgage-backed securities
|
20,579
|
(527
|
)
|
1,481
|
(87
|
)
|
22,060
|
(614
|
)
|
|||||||||||||||
Totals
|
$
|
50,974
|
$
|
(757
|
)
|
$
|
1,481
|
$
|
(87
|
)
|
$
|
52,455
|
$
|
(844
|
)
|
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)
|
||||||||||||||||||||||||
March
31, 2010
|
||||||||||||||||||||||||
States
and political subdivisions
|
$
|
9,651
|
$
|
(245
|
)
|
$
|
1,702
|
$
|
(316
|
)
|
$
|
11,353
|
$
|
(561
|
)
|
|||||||||
Totals
|
$
|
9,651
|
$
|
(245
|
)
|
$
|
1,702
|
$
|
(316
|
)
|
$
|
11,353
|
$
|
(561
|
)
|
|||||||||
December
31, 2009
|
||||||||||||||||||||||||
States
and political subdivisions
|
$
|
9,937
|
$
|
(297
|
)
|
$
|
1,499
|
$
|
(331
|
)
|
$
|
11,436
|
$
|
(628
|
)
|
|||||||||
Totals
|
$
|
9,937
|
$
|
(297
|
)
|
$
|
1,499
|
$
|
(331
|
)
|
$
|
11,436
|
$
|
(628
|
)
|
At March
31, 2010, $68.9 million in debt securities had unrealized losses with aggregate
depreciation of 2.7% of the Company’s amortized cost basis. Of these securities,
$3.1 million had a continuous unrealized loss position for twelve months or
longer with an aggregate depreciation of 12.7%. The unrealized losses relate
principally to the general change in interest rates and illiquidity, and not
credit quality, that has occurred since the securities purchase dates, and such
unrecognized losses or gains will continue to vary with general interest rate
level fluctuations in the future. As management does not intend to sell the
securities, and it is unlikely that the Company will be required to sell the
securities before their anticipated recovery, no declines are deemed to be
other-than-temporary.
The
amortized cost and fair value of investment securities, as of March 31, 2010, 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
|
$
|
6,271
|
$
|
6,285
|
$
|
-
|
$
|
-
|
$
|
100
|
$
|
100
|
||||||||||||
One
to five years
|
62,005
|
62,187
|
-
|
-
|
-
|
-
|
||||||||||||||||||
Five
to ten years
|
17,991
|
18,198
|
1,459
|
1,459
|
-
|
-
|
||||||||||||||||||
Over
ten years
|
38,123
|
37,561
|
9,894
|
9,333
|
1,116
|
1,116
|
||||||||||||||||||
Equity
investments with no stated maturity
|
-
|
-
|
-
|
-
|
8,120
|
8,120
|
||||||||||||||||||
$
|
124,390
|
$
|
124,231
|
$
|
11,353
|
$
|
10,792
|
$
|
9,336
|
$
|
9,336
|
Securities
with carrying amounts of $46.8 million and $49.5 million at March 31, 2010 and
December 31, 2009, respectively, were pledged as collateral on public deposits
and for other purposes as required or permitted by law.
Note
6. Loans
Loans
consisted of:
March
31,
|
December
31,
|
|||||||
2010
|
2009
|
|||||||
(In
thousands)
|
||||||||
Commercial
|
$
|
135,081
|
$
|
137,684
|
||||
Commercial
real estate
|
435,624
|
452,235
|
||||||
Residential
real estate
|
419,513
|
399,588
|
||||||
Construction
real estate
|
180,655
|
194,179
|
||||||
Installment
and other
|
52,862
|
58,456
|
||||||
Total
loans
|
1,223,735
|
1,242,142
|
||||||
Unearned
income
|
(2,215
|
)
|
(2,356
|
)
|
||||
Gross
loans
|
1,221,520
|
1,239,786
|
||||||
Allowance
for loan losses
|
(24,822
|
)
|
(24,504
|
)
|
||||
Net
loans
|
$
|
1,196,698
|
$
|
1,215,282
|
Loans are
made to individuals as well as commercial and tax exempt
entities. Specific loan terms vary as to interest rate, repayment and
collateral requirements based on the type of loan requested and the credit
worthiness of the prospective borrower. Credit risk tends to be
geographically concentrated, in that the majority of loan customers are located
in the markets serviced by the Bank.
Non-performing
loans as of March 31, 2010 and December 31, 2009, were as follows:
At
March 31, 2010
|
At
December 31, 2009
|
|||||||
(In
thousands)
|
||||||||
Non-accruing
loans
|
$
|
64,463
|
$
|
65,035
|
||||
Total
non-performing loans
|
64,463
|
65,035
|
There
were no loans past due more than 90 days and still accruing interest as of March
31, 2010 or December 31, 2009. The reduction in interest income
associated with loans on non-accrual status was $1.4 million and $3.4 million as
of March 31, 2010 and December 31, 2009, respectively.
Information
about impaired loans as of March 31, 2010 and December 31, 2009 is as
follows:
March
31,
|
December
31,
|
|||||||
2010
|
2009
|
|||||||
(In
thousands)
|
||||||||
Loans
for which there was a related allowance for credit losses
|
$
|
2,684
|
$
|
-
|
||||
Other
impaired loans
|
71,706
|
67,736
|
||||||
Total
impaired loans
|
$
|
74,390
|
$
|
67,736
|
||||
Average
monthly balance of impaired loans
|
$
|
69,721
|
$
|
51,884
|
||||
Related
allowance for credit losses
|
$
|
263
|
$
|
-
|
||||
Interest
income recognized on an accrual basis
|
$
|
118
|
$
|
75
|
||||
Interest
income recognized on a cash basis
|
$
|
68
|
$
|
320
|
Total
troubled debt restructures, both those in accrual and non-accrual status, were
$6.8 million and $13.8 million as of March 31, 2010 and December 31, 2009,
respectively.
Activity
in the allowance for loan losses was as follows:
Three
Months Ended March 31,
|
Year
Ended December 31,
|
|||||||
2010
|
2009
|
|||||||
(In
thousands)
|
||||||||
Balance,
beginning of period
|
$
|
24,504
|
$
|
15,230
|
||||
Provision
for loan losses
|
4,257
|
26,024
|
||||||
Charge-offs
|
(4,059
|
)
|
(17,379
|
)
|
||||
Recoveries
|
120
|
629
|
||||||
Net
charge-offs
|
(3,939
|
)
|
(16,750
|
)
|
||||
Balance,
end of period
|
$
|
24,822
|
$
|
24,504
|
Note
7. Other Real Estate Owned
Other
real estate owned consists of property acquired due to foreclosure on real
estate loans. Total other real estate owned consisted of:
At
March 31, 2010
|
At
December 31, 2009
|
|||||||
(In
thousands)
|
||||||||
Construction
property
|
$
|
12,196
|
$
|
12,782
|
||||
Residential
real estate
|
4,648
|
3,337
|
||||||
Commercial
real estate
|
3,181
|
631
|
||||||
Total
|
$
|
20,025
|
$
|
16,750
|
Note
8. 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 after December 31, 2005 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 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 months ended March 31, 2010 or
2009.
A summary
of stock option and stock appreciation right activity under the 1998 Plan and
the 2005 Plan as of March 31, 2010, 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, 2010
|
412,500
|
$
|
27.03
|
|||||||||||||
Granted
|
-
|
-
|
||||||||||||||
Exercised
|
-
|
-
|
||||||||||||||
Forfeited
or expired
|
-
|
-
|
||||||||||||||
Outstanding
at March 31, 2010
|
412,500
|
$
|
27.03
|
2.57
|
$
|
1,729
|
||||||||||
Exercisable
at March 31, 2010
|
229,000
|
$
|
26.77
|
3.34
|
$
|
995
|
There
were no stock options exercised during the three months ended March 31, 2010 or
2009.
As of
March 31, 2010, there was $221 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. That cost is
expected to be recognized over a weighted-average vesting period of 1.6 years.
During the three month period ended March 31, 2010, we expensed $36 thousand for
stock appreciation rights that will vest in 2011 and 2012.
Note
9. Short-Term Borrowings
The
Company had Federal Home Loan Bank (FHLB) advances with maturity dates of less
than one year of $1.2 million as of March 31, 2010 and $20.0 million as
of December 31, 2009. As of March 31, 2010, the advances had a fixed
interest rate of 6.03%.
Note
10. Long-Term Borrowings
The
Company had FHLB advances with maturity dates greater than one year of $32.3
million as of March 31, 2010 and $13.5 million as of December 31, 2009. As of
March 31, 2010, the advances had fixed interest rates ranging from 2.57% to
6.34%.
Note
11. Long-term Capital Lease Obligations
The
Company is leasing land in Santa Fe and has built 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 March
31, 2010 and 2009 were $46 thousand.
Note 12. Junior Subordinated Debt Owed to
Unconsolidated Trusts
The
following table presents details on the junior subordinated debt owed to
unconsolidated trusts as of March 31, 2010.
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
|
%
|
2.95%
(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
|
%
|
2.95%
(variable)
|
6.88
|
%
|
6.83
|
%
|
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 its
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 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. As of March 31, 2010, 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 $615 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 March 31, 2010 and 2009, $3 thousand of these issuance costs were
amortized. Unamortized issuance costs were $280 thousand and $283 thousand at
March 31, 2010 and December 31, 2009, respectively. There were no issuance costs
associated with the other trust preferred security issues.
