UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2017
or
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 000-50266
TRINITY CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
New Mexico | 85-0242376 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
1200 Trinity Drive Los Alamos, New Mexico | 87544 | |
(Address of principal executive offices) | (Zip Code) |
(505) 662-5171
(Registrant's telephone number, including area code)
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 ☐ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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 registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Act. (Check one):
Large accelerated filer ☐ | Accelerated filer ☐ |
Non-accelerated filer ☐ (do not check if a smaller reporting company) | Smaller reporting company ☒ |
Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ☐ Yes ☒ No
As of March 31, 2017, there were 9,249,283 shares of voting Common Stock outstanding and 8,286,200 shares of non-voting Common Stock outstanding.
TABLE OF CONTENTS
PART I – FINANCIAL INFORMATION | |
Item 1. Financial Statements and Supplementary Data | 2 |
Item 2. Management's Discussions and Analysis of Financial Condition and Results of Operations | 22 |
Item 3. Quantitative and Qualitative Disclosures About Market Risk | 31 |
Item 4. Controls and Procedures | 31 |
PART II – OTHER INFORMATION | |
Item 1. Legal Proceedings | 33 |
Item 1A. Risk Factors | 33 |
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 33 |
Item 3. Defaults Upon Senior Securities | 33 |
Item 4. Mine Safety Disclosures | 33 |
Item 5. Other Information | 33 |
Item 6. Exhibits | 34 |
Signatures | 35 |
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
TRINITY CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share and per share data) | ||||||||
March 31, 2017 | December 31, 2016 | |||||||
ASSETS | ||||||||
Cash and due from banks | $ | 12,716 | $ | 13,537 | ||||
Interest-bearing deposits with banks | 33,981 | 105,798 | ||||||
Securities purchased under resell agreements | - | - | ||||||
Cash and cash equivalents | 46,697 | 119,335 | ||||||
Investment securities available for sale, at fair value | 451,089 | 439,650 | ||||||
Investment securities held to maturity, at amortized cost (fair value of $7,612 and $8,613 as of March 31, 2017 and December 31, 2016, respectively) | 7,954 | 8,824 | ||||||
Non-marketable equity securities | 3,621 | 3,812 | ||||||
Loans held for sale | - | - | ||||||
Loans (net of allowance for loan losses of $14,187 and $14,352 as of March 31, 2017 and December 31, 2016, respectively) | 764,469 | 771,138 | ||||||
Mortgage servicing rights ("MSRs"), net | 6,667 | 6,905 | ||||||
Bank owned life insurance ("BOLI") | 10,282 | 10,191 | ||||||
Premises and equipment, net | 26,001 | 25,959 | ||||||
Other real estate owned ("OREO"), net | 7,991 | 8,436 | ||||||
Other assets | 31,305 | 31,187 | ||||||
Total assets | $ | 1,356,076 | $ | 1,425,437 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
Liabilities | ||||||||
Deposits: | ||||||||
Noninterest-bearing | $ | 163,110 | $ | 181,974 | ||||
Interest-bearing | 1,043,374 | 1,033,115 | ||||||
Total deposits | 1,206,484 | 1,215,089 | ||||||
Borrowings | 2,300 | 2,300 | ||||||
Junior subordinated debt | 36,931 | 36,927 | ||||||
Other liabilities | 10,682 | 33,822 | ||||||
Total liabilities | 1,256,397 | 1,288,138 | ||||||
Stock owned by Employee Stock Ownership Plan ("ESOP") participants; 671,962 shares and 671,962 shares as of March 31, 2017 and December 31, 2016, respectively, at fair value | $ | 3,192 | $ | 3,192 | ||||
Commitments and contingencies (Notes 13) | ||||||||
Stockholders' equity | ||||||||
Preferred stock, no par, 1,000,000 shares authorized | ||||||||
Series A, 9% cumulative perpetual; 0 shares and 35,539 shares issued and outstanding as of March 31, 2017 and December 31, 2016, respectively, $1,000 liquidation value per share, at amortized cost | $ | - | $ | 35,068 | ||||
Series B, 9% cumulative perpetual; 0 shares and 1,777 shares issued and outstanding as of March 31, 2017 and December 31, 2016, respectively, $1,000 liquidation value per share, at amortized cost | - | 1,850 | ||||||
Series C, 0% convertible cumulative perpetual; 0 shares and 82,862 shares issued and outstanding as of March 31, 2017 and December 31, 2016, respectively, $475 liquidation value per share, at amortized cost | - | 37,089 | ||||||
Common stock, no par; 20,000,000 shares authorized; 9,249,283 shares and 9,199,306 shares issued and outstanding as of March 31, 2017 and December 31, 2016, respectively | 9,543 | 9,510 | ||||||
Common stock non-voting, no par; 20,000,000 shares authorized; 8,286,200 shares and 0 shares issued and outstanding as of March 31, 2017 and December 31, 2016, respectively | 8,286 | - | ||||||
Additional paid-in capital | 29,638 | 694 | ||||||
Retained earnings | 54,134 | 55,391 | ||||||
Accumulated other comprehensive income (loss) | (5,114 | ) | (5,495 | ) | ||||
Total stockholders' equity | 96,487 | 134,107 | ||||||
Total liabilities and stockholders' equity | $ | 1,356,076 | $ | 1,425,437 |
The accompanying notes are an integral part of these consolidated financial statements.
1
TRINITY CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data) | Three Months Ended March 31, | |||||||
2017 | 2016 | |||||||
Interest income: | ||||||||
Loans, including fees | $ | 9,307 | $ | 10,130 | ||||
Interest and dividends on investment securities: | ||||||||
Taxable | 1,672 | 1,731 | ||||||
Nontaxable | 246 | 17 | ||||||
Other interest income | 161 | 248 | ||||||
Total interest income | 11,386 | 12,126 | ||||||
Interest expense: | ||||||||
Deposits | 459 | 623 | ||||||
Borrowings | 36 | 36 | ||||||
Junior subordinated debt | 720 | 707 