Dividends
accrued and unpaid to securities holders totaled $197 thousand and $478
thousand on March 31, 2010 and December 31, 2009, respectively.
Under the
terms of the securities purchase agreement between the Company and the U.S.
Treasury pursuant to which the Company issued its Series A Preferred Stock as
part of the TARP Capital Purchase Program, prior to the earlier of (i) March 27,
2012 and (ii) the date on which all of the shares of the Series A and Series B
Preferred Stock have been redeemed by us or transferred by Treasury to third
parties, we may not redeem our trust preferred securities (or the related junior
subordinated notes), without the consent of Treasury.
Note 13. 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.
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 March
31, 2010 and December 31, 2009, the following credit-related commitments were
outstanding:
Contract
Amount
|
||||||||
March
31, 2010
|
December
31,
2009
|
|||||||
(In
thousands)
|
||||||||
Unfunded
commitments under lines of credit
|
$
|
151,889
|
$
|
155,535
|
||||
Commercial
and standby letters of credit
|
12,740
|
14,628
|
Commitments
to extend 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 equity 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 Bank, 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 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 Bank is committed.
Commercial
and standby letters of credit are conditional credit-related commitments issued
by the Bank to guarantee the performance of a customer to a third party. Those
letters of credit are primarily issued to support public and private borrowing
arrangements. Essentially all 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 Bank generally 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 Bank would be required to fund the
credit-related commitment. The maximum potential amount of future payments the
Bank could be required to make is represented by the contractual amount shown in
the summary above. If the credit-related commitment is funded, the Bank would be
entitled to seek recovery from the customer. At March 31, 2010 and December 31,
2009, 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 $24 thousand both as
of March 31, 2010 and December 31, 2009, 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 Bank 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”). 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 state 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 are granted primarily to commercial
borrowers.
Note
14. 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 March 31, 2010 and December 31, 2009 was $242 thousand for each
period.
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 March 31, 2010 and March 31, 2009, a
net amount of $44 thousand and $2 thousand was accreted to equity,
respectively.
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 March 31,
2010 and March 31, 2009, the total of these two amounts was $529 thousand and
$23 thousand, respectively.
Note
15. Litigation
Trinity,
the Bank, Title Guaranty, Cottonwood, FNM Investment Fund IV, FNM Investor
Series IV, 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, which, in the opinion of management, in the aggregate, would be
considered material to the Company's consolidated financial
condition.
Note 16.
Derivative Financial Instruments
In the
normal course of business, the Bank uses a variety of financial instruments to
service the financial needs of customers and to reduce its exposure to
fluctuations in interest rates. Derivative instruments that the Bank
uses as part of its interest rate risk management strategy include mandatory
forward delivery commitments and rate lock commitments.
As a
result of using over-the-counter derivative instruments, the Bank has potential
exposure to credit loss in the event of nonperformance by the
counterparties. The Bank manages this credit risk by selecting only
well established, financially strong counterparties, spreading the credit risk
amongst many such counterparties and by placing contractual limits on the amount
of unsecured credit risk from any single counterparty. The Bank’s
exposure to credit risk in the event of default by counterparty is the current
cost of replacing the contracts net of any available margins retained by the
Bank. However, if the borrower defaults on the commitment the Bank
requires the borrower to cover these costs.
The
Company’s derivative instruments outstanding at March 31, 2010, include
commitments to fund loans held for sale. The interest rate lock
commitment was valued at fair market value at inception. The rate
locks will continue to be adjusted for changes in value resulting from changes
in market interest rates.
The
Company originates single-family residential loans for sale pursuant to programs
with the Federal National Mortgage Association (“FNMA”). At the time
the interest rate is locked in by the borrower, the Bank concurrently enters
into a forward loan sale agreement with respect to the sale of such loan at a
set price in an effort to manage the interest rate risk inherent in the locked
loan commitment. Any change in the fair value of the loan commitment
after the borrower locks in the interest rate is substantially offset by the
corresponding change in the fair value of the forward loan sale agreement
related to such loan. The period from the time the borrower locks in
the interest rate to the time the Bank funds the loan and sells it to FNMA is
generally 60 days. The fair value of each instrument will rise or
fall in response to changes in market interest rates subsequent to the dates the
interest rate locks and forward loan sale agreements are entered
into. In the event that interest rates rise after the Bank enters
into an interest rate lock, the fair value of the loan commitment will
decline. However, the fair value of the forward loan sale agreement
related to such loan commitment should increase by substantially the same
amount, effectively eliminating the Company’s interest rate and price
risk.
At March
31, 2010, the Company had notional amounts of $7.7 million in contracts with
customers and $20.0 million in contracts with FNMA for interest rate lock
commitments outstanding related to loans being originated for
sale. The related fair values of these commitments were an asset of
$229 thousand and a liability of $1 thousand as of March 31,
2010.
Note
17. Fair Value Measurements
ASC Topic
820 defines fair value as the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market
participants. A fair value measurement assumes that the transaction to sell the
asset or transfer the liability occurs in the principal market for the asset or
liability or, in the absence of a principal market, the most advantageous market
for the asset or liability. The price in the principal (or most advantageous)
market used to measure the fair value of the asset or liability shall not be
adjusted for transaction costs. An orderly transaction is a transaction that
assumes exposure to the market for a period prior to the measurement date to
allow for marketing activities that are usual and customary for transactions
involving such assets and liabilities; it is not a forced transaction. Market
participants are buyers and sellers in the principal market that are (i)
independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to
transact.
ASC Topic
820 requires the use of valuation techniques that are consistent with the market
approach, the income approach and/or the cost approach. The market approach uses
prices and other relevant information generated by market transactions involving
identical or comparable assets and liabilities. The income approach uses
valuation techniques to convert expected future amounts, such as cash flows or
earnings, to a single present value amount on a discounted basis. The cost
approach is based on the amount that currently would be required to replace the
service capacity of an asset (replacement cost). Valuation techniques should be
consistently applied. Inputs to valuation techniques refer to the assumptions
that market participants would use in pricing the asset or liability. Inputs may
be observable, meaning those that reflect the assumptions market participants
would use in pricing the asset or liability developed based on market data
obtained from independent sources, or unobservable, meaning those that reflect
the reporting entity's own assumptions about the assumptions market participants
would use in pricing the asset or liability developed based on the best
information available in the circumstances. In that regard, ASC Topic 820
establishes a fair value hierarchy for valuation inputs that gives the highest
priority to quoted prices in active markets for identical assets or liabilities
and the lowest priority to unobservable inputs. The fair value hierarchy is as
follows:
·
|
Level
1: Quoted prices (unadjusted) for identical assets or liabilities in
active markets that the entity has the ability to access as of the
measurement date.
|
·
|
Level
2: Significant other observable inputs other than Level 1 prices such as
quoted prices for similar assets or liabilities; quoted prices in markets
that are not active; or other inputs that are observable or can be
corroborated by observable market
data.
|
·
|
Level
3: Significant unobservable inputs that reflect a reporting entity’s own
assumptions about the assumptions that market participants would use in
pricing an asset or liability.
|
A
description of the valuation methodologies used for instruments measured at fair
value, as well as the general classification of such instruments pursuant to the
valuation hierarchy, is set forth below.
In
general, fair value is based upon quoted market prices, where available. If such
quoted market prices are not available, fair value is based upon internally
developed models that primarily use observable market-based
parameters as inputs. Valuation adjustments may be made to ensure that financial
instruments are recorded at fair value. These adjustments may include amounts to
reflect counterparty credit quality, the Company's creditworthiness, among other
things, as well as unobservable parameters. Any such valuation adjustments are
applied consistently over time. Our valuation methodologies may produce a fair
value calculation that may not be indicative of net realizable value or
reflective of future fair values. While management believes the Company’s
valuation methodologies are appropriate and consistent with other market
participants, the use of different methodologies or assumptions to determine the
fair value of certain financial instruments could result in a different estimate
of fair value at the reporting date. Transfers between levels of the fair value
hierarchy are recognized on the actual date of the event or circumstances that
caused the transfer, which generally coincides with the Company’s monthly and/or
quarterly valuation process.
Financial Instruments
Recorded at Fair Value on a Recurring Basis
Securities
Available for Sale. The fair values of securities available for sale are
determined by quoted prices in active markets, when available. If quoted market
prices are not available, the fair value is determined by a matrix pricing,
which is a mathematical technique, widely used in the industry to value debt
securities without relying exclusively on quoted prices for the specific
securities but rather by relying on the securities’ relationship to other
benchmark quoted securities.
Derivatives.
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.
The
following table summarizes financial assets and financial liabilities measured
at fair value on a recurring basis as of March 31, 2010 and December 31, 2009,
segregated by the level of the valuation inputs within the fair value hierarchy
utilized to measure fair value (in thousands):
March
31, 2010
|
Total
|
Quoted
Prices in Active Markets for Identical Assets (Level
1)
|
Significant
Other Observable Inputs (Level 2)
|
Significant
Unobservable Inputs (Level 3)
|
||||||||||||
(In
thousands)
|
||||||||||||||||
Financial
Assets:
|
||||||||||||||||
Investment
securities available for sale:
|
||||||||||||||||
Available
for sale
|
||||||||||||||||
Government
sponsored agencies
|
$
|
53,366
|
$
|
-
|
$
|
53,366
|
$
|
-
|
||||||||
States
and political subdivisions
|
26,427
|
-
|
26,427
|
-
|
||||||||||||
Residential
mortgage-backed securities
|
44,438
|
-
|
44,438
|
-
|
||||||||||||
Interest
rate lock commitments, mandatory forward delivery commitments and pair
offs, net asset
|
229
|
-
|
229
|
-
|
||||||||||||
Financial
Liabilities:
|
||||||||||||||||
Interest
rate lock commitments, mandatory forward delivery commitments and pair
offs, net liability
|
$
|
1
|
$
|
-
|
$
|
1
|
$
|
-
|
||||||||
Off-balance-sheet
instruments:
|
||||||||||||||||
Loan
commitments and standby letters of credit
|
$
|
24
|
$
|
-
|
$
|
24
|
$
|
-
|
||||||||
December
31, 2009
|
||||||||||||||||
Financial
Assets:
|
||||||||||||||||
Investment
securities available for sale:
|
||||||||||||||||
Available
for sale
|
||||||||||||||||
Government
sponsored agencies
|
$
|
68,382
|
$
|
-
|
$
|
68,382
|
$
|
-
|
||||||||
States
and political subdivisions
|
26,519
|
-
|
26,519
|
-
|
||||||||||||
Residential
mortgage-backed securities
|
41,855
|
-
|
41,855
|
-
|
||||||||||||
Interest
rate lock commitments, mandatory forward delivery commitments and pair
offs, net asset
|
251
|
-
|
251
|
-
|
||||||||||||
Financial
Liabilities:
|
||||||||||||||||
Interest
rate lock commitments, mandatory forward delivery commitments and pair
offs, net liability
|
$
|
1
|
$
|
-
|
$
|
1
|
$
|
-
|
||||||||
Off-balance-sheet
instruments:
|
||||||||||||||||
Loan
commitments and standby letters of credit
|
$
|
24
|
$
|
-
|
$
|
24
|
$
|
-
|
There
were no financial assets measured at fair value on a recurring basis for which
the Company used significant unobservable inputs (Level 3) during the periods
presented in these financial statements.
Financial Instruments
Recorded at Fair Value on a Nonrecurring Basis
The
Company may be required, from time to time, to measure certain financial assets
and financial liabilities at fair value on a nonrecurring basis in accordance
with U.S. generally accepted accounting principles. These include assets that
are measured at the lower of cost or market value that were recognized at fair
value below cost at the end of the period.
Impaired
Loans. Loans for which it is
probable that payment of interest and principal will not be made in accordance
with the contractual terms of the loan agreement are considered
impaired. Once a loan is identified as impaired, management measures
the amount of that impairment in accordance with ASC Topic 310. The
fair value of impaired loans is estimated using one of several methods,
including collateral value, market value of similar debt, enterprise value,
liquidation value and discounted cash flows. Those impaired loans not
requiring an allowance represent loans for which the fair value of the expected
repayments or collateral exceed the recorded investments in such
loans. At March 31, 2010, substantially all of the total impaired
loans were evaluated based on the fair value of the collateral. In
accordance with ASC Topic 820, impaired loans where an allowance is established
based on the fair value of collateral require classification in the fair value
hierarchy. Collateral values are estimated using Level 3 inputs based
on customized discounting criteria. For a majority of impaired loans,
the Company obtains a current independent appraisal of loan
collateral. Other valuation techniques are used as well, including
internal valuations, comparable property analysis and contractual sales
information. For substantially all impaired loans with an appraisal
more than 6 months old, the Company further discounts market prices by 10% to
30% and in some cases, up to an additional 50%. This discount is
based on our evaluation of related market conditions and is in addition to a
reduction in value for potential sales costs and discounting that has been
incorporated in the independent appraisal.
Loans held for
sale. 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 to current
earnings.
Mortgage
Servicing Rights. 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 to current earnings. Only the tranches deemed impaired are included in
the following table.
Non-Financial Assets and
Non-Financial Liabilities Recorded at Fair Value
Application
of ASC Topic 820 to non-financial assets and non-financial liabilities became
effective January 1, 2009. The Company has no non-financial assets or
non-financial liabilities measured at fair value on a recurring basis. Certain
non-financial assets and non-financial liabilities measured at fair value on a
non-recurring basis include foreclosed assets.
Other Real Estate
and Other Repossessed Assets (Foreclosed Assets). Foreclosed assets, upon
initial recognition, are measured and reported at fair value through a
charge-off to the allowance for possible loan losses based upon the fair value
of the foreclosed asset. The fair value of foreclosed assets, upon initial
recognition, are estimated using Level 3 inputs based on customized discounting
criteria.
During
the first quarter of 2010 and the year ended December 31, 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 $5.4 million and $25.0 million
(utilizing Level 3 valuation inputs) during the three months ended March 31,
2010 and the year ended December 31, 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 $453
thousand and $3.7 million, during the three months ended March 31, 2010 and the
year ended December 31, 2009, respectively. Other than foreclosed assets
measured at fair value (less estimated disposal costs) upon initial recognition,
a total of $2.0 million in foreclosed assets were remeasured at fair value
during both the three months ended March 31, 2010 and the year ended December
31, 2009, resulting in a charge of $339 thousand and $283 thousand to current
earnings, respectively.
Assets
measured at fair value on a nonrecurring basis as of March 31, 2010 and December
31, 2009 are included in the table below (in thousands):
March
31, 2010
|
Total
|
Quoted
Prices in Active Markets for Identical Assets (Level
1)
|
Significant
Other Observable Inputs (Level 2)
|
Significant
Unobservable Inputs (Level 3)
|
||||||||||||
(In
thousands)
|
||||||||||||||||
Financial
Assets:
|
||||||||||||||||
Impaired
loans
|
$
|
16,484
|
$
|
-
|
$
|
-
|
$
|
16,484
|
||||||||
Loans
held for sale
|
579
|
-
|
579
|
-
|
||||||||||||
Mortgage
servicing rights
|
3,028
|
-
|
-
|
3,028
|
||||||||||||
Non-Financial
Assets:
|
||||||||||||||||
Foreclosed
assets
|
20,025
|
-
|
-
|
20,025
|
||||||||||||
December
31, 2009
|
||||||||||||||||
Financial
Assets:
|
||||||||||||||||
Impaired
loans
|
$
|
14,954
|
$
|
-
|
$
|
-
|
$
|
14,954
|
||||||||
Loans
held for sale
|
3,522
|
-
|
3,522
|
-
|
||||||||||||
Mortgage
servicing rights
|
3,049
|
-
|
-
|
3,049
|
||||||||||||
Non-Financial
Assets:
|
||||||||||||||||
Foreclosed
assets
|
16,750
|
-
|
-
|
16,750
|
ASC Topic
825 requires disclosure of the fair value of financial assets and financial
liabilities, including those financial assets and financial liabilities that are
not measured and reported at fair value on a recurring basis or non-recurring
basis. The methodologies for estimating the fair value of financial
assets and financial liabilities that are measured at fair value on a recurring
or non-recurring basis are discussed above. The estimated fair value
approximates carrying value for cash and cash equivalents and accrued
interest. The methodologies for other financial assets and financial
liabilities are discussed below:
The
following methods and assumptions were used by the Company in estimating the
fair values of its other financial instruments:
Cash and due from
banks and interest bearing deposits with banks: The carrying amounts
reported in the balance sheet approximate fair value.
Non-marketable
securities, including FHLB and FRB Stock: The carrying amounts reported
in the balance sheet approximate fair value.
Loans:
Most commercial loans and some real estate mortgage loans are made on a variable
rate basis. For those variable-rate loans that reprice frequently
with no significant change in credit risk, fair values are based on carrying
values. The fair values for fixed rate and all other loans are
estimated using discounted cash flow analyses, using interest rates currently
being offered for loans with similar terms to borrowers with similar credit
quality.
Non-interest
bearing deposits: The fair values disclosed are equal to their balance
sheet carrying amounts, which represent the amount payable on
demand.
Interest bearing
deposits: The fair values disclosed for deposits with no defined
maturities are equal to their carrying amounts, which represent the amounts
payable on demand. The carrying amounts for variable-rate, fixed-term
money market accounts and certificates of deposit approximate their fair values
at the reporting date. Fair values for fixed-rate certificates of
deposit are estimated using a discounted cash flow calculation that applies
interest rates currently being offered on similar certificates to a schedule of
aggregated expected monthly maturities on time deposits.
Short-term
borrowings: The carrying amounts of federal funds purchased, borrowings
under repurchase agreements and other short-term borrowings with maturities of
90 days or less approximate their fair values. The fair value of
short-term borrowings greater than 90 days is based on the discounted value of
contractual cash flows.
Long-term
borrowings: The fair values of the Company's long-term borrowings (other
than deposits) are estimated using discounted cash flow analyses, based on the
Company's current incremental borrowing rates for similar types of borrowing
arrangements.
Junior
subordinated notes issued to capital trusts: The fair values of the
Company’s junior subordinated notes issued to capital trusts are estimated based
on the quoted market prices, when available, of the related trust preferred
security instruments, or are estimated based on the quoted market prices of
comparable trust preferred securities.
Off-balance-sheet
instruments: Fair values for the Company's off-balance-sheet lending
commitments in the form of letters of credit are based on fees currently charged
to enter into similar agreements, taking into account the remaining terms of the
agreements.
The
estimated fair values of financial instruments are as follows:
March
31, 2010
|
December
31, 2009
|
|||||||||||||||
Carrying
amount
|
Fair
value
|
Carrying
amount
|
Fair
value
|
|||||||||||||
(In
thousands)
|
||||||||||||||||
Financial
assets:
|
||||||||||||||||
Cash
and due from banks
|
$
|
20,275
|
$
|
20,275
|
$
|
18,761
|
$
|
18,761
|
||||||||
Interest-bearing
deposits with banks
|
143,709
|
143,709
|
188,114
|
188,114
|
||||||||||||
Federal
funds sold and securities purchased under resell
agreements
|
403
|
403
|
620
|
620
|
||||||||||||
Investments:
|
||||||||||||||||
Available
for sale
|
124,231
|
124,231
|
136,756
|
136,756
|
||||||||||||
Held
to maturity
|
11,353
|
10,792
|
11,436
|
10,808
|
||||||||||||
Other
investments
|
8,220
|
8,220
|
9,568
|
9,568
|
||||||||||||
Loans,
net
|
1,196,698
|
1,185,277
|
1,215,282
|
1,203,138
|
||||||||||||
Loans
held for sale
|
7,893
|
7,933
|
9,245
|
9,268
|
||||||||||||
Accrued
interest receivable
|
6,871
|
6,871
|
6,840
|
6,840
|
||||||||||||
Mortgage
servicing rights
|
7,645
|
8,846
|
7,647
|
8,754
|
||||||||||||
Derivative
financial instruments
|
229
|
229
|
251
|
251
|
||||||||||||
Financial
liabilities:
|
||||||||||||||||
Non-interest
bearing deposits
|
$
|
90,234
|
$
|
90,234
|
$
|
87,238
|
$
|
87,238
|
||||||||
Interest
bearing deposits
|
1,307,219
|
1,310,277
|
1,381,207
|
1,385,968
|
||||||||||||
Short-term
borrowings
|
1,183
|
1,233
|
20,000
|
20,182
|
||||||||||||
Long-term
borrowings
|
32,300
|
40,824
|
13,493
|
14,620
|
||||||||||||
Junior
subordinated debt owed to unconsolidated trusts
|
37,116
|
18,118
|
37,116
|
18,118
|
||||||||||||
Accrued
interest payable
|
4,514
|
4,514
|
5,038
|
5,038
|
||||||||||||
Derivative
financial instruments
|
1
|
1
|
1
|
1
|
||||||||||||
Off-balance
sheet instruments:
|
||||||||||||||||
Standby
letters of credit
|
$
|
24
|
$
|
24
|
$
|
24
|
$
|
24
|
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 for the year ended
December 31, 2009.
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 for the year ended December 31, 2009. 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 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 first three months of 2010, the Company experienced some stabilization of
the prior year's deterioration in asset quality, as measured by non-performing
assets and classified loans that are still performing. However, 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 allocations during the first three months of
2010 to be a necessary and prudent step to reserve against probable losses
indicated by deterioration in asset quality compared to the same period in 2009.
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.
Mortgage
Servicing Right (MSR) Assets: Servicing residential mortgage loans for
third-party investors represents a significant business activity of the Bank. As
of March 31, 2010, mortgage loans serviced for others totaled $1.0 billion. The
net carrying amount of the MSRs on these loans total $7.6 million as of March
31, 2010. 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.
An
analysis of changes in mortgage servicing rights assets follows:
Three
Months Ended March 31,
|
||||||||
2010
|
2009
|
|||||||
(In
thousands)
|
||||||||
Balance
at beginning of period
|
$
|
8,525
|
$
|
6,908
|
||||
Servicing
rights originated and capitalized
|
307
|
1,480
|
||||||
Amortization
|
(502
|
)
|
(642
|
)
|
||||
$
|
8,330
|
$
|
7,746
|
Below is
an analysis of changes in the mortgage servicing right assets valuation
allowance:
Three
Months Ended March 31,
|
||||||||
2010
|
2009
|
|||||||
(In
thousands)
|
||||||||
Balance
at beginning of period
|
$
|
(878
|
)
|
$
|
(1,637
|
)
|
||
Aggregate
reductions credited to operations
|
332
|
504
|
||||||
Aggregate
additions charged to operations
|
(139
|
)
|
(848
|
)
|
||||
$
|
(685
|
)
|
$
|
(1,981
|
)
|
The fair
values of the MSRs were $8.8 million on both March 31, 2010 and December 31,
2009.
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.
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 March 31, 2010, 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
March 31, 2010 and December 31, 2009:
March
31, 2010
|
December
31, 2009
|
|||||||
Prepayment
Standard Assumption (PSA) speed
|
228.00
|
%
|
232.00
|
%
|
||||
Discount
rate
|
10.76
|
10.76
|
||||||
Earnings
rate
|
2.73
|
2.75
|
Overview
The
Company’s net income (loss) available to common shareholders improved
by $3 thousand (3.1%) from the quarter ended December 31, 2009 to the quarter
ended March 31, 2010, moving from a net loss of $(96) thousand to a net loss of
$(93) thousand. In addition, the Company’s net income (loss) available to
common shareholders decreased $3.3 million (102.9%) from the first quarter
of 2009 to the first quarter of 2010, moving from net income of $3.2
million to a net loss of $(93) thousand. The decrease from the first quarter of
2009 was primarily due to a decrease in non-interest income and an increase
in non-interest expenses. The decrease in non-interest income was primarily
due to the large mortgage refinance activity that took place in the first
quarter of 2009 which was not experienced in the first quarter of
2010. Total assets decreased by $73.6 million (4.4%) from
December 31, 2009 to March 31, 2010, mainly due to decreases in cash
and cash equivalents and net loans. The decrease in assets was largely due to a
decreased loan demand and planned as part of a move to enhance capital
ratios.
Regulatory
Proceedings Against the Bank. As discussed more fully in the
Company's Form 10-K for the year ended December 31, 2009, the Bank and the OCC
entered into a written agreement (the “Agreement”) on January 26,
2010. The Agreement is based on the concerns of the OCC due to an
excessive level of classified assets and concentrations of
credit. The Agreement contains, among other things, directives for
the Bank to take specific actions, within time frames specified therein, to
address risk management and capital matters that, in the view of the OCC, may
impact the Bank’s overall safety and soundness. Specifically, the
Bank is required to, among other things: (i) continue to develop, implement and
ensure adherence to written programs designed to reduce the level of credit risk
in the Bank’s loan portfolio; (ii) review, revise and ensure adherence to a
written capital program; (iii) comply with its approved capital program,
which calls for maintaining higher than the regulatory minimum capital ratios;
and (iv) obtain prior OCC approval before paying dividends.
At March
31, 2010 and May 10, 2010, the Bank was believes that it has fully addressed the
provisions of the Agreement within the timeframes identified or has obtained
necessary approvals for extensions from the OCC. The Bank will
continue taking the necessary actions to satisfy all requirements in the
Agreement. A copy of the Agreement was filed as Exhibit 99-1 to the
Company’s Current Report on Form 8-K filed on February 1, 2010 with the
SEC. The filing is available on the SEC’s website and the Company’s
website.
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 $5.3 million during the first quarter of 2010, compared to net
operating income of $9.4 million during the same period in 2009. This
represented a decrease of $4.1 million (43.0%). Net income (loss) available
to common shareholders for the first quarter of 2010 decreased to a loss of
$(93) thousand or $(0.01) diluted earnings (loss) per share, compared to
$3.2 million or $0.50 diluted earnings per share for the same period in 2009, a
decrease of $3.3 million (102.9%) in net income and a decrease in earnings per
share of $0.51 (102.0%). This decrease in net income was primarily due to a
decrease in the non-interest income of $3.4 million (52.9%) and an
increase in non-interest expense of $496 thousand (4.7%). The decrease in
non-interest income was primarily due to a decrease in the gain on sale of loans
of $2.3 million, due to a drop in mortgage loan refinance activity from high
levels during the first quarter of 2009. The increase in non-interest
expense was mainly due to an increase in the premium on FDIC insurance. This
increase was due to both an increase in the base assessment rate experienced
industry-wide and an increase in the expense due to a change in the Bank's risk
profile related to the Bank's Agreement with the OCC. There was also a
decrease in net interest income of $101 thousand (0.8%) and an increase in the
provision for loan losses of $96 thousand (2.3%). Income tax expenses
decreased $1.3 million (67.3%) due to lower pre-tax income. Additionally,
during the first quarter of 2010, 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; during
the first quarter of 2009, the dividends and accretion were was $23
thousand.
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, collection expenses 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.
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 March 31,
|
||||||||||||||||||||||||
2010
|
2009
|
|||||||||||||||||||||||
Average
Balance
|
Interest
|
Yield/Rate
|
Average
Balance
|
Interest
|
Yield/Rate
|
|||||||||||||||||||
(Dollars
in thousands)
|
||||||||||||||||||||||||
Interest-earning
Assets:
|
||||||||||||||||||||||||
Loans(1)
|
$
|
1,236,032
|
$
|
17,272
|
5.67
|
%
|
$
|
1,255,147
|
$
|
18,992
|
6.14
|
%
|
||||||||||||
Taxable
investment securities
|
116,315
|
633
|
2.21
|
62,736
|
198
|
1.28
|
||||||||||||||||||
Investment
securities exempt from federal income taxes (2)
|
37,491
|
482
|
5.21
|
21,658
|
349
|
6.54
|
||||||||||||||||||
Federal
funds sold
|
511
|
-
|
-
|
2,205
|
1
|
0.18
|
||||||||||||||||||
Other
interest-bearing deposits
|
138,583
|
105
|
0.31
|
36,736
|
9
|
0.10
|
||||||||||||||||||
Investment
in unconsolidated trust subsidiaries
|
1,116
|
20
|
7.27
|
1,116
|
21
|
7.63
|
||||||||||||||||||
Total
interest-earning assets
|
1,530,048
|
18,512
|
4.91
|
1,379,598
|
19,570
|
5.75
|
||||||||||||||||||
Non-interest-earning
assets
|
87,038
|
47,658
|
||||||||||||||||||||||
Total
assets
|
$
|
1,617,086
|
$
|
1,427,256
|
||||||||||||||||||||
Interest-bearing
Liabilities:
|
||||||||||||||||||||||||
Deposits:
|
||||||||||||||||||||||||
NOW
deposits
|
$
|
102,279
|
$
|
70
|
0.28
|
%
|
$
|
104,889
|
$
|
121
|
0.47
|
%
|
||||||||||||
Money
market deposits
|
211,650
|
137
|
0.26
|
192,255
|
174
|
0.37
|
||||||||||||||||||
Savings
deposits
|
371,193
|
267
|
0.29
|
313,164
|
380
|
0.49
|
||||||||||||||||||
Time
deposits over $100,000
|
418,953
|
2,358
|
2.28
|
332,753
|
2,712
|
3.31
|
||||||||||||||||||
Time
deposits under $100,000
|
215,311
|
1,131
|
2.13
|
206,966
|
1,529
|
3.00
|
||||||||||||||||||
Short-term
borrowings, including ESOP borrowings under 1 year
|
18,938
|
216
|
4.63
|
19,765
|
63
|
1.29
|
||||||||||||||||||
Long-term
borrowings, including ESOP borrowings over 1 year
|
14,549
|
128
|
3.57
|
28,526
|
311
|
4.42
|
||||||||||||||||||
Long-term
capital lease obligations
|
2,211
|
67
|
12.29
|
2,211
|
67
|
12.29
|
||||||||||||||||||
Junior
subordinated debt owed to unconsolidated trusts
|
37,116
|
683
|
7.46
|
37,116
|
709
|
7.75
|
||||||||||||||||||
Total
interest-bearing liabilities
|
1,392,200
|
5,057
|
1.47
|
1,237,645
|
6,066
|
1.99
|
(Continued
on following page)
(Continued
from prior page)
Three
Months Ended March 31,
|
||||||||||||||||||||||
2010
|
2009
|
|||||||||||||||||||||
Average
Balance
|
Interest
|
Yield/Rate
|
Average
Balance
|
Interest
|
Yield/Rate
|
|||||||||||||||||
(Dollars
in thousands)
|
||||||||||||||||||||||
Demand
deposits--non-interest-bearing
|
$
|
45,800
|
$
|
48,655
|
||||||||||||||||||
Other
non-interest-bearing liabilities
|
55,848
|
35,232
|
||||||||||||||||||||
Stockholders'
equity, including stock owned by ESOP
|
123,238
|
105,724
|
||||||||||||||||||||
Total
liabilities and stockholders equity
|
$
|
1,617,086
|
$
|
1,427,256
|
||||||||||||||||||
Net
interest income on a fully tax-equivalent basis/interest rate
Spread(3)
|
$
|
13,455
|
3.43
|
%
|
$
|
13,504
|
3.77
|
%
|
||||||||||||||
Net
interest margin on a fully tax-equivalent basis(4)
|
3.57
|
%
|
3.97
|
%
|
||||||||||||||||||
Net
interest margin(4)
|
3.52
|
%
|
3.93
|
%
|
________________
(1)
|
Average
loans include non-accrual loans of $67.8 million and $36.6 million for
March 31, 2010 and 2009, respectively. Interest income includes loan
origination fees of $540 thousand and $896 thousand for the three months
ended March 31, 2010 and 2009,
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 quarter of 2010, net interest income on a fully tax-equivalent
basis decreased $49 thousand (0.4%) compared to the first quarter of 2009,
remaining at $13.5 million. The decrease in net interest income on a fully
tax-equivalent basis resulted from a decrease in interest income on a fully
tax-equivalent basis of $1.1 million (5.4%), which was largely offset by a
decrease in interest expense of $1.0 million (16.6%). Interest income on
a fully tax-equivalent basis decreased mainly due to a decrease in
the yield on interest-earning assets of 84 basis points, which
accounted for a decrease in interest income on a fully tax-equivalent
basis of $1.3 million. This was partially offset by an increase in average
interest-earning assets of $150.5 million (10.9%), which accounted for an
increase of $220 thousand in interest income on a fully tax-equivalent basis.
Interest expense decreased due to a decrease in the cost of
interest-bearing liabilities of 52 basis points, which accounted for $1.6
million of the decrease. This was partially offset by an increase in average
total interest-bearing liabilities of $154.6 million (12.5%), accounting for an
increase in $604 thousand in interest expense. The net interest margin expressed
on a fully tax-equivalent basis decreased 40 basis points to 3.57% for the
quarter ended March 31, 2010 from 3.97% for the quarter ended March 31,
2009.
The
following table reconciles net interest income on a fully tax-equivalent basis
for the periods presented:
Three
Months Ended March 31,
|
||||||||
2010
|
2009
|
|||||||
(In
thousands)
|
||||||||
Net
interest income
|
$
|
13,271
|
$
|
13,372
|
||||
Tax-equivalent
adjustment to net interest income
|
184
|
132
|
||||||
Net
interest income, fully tax-equivalent basis
|
$
|
13,455
|
$
|
13,504
|
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 March 31,
|
||||||||||||
2010
Compared to 2009
|
||||||||||||
Change
Due to Volume
|
Change
Due to Rate
|
Total
Change
|
||||||||||
(In
thousands)
|
||||||||||||
Interest-earning
Assets:
|
||||||||||||
Loans
|
$
|
(285
|
)
|
$
|
(1,435
|
)
|
$
|
(1,720
|
)
|
|||
Taxable
investment securities
|
236
|
199
|
435
|
|||||||||
Investment
securities exempt from federal income taxes(1)
|
215
|
(82
|
)
|
133
|
||||||||
Federal
funds sold
|
(1
|
)
|
(1
|
)
|
(1
|
)
|
||||||
Other
interest bearing deposits
|
55
|
41
|
96
|
|||||||||
Investment
in unconsolidated trust subsidiaries
|
-
|
(1
|
)
|
(1
|
)
|
|||||||
Total
increase (decrease) in interest income
|
$
|
220
|
$
|
(1,278
|
)
|
$
|
(1,058
|
)
|
||||
Interest-bearing
Liabilities:
|
||||||||||||
NOW
deposits
|
$
|
(3
|
)
|
$
|
(48
|
)
|
$
|
(51
|
)
|
|||
Money
market deposits
|
17
|
(54
|
)
|
(37
|
)
|
|||||||
Savings
deposits
|
61
|
(174
|
)
|
(113
|
)
|
|||||||
Time
deposits over $100,000
|
604
|
(958
|
)
|
(354
|
)
|
|||||||
Time
deposits under $100,000
|
60
|
(458
|
)
|
(398
|
)
|
|||||||
Short-term
borrowings, including ESOP borrowings under 1 year
|
(3
|
)
|
156
|
153
|
||||||||
Long-term
borrowings, including ESOP borrowings over 1 year
|
(131
|
)
|
(52
|
)
|
(183
|
)
|
||||||
Long-term
capital lease obligations
|
-
|
-
|
-
|
|||||||||
Junior
subordinated debt owed to unconsolidated trusts
|
-
|
(26
|
)
|
(26
|
)
|
|||||||
Total
increase (decrease) in interest expense
|
$
|
604
|
$
|
(1,613
|
)
|
$
|
(1,009
|
)
|
||||
Increase
(decrease) in net interest income
|
$
|
(384
|
)
|
$
|
335
|
$
|
(49
|
)
|
____________________
(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.
|
Other
Income. Changes in other income between the three months ended March 31,
2010 and 2009 were as follows:
Three
Months Ended March 31,
|
||||||||||||
2010
|
2009
|
Net
difference
|
||||||||||
(In
thousands)
|
||||||||||||
Other
income:
|
||||||||||||
Mortgage
loan servicing fees
|
$
|
646
|
$
|
787
|
$
|
(141
|
)
|
|||||
Trust
fees
|
355
|
376
|
(21
|
)
|
||||||||
Loan
and other fees
|
666
|
613
|
53
|
|||||||||
Service
charges on deposits
|
408
|
407
|
1
|
|||||||||
Gain
on sale of loans
|
720
|
3,069
|
(2,349
|
)
|
||||||||
Gain
on sale of securities
|
47
|
698
|
(651
|
)
|
||||||||
Title
insurance premiums
|
188
|
441
|
(253
|
)
|
||||||||
Other
operating income
|
26
|
103
|
(77
|
)
|
||||||||
$
|
3,056
|
$
|
6,494
|
$
|
(3,438
|
)
|
In the
first quarter of 2010, other income decreased from the first quarter of 2009 by
$3.4 million (52.9%) from $6.5 million to $3.1 million. Gain on sale of loans
decreased $2.3 million (76.5%) from 2009 to 2010 due to a lower volume of loans
sold between the two periods. Gain on sale of securities decreased $651 thousand
(93.3%) due to the volume of securities sold was lower in the first quarter of
2010 than in the same period in 2009.Title insurance premiums decreased $253
thousand (57.4%) due to a lower volume of policies written in the first
quarter of 2010 compared to the same period in 2009. Both the gain on sale of
loans and title insurance premiums were influenced by a lower volume of
mortgage refinancing business in 2010 compared to 2009, due to historically low
interest rates in the first quarter of 2009. Mortgage loan servicing fees
decreased $141 thousand (17.9%) due to additional fees associated with this high
volume of mortgage loan refinancing in 2009, which subsequently dropped in
2010.
Other
Expenses. Changes in other expenses between the three months ended March
31, 2010 and 2009 were as follows:
Three
Months Ended March 31,
|
||||||||||||
2010
|
2009
|
Net
difference
|
||||||||||
(In
thousands)
|
||||||||||||
Other
expenses:
|
||||||||||||
Salaries
and employee benefits
|
$
|
5,078
|
$
|
5,044
|
$
|
34
|
||||||
Occupancy
|
977
|
824
|
153
|
|||||||||
Data
processing
|
724
|
631
|
93
|
|||||||||
Marketing
|
356
|
448
|
(92
|
)
|
||||||||
Amortization
and valuation of mortgage servicing rights
|
309
|
986
|
(677
|
)
|
||||||||
Amortization
and valuation of other intangible assets
|
125
|
123
|
2
|
|||||||||
Supplies
|
91
|
186
|
(95
|
)
|
||||||||
Loss
on sale of other real estate owned
|
432
|
218
|
214
|
|||||||||
Postage
|
161
|
167
|
(6
|
)
|
||||||||
Bankcard
and ATM network fees
|
163
|
330
|
(167
|
)
|
||||||||
Legal,
professional and accounting fees
|
753
|
368
|
385
|
|||||||||
FDIC
insurance premiums
|
898
|
247
|
651
|
|||||||||
Collection
expenses
|
380
|
122
|
258
|
|||||||||
Other
|
538
|
795
|
(257
|
)
|
||||||||
$
|
10,985
|
$
|
10,489
|
$
|
496
|
For the
first quarter of 2010, other expenses increased $496 thousand (4.7%) to $11.0
million in 2010 from $10.5 million in the first quarter of 2009. FDIC insurance
premiums increased $651 thousand (263.6%), reflecting both an increase which was
experienced industry-wide as well as a change in the risk profile of the Bank
relating to matters set forth in the Agreement with the OCC. Legal, professional
and accounting fees increased $385 thousand (104.6%) due to additional expenses
associated with collection efforts on non-performing loans. Other
collection expenses also increased $258 thousand (211.5%), also due to
additional collection efforts due to a rise in non-performing assets between the
two periods. Loss on sale of other real estate owned increased $214
thousand (98.2%) due to both sales of foreclosed properties and additional
write-downs of property due to lower values from current appraisals.
Occupancy expenses increased $153 thousand (18.6%) mainly due to additional
expenses associated with the opening of the third office in Santa Fe during the
fourth quarter of 2009. These increases were partially offset by a
decrease in the amortization and valuation of mortgage servicing rights of $677
thousand (68.7%), mainly due to a decrease in the valuation allowance for
mortgage servicing rights due to a higher interest rate environment as of March
31, 2010 compared to March 31, 2009. Other expenses also decreased by $257
thousand (32.3%), mainly due to a decrease in the expenses associated with
interest-rate lock contracts in 2010, due to a lower volume of mortgage loan
activity.
Income Taxes.
In the first quarter of 2010, provision for income tax expense decreased
$1.3 million (67.3%) from the first quarter of 2009, decreasing from $2.0
million in 2009 to $649 thousand in 2010. This was due to lower pretax income in
the first quarter of 2010 compared to the first quarter of 2009. The
effective tax rate increased from 38.1% to 59.8% between the two periods. The
main reason for this increase in effective tax rate was due to a decrease in the
effective tax rate used to value the deferred tax assets at the beginning of
2010, resulting in a current income tax expense.
Financial
Condition
General.
Total assets at March 31, 2010 were $1.6 billion, a decrease of $73.6
million (4.4%) from December 31, 2009. Cash and cash equivalents accounted for
most of this change, decreasing $43.1 million (20.8%) during the
first three months of 2010. Net loans decreased $18.6 million (1.5%),
mainly due to a decrease in new loan activity and demand, while existing loans
that matured were paid off. Total investment securities decreased $12.8
million (8.1%) as some maturing investments were not replaced by new
investments. Much of this decrease in total assets was due to a decrease
in deposits of $71.0 million (4.8%). This decrease in total deposits was
planned, as there was decreased demand for new loans and the return on cash
deposited at other institutions and investments did not warrant maintaining
such a large amount of cash and investments. Total liabilities decreased
$73.3 million (4.7%) during the first quarter of 2010, largely due to this
decrease in total deposits. Stockholders' equity (including stock owned by
the Employee Stock Ownership Plan) decreased by $288 thousand (0.2%) mainly due
to a decrease in accumulated comprehensive income and retained
earnings.
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 manage 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.
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
March 31, 2010
|
At
December 31, 2009
|
At
March 31, 2009
|
||||||||||||||||||||||
Amortized
Cost
|
Fair
Value
|
Amortized
Cost
|
Fair
Value
|
Amortized
Cost
|
Fair
Value
|
|||||||||||||||||||
(In
thousands)
|
||||||||||||||||||||||||
Securities
Available for Sale:
|
||||||||||||||||||||||||
Government
sponsored agencies
|
$
|
53,354
|
$
|
53,366
|
$
|
68,502
|
$
|
68,382
|
$
|
46,356
|
$
|
47,727
|
||||||||||||
States
and political subdivisions
|
26,080
|
26,427
|
26,112
|
26,519
|
12,766
|
12,985
|
||||||||||||||||||
Residential
mortgage-backed securities
|
44,956
|
44,438
|
41,906
|
41,855
|
7,306
|
6,899
|
||||||||||||||||||
Equity
securities
|
-
|
-
|
-
|
-
|
1
|
-
|
||||||||||||||||||
Total
securities available for sale
|
$
|
124,390
|
$
|
124,231
|
$
|
136,520
|
$
|
136,756
|
$
|
66,429
|
$
|
67,611
|
||||||||||||
Securities
Held to Maturity
|
||||||||||||||||||||||||
Government
sponsored agencies
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||||||||
States
and political subdivisions
|
11,353
|
10,792
|
11,436
|
10,808
|
8,860
|
9,522
|
||||||||||||||||||
Total
securities held to maturity
|
$
|
11,353
|
$
|
10,792
|
$
|
11,436
|
$
|
10,808
|
$
|
8,860
|
$
|
9,522
|
||||||||||||
Other
securities:
|
||||||||||||||||||||||||
Non-marketable
equity securities (including FRB and FHLB stock)
|
$
|
8,220
|
$
|
8,220
|
$
|
8,452
|
$
|
8,452
|
$
|
5,498
|
$
|
5,498
|
||||||||||||
Investment
in unconsolidated trusts
|
1,116
|
1,116
|
1,116
|
1,116
|
1,116
|
1,116
|
||||||||||||||||||
Total
other securities
|
$
|
9,336
|
$
|
9,336
|
$
|
9,568
|
$
|
9,568
|
$
|
6,614
|
$
|
6,614
|
The
Company had a total of $45.0 million in Collateralized Mortgage Obligations
(“CMOs”) as of March 31, 2010. All of these CMOs were private label issues or
issued by Government-sponsored agencies 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 March 31, 2010, 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 March 31, 2010, 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.
Loan Portfolio.
The following tables set forth the composition of the loan
portfolio:
At
March 31, 2010
|
At
December 31, 2009
|
At
March 31, 2009
|
||||||||||||||||||||||
Amount
|
Percent
|
Amount
|
Percent
|
Amount
|
Percent
|
|||||||||||||||||||
(Dollars
in thousands)
|
||||||||||||||||||||||||
Commercial
|
$
|
135,081
|
11.04
|
%
|
$
|
137,684
|
11.08
|
%
|
$
|
121,631
|
9.89
|
%
|
||||||||||||
Commercial
real estate
|
435,624
|
35.60
|
452,235
|
36.41
|
413,590
|
33.62
|
||||||||||||||||||
Residential
real estate
|
419,513
|
34.28
|
399,588
|
32.17
|
383,613
|
31.19
|
||||||||||||||||||
Construction
real estate
|
180,655
|
14.76
|
194,179
|
15.63
|
252,346
|
20.52
|
||||||||||||||||||
Installment
and other
|
52,862
|
4.32
|
58,456
|
4.71
|
58,764
|
4.78
|
||||||||||||||||||
Total
loans
|
1,223,735
|
100.00
|
1,242,142
|
100.00
|
1,229,944
|
100.00
|
||||||||||||||||||
Unearned
income
|
(2,215
|
)
|
(2,356
|
)
|
(2,209
|
)
|
||||||||||||||||||
Gross
loans
|
1,221,520
|
1,239,786
|
1,227,735
|
|||||||||||||||||||||
Allowance
for loan losses
|
(24,822
|
)
|
(24,504
|
)
|
(17,963
|
)
|
||||||||||||||||||
Net
loans
|
$
|
1,196,698
|
$
|
1,215,282
|
$
|
1,209,772
|
Total
loans decreased $18.4 million (1.5%) from December 31, 2009 to March 31, 2010,
remaining at $1.2 billion. The decrease was primarily in the commercial real
estate and construction real estate portfolios, which was partially offset by an
increase in the residential real estate portfolio. 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 for the year ending December 31, 2009 filed with the
SEC on March 16, 2010.
As part
of the Agreement with the OCC, the Bank is actively reducing its loan
concentrations in the commercial real estate and construction real estate
categories. We have adopted as policy certain internal limits on
these concentrations, based upon the bank’s risk profile.
Asset Quality.
The following table sets forth the amounts of non-performing loans and
non-performing assets at the dates indicated:
At
March 31, 2010
|
At
December 31, 2009
|
At
March 31, 2009
|
||||||||||
(Dollars
in thousands)
|
||||||||||||
Non-accruing
loans
|
$
|
64,463
|
$
|
65,035
|
$
|
40,467
|
||||||
Loans
90 days or more past due, still accruing interest
|
-
|
-
|
-
|
|||||||||
Total
non-performing loans
|
64,463
|
65,035
|
40,467
|
|||||||||
Other
real estate owned
|
20,025
|
16,750
|
4,143
|
|||||||||
Other
repossessed assets
|
403
|
406
|
428
|
|||||||||
Total
non-performing assets
|
$
|
84,891
|
$
|
82,191
|
$
|
45,038
|
||||||
Restructured
loans, still accruing interest
|
2,990
|
2,513
|
36
|
|||||||||
Total
non-performing loans to total loans
|
5.27
|
%
|
5.24
|
%
|
3.29
|
%
|
||||||
Allowance
for loan losses to non-performing loans
|
38.51
|
%
|
37.68
|
%
|
44.39
|
%
|
||||||
Total
non-performing assets to total assets
|
5.30
|
%
|
4.90
|
%
|
2.95
|
%
|
At March
31, 2010, total non-performing assets increased $2.7 million (3.3%) to $84.9
million from $82.2 million at December 31, 2009, primarily due to an increase
in other real estate owned of $3.3 million (19.6%), which was partially
offset by a decrease in non-accruing loans of $572 thousand (0.9%). Other real
estate owned increased mainly due to an increase in foreclosed commercial and
residential real estate properties, partially offset by a decrease in
construction real estate properties. Non-accruing loans decreased mainly due to
a decrease in non-accruing construction loans of $961 thousand, a decrease in
non-accruing commercial non-real estate loans of $199 thousand and a decrease in
non-accruing commercial real estate loans of $50 thousand. These
decreases were partially offset by increases in non-accruing residential real
estate loans of $490 thousand and an increase in non-accruing installment and
other loans of $148 thousand. The majority of the declines in non-accruing loans
were due to the loans being transferred to other real estate owned or other
repossessed assets at the estimated fair market value of the underlying
collateral less estimated selling costs, with any excess being charged to the
allowance for loan losses, as a result of the conclusion of the foreclosure or
workout process. Loans with specifically identified losses as of March 31, 2010,
totaled $2.7 million, with a specific portion of the allowance for loan losses
allocated to cover these estimated losses of $263 thousand. As of March 31,
2010, 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.
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 $6.8 million and $13.8
million as of March 31, 2010 and December 31, 2009, respectively.
Those restructured loans considered performing loans totaled $3.0 million and
$2.5 million as of March 31, 2010 and December 31, 2009,
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 March 31,
|
||||||||
2010
|
2009
|
|||||||
(Dollars
in thousands)
|
||||||||
Balance
at beginning of period
|
$
|
24,504
|
$
|
15,230
|
||||
Provision
for loan losses
|
4,257
|
4,161
|
||||||
Total
charge-offs
|
(4,059
|
)
|
(1,622
|
)
|
||||
Total
recoveries
|
120
|
194
|
||||||
Net
charge-offs
|
(3,939
|
)
|
(1,428
|
)
|
||||
Balance
at end of period
|
$
|
24,822
|
$
|
17,963
|
||||
Gross
loans at end of period
|
$
|
1,221,520
|
$
|
1,227,735
|
||||
Ratio
of allowance to total loans
|
2.03
|
%
|
1.46
|
%
|
||||
Ratio
of net charge-offs to average loans(1)
|
1.29
|
%
|
0.46
|
%
|
____________________
(1)
|
Net
charge-offs are annualized for the purposes of this
calculation.
|
Net
charge-offs for the three months ended March 31, 2010, totaled $3.9 million, an
increase of $2.5 million (175.8%), from $1.4 million for the three months ended
March 31, 2009. The majority of the net charge-offs were residential real estate
($1.5 million), commercial non-real estate ($1.3 million) and installment and
other loans ($654 thousand). The increase in net charge-offs for the first
quarter of 2010 compared to the same period in 2009 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 $96 thousand
(2.3%) 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
December 31,
|
||||||||||||||||||||||||
At
March 31, 2010
|
At
December 31, 2009
|
At
March 31, 2009
|
||||||||||||||||||||||
Amount
|
Percent
|
Amount
|
Percent
|
Amount
|
Percent
|
|||||||||||||||||||
(Dollars
in thousands)
|
||||||||||||||||||||||||
Commercial
|
$
|
6,048
|
11.04
|
%
|
$
|
4,371
|
11.08
|
%
|
$
|
2,717
|
9.89
|
%
|
||||||||||||
Commercial
and residential real estate
|
8,789
|
69.88
|
8,416
|
68.58
|
5,619
|
64.81
|
||||||||||||||||||
Construction
real estate
|
6,695
|
14.76
|
8,637
|
15.63
|
7,298
|
20.52
|
||||||||||||||||||
Installment
and other
|
3,290
|
4.32
|
3,080
|
4.71
|
2,329
|
4.78
|
||||||||||||||||||
Total
|
$
|
24,822
|
100.00
|
%
|
$
|
24,504
|
100.00
|
%
|
$
|
17,963
|
100.00
|
%
|
The
allowance for loan losses increased $6.9 million (38.2%) from March 31,
2009 to March 31, 2010. This was mainly due to an increase in the allowance
allocated to commercial non-real estate and residential and commercial real
estate loans. The allocation for commercial non-real estate loans increased $3.3
million (122.6%) mainly due to an increase in historical loss experience (based
on regression analysis) of $3.0 million and an increase in the allocation for
qualitative adjustments of $171 thousand. The allocation for commercial and
residential real estate loans increased $3.2 million (56.4%) mainly due to an
increase in the allocation for historical loss experience (based on regression
analysis) of $2.0 million and an increase in the allocation for qualitative
adjustments of $843 thousand. In addition, the allocation for installment and
other loans increased $961 thousand (41.3%), mainly due to an increase in the
allocation for historical loss experience (based on regression analysis) of $822
thousand. Finally, the allocation for construction real estate loans decreased
$603 thousand (8.3%), mainly due to a decrease in the allocation for qualitative
adjustments of $876 thousand. For further information, please see discussion in
“Critical Accounting Policies—Allowance for Loan Losses” above.
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 March 31, 2010 were $74.4 million. Collateral associated with
impaired loans identified as collateral-dependent (less estimated selling costs)
exceeded this amount. Impaired loans identified as cash-flow dependent had a
total of $263 thousand in specific loan allocations in the allowance for loan
losses to cover estimated losses in these loans.
The Bank anticipates the
volume of outstanding commercial real estate and construction loans to continue
to decline in accordance with the requirements of the Agreement between the Bank
and the OCC. Overall, management’s outlook for the New Mexico economy for the
remainder 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 a negative 4.1% in 2009, and is
expected to be a negative 0.6% in 2010. Housing construction overall is expected
to remain depressed throughout the first half of 2010, but experience a modest
uptick toward the end 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.
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
March 31, 2010
|
At
December 31, 2009
|
At
March 31, 2009
|
||||||||||
(In
thousands)
|
||||||||||||
Performing
loans classified as:
|
||||||||||||
Substandard
|
$
|
28,883
|
$
|
30,648
|
$
|
48,403
|
||||||
Doubtful
|
-
|
-
|
-
|
|||||||||
Total
performing adversely classified loans
|
$
|
28,883
|
$
|
30,648
|
$
|
48,403
|
||||||
Special
mention loans
|
$
|
2,744
|
$
|
5,269
|
$
|
31,173
|
Total
performing adversely classified assets decreased $19.5 million (40.3%) from
March 31, 2009 to March 31, 2010. The reason for the decrease was a decrease of
$19.5 million in substandard loans. This was primarily due to the foreclosure and
subsequent move to other real estate owned 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 upgrading or payoff of several loan
relationships in the construction and commercial real estate loan portfolio.
Special mention loans decreased $28.4 million (91.2%) between March 31,
2009 and March 31, 2010, 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 March 31, 2010, the underlying collateral was deemed adequate such that no
impairment was required to be 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 many areas of the nation, real estate values
have fallen and there are concerns that such values will stagnate or continue to
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 (used in) operating activities
was $7.5 million and $(11.6) million for the three months ended March 31,
2010 and March 31, 2009, respectively, an increase in cash provided of
$19.1 million. This increase was primarily due to a decrease in cash used in the
origination of loans held for sale of $136.7 million, which was largely offset
by a decrease in cash provided by the sale of these loans of $115.0 million. Net
cash provided by investing activities was $22.7 million and $30.5 million
for the three months ended March 31, 2010 and March 31, 2009, respectively. The
$7.8 million decrease in cash provided by investing activities was largely due
to a decrease in the proceeds from the sales of investment securities of $38.7
million and an increase in cash used in the purchase of investment securities of
$1.9 million. These items were partially offset by an increase in cash provided
by the maturities and paydowns of investment securities of $19.2 million and a
decrease in cash used by loans funded, net of repayments of $10.3 million. Net
cash (used in) provided by financing activities was $(73.2) million and $106.7
million for the three months ended March 31, 2010 and March 31, 2009,
respectively. The $179.9 million decrease in cash provided by financing
activities was mainly due to a decrease in cash provided by net growth of
deposits of $114.7 million, a decrease in cash provided by the issuance of
preferred stock of $35.5 million and a decrease in cash provided by the issuance
of borrowings (net of repayments) of $30.0 million.
The most
significant change in deposits from December 31, 2009 to March 31, 2010
occurred in savings deposits (decreasing $80.4 million), with a
smaller decrease in NOW accounts ($18.3million). There were increases
in MMDA accounts ($19.2 million) and time deposits over $100,000 ($6.3
million), other time deposits ($1.2 million) and DDA accounts ($1.0
million).
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 March 31, 2010, we had the ability to borrow from
the FHLB up to a total of $152.6 million in additional funds. We also may borrow
through the Federal Reserve Bank’s discount window up to a total of $118.6
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 March
31, 2010, Trinity’s total risk-based capital ratio was 14.42%, the Tier 1
capital to risk-weighted assets ratio was 13.16%, and the Tier 1 capital to
average assets ratio was 9.78%. At December 31, 2009, Trinity’s total risk-based
capital ratio was 14.16%, the Tier 1 capital to risk-weighted assets ratio was
12.90%, and the Tier 1 capital to average assets ratio was 9.58%.
At March
31, 2010, the Bank’s total risk-based capital ratio was 13.99%, the Tier 1
capital to risk-weighted assets ratio was 12.73%, and the Tier 1 capital to
average assets ratio was 9.45%. At December 31, 2009, the Bank’s total
risk-based capital ratio was 13.63%, the Tier 1 capital to risk-weighted assets
ratio was 12.37%, and the Tier 1 capital to average assets ratio was 9.18%. The
Bank exceeded the general minimum regulatory requirements to be considered
“well-capitalized” under Federal Deposit Insurance Corporation regulations at
March 31, 2010 and December 31, 2009.
At March
31, 2010 and December 31, 2009, Trinity’s book value per common share was $13.81
and $13.87, 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.
The
following tables set forth the amounts of interest earning assets and interest
bearing liabilities outstanding at March 31, 2010, 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 March 31, 2010 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 March 31, 2010:
|
0-90
Days
|
91-365
Days
|
1-5
Years
|
Over
5 Years
|
Total
|
||||||||||||||
(Dollars
in thousands)
|
|||||||||||||||||||
Interest-earning
Assets:
|
|||||||||||||||||||
Loans
|
$
|
479,124
|
$
|
417,039
|
$
|
268,783
|
$
|
56,574
|
$
|
1,221,520
|
|||||||||
Loans
held for sale
|
7,893
|
-
|
-
|
-
|
7,893
|
||||||||||||||
Investment
securities
|
15,703
|
20,231
|
62,350
|
45,520
|
143,804
|
||||||||||||||
Securities
purchased under agreements to resell
|
403
|
-
|
-
|
-
|
403
|
||||||||||||||
Interest-bearing
deposits with banks
|
143,709
|
-
|
-
|
-
|
143,709
|
||||||||||||||
Investment
in unconsolidated trusts
|
186
|
-
|
-
|
930
|
1,116
|
||||||||||||||
Total
interest-earning assets
|
$
|
647,018
|
$
|
437,270
|
$
|
331,133
|
$
|
103,024
|
$
|
1,518,445
|
|||||||||
Interest-bearing
Liabilities:
|
|||||||||||||||||||
NOW
deposits
|
$
|
46,556
|
$
|
88,649
|
$
|
-
|
$
|
-
|
$
|
135,205
|
|||||||||
Money
market deposits
|
78,793
|
107,950
|
-
|
-
|
186,743
|
||||||||||||||
Savings
deposits
|
153,808
|
203,231
|
-
|
-
|
357,039
|
||||||||||||||
Time
deposits over $100,000
|
125,976
|
229,708
|
53,345
|
3,255
|
412,284
|
||||||||||||||
Time
deposits under $100,000
|
54,425
|
135,625
|
24,681
|
1,217
|
215,948
|
||||||||||||||
Short-term
borrowings
|
9
|
1,174
|
-
|
-
|
1,183
|
||||||||||||||
Long-term
borrowings
|
-
|
-
|
10,000
|
22,300
|
32,300
|
||||||||||||||
Capital
lease obligations
|
-
|
-
|
-
|
2,211
|
2,211
|
||||||||||||||
Junior
subordinated debt owed to unconsolidated trusts
|
6,186
|
-
|
-
|
30,930
|
37,116
|
||||||||||||||
Total
interest-bearing liabilities
|
$
|
465,753
|
$
|
766,337
|
$
|
88,026
|
$
|
59,913
|
$
|
1,380,029
|
|||||||||
Rate
sensitive assets (RSA)
|
$
|
647,018
|
$
|
1,084,288
|
$
|
1,415,421
|
$
|
1,518,445
|
1,518,445
|
||||||||||
Rate
sensitive liabilities (RSL)
|
465,753
|
1,232,090
|
1,320,116
|
1,380,029
|
1,380,029
|
||||||||||||||
Cumulative
GAP (GAP=RSA-RSL)
|
181,265
|
(147,802
|
)
|
95,305
|
138,416
|
138,416
|
|||||||||||||
RSA/Total
assets
|
40.36
|
%
|
67.64
|
%
|
88.29
|
%
|
94.72
|
%
|
94.72
|
%
|
|||||||||
RSL/Total
assets
|
29.05
|
%
|
76.86
|
%
|
82.35
|
%
|
86.08
|
%
|
86.08
|
%
|
|||||||||
GAP/Total
assets
|
11.31
|
%
|
(9.22
|
%
|
)
|
5.94
|
%
|
8.63
|
%
|
8.63
|
%
|
||||||||
GAP/RSA
|
28.02
|
%
|
(13.63
|
%
|
)
|
6.73
|
%
|
9.12
|
%
|
9.12
|
%
|
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 March 31, 2010 and December 31, 2009, 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
At
March 31, 2010
|
At
December 31, 2009
|
|||||||||||||||||
Changes
in Levels of Interest Rates
|
Dollar
Change
|
Percent
Change
|
Dollar
Change
|
Percent
Change
|
||||||||||||||
(Dollars
in thousands)
|
||||||||||||||||||
+2.00
|
%
|
$
|
(6,197
|
)
|
(11.33
|
%)
|
$
|
(6,584
|
)
|
(11.71
|
%)
|
|||||||
+1.00
|
(3,594
|
)
|
(6.57
|
)
|
(3,329
|
)
|
(5.92
|
)
|
||||||||||
(1.00
|
)
|
673
|
1.23
|
(281
|
)
|
(0.50
|
)
|
|||||||||||
(2.00
|
)
|
569
|
1.04
|
(394
|
)
|
(0.70
|
)
|
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 March 31,
2010.
|
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 March 31, 2010 pursuant to Rule 13a-15(b) under the Securities
Exchange Act of 1934. Management identified two controls which were deficient as
of December 31, 2009, as described in the Company's Form 10-K filed with the SEC
on March 16, 2010. Management reviewed these processes and controls
in light of the noted deficiencies. In connection with this
examination, management determined that the deficiency related to valuation of
certain loan collateral was caused by the failure to obtain an independent
valuation of collateral, as required by our internal policies, on one loan
primarily due to the uncommon type of collateral. Management has
improved the processes and controls for ensuring that independent valuations are
obtained on all collateral on a timely basis. As of March 31, 2010,
management believed the controls relating to loan collateral to be
effective. The other control that was deficient as of December 31,
2009 was an error in accrual treatment of FDIC pre-paid
assessments. Management has determined that this error was a one-time
event due to a change in rule with differing interpretations. Based
upon the control and process changes described above and its most recent review
and evaluation, the CEO and CFO have concluded that our current disclosure
controls and procedures were effective as of March 31, 2010.
Changes
in Internal Control over Financial Reporting.
The
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 are described in "Evaluation of Disclosure Controls
and Procedures" above.
PART
II — OTHER INFORMATION
Item
1. Legal Proceedings
Trinity,
the Bank, Title Guaranty, Cottonwood, FNM Investment Fund IV, FNM Investor
Series IV, 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, which, in the opinion of management, in the aggregate, would be
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 for the year ended
December 31, 2009, filed with the Securities and Exchange Commission on March
16, 2010.
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds
There
were no repurchases of securities during the first quarter of
2010.
Item
3. Defaults Upon Senior Securities
None
Item
4. Removed and Reserved
Item
5. Other Information
None
Item
6. Exhibits
10.1
|
Agreement
by and between Los Alamos National Bank and the Comptroller of the
Currency (incorporated by reference to Exhibit 99.1 to the Company's Form
8-K filed on February 1, 2010)
|
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:
May 10, 2010
|
By:
|
/s/
WILLIAM C. ENLOE
|
William
C. Enloe
|
||
President
and Chief Executive Officer
|
||
Date:
May 10, 2010
|
By:
|
/s/
DANIEL R. BARTHOLOMEW
|
Daniel
R. Bartholomew
|
||
Chief
Financial Officer
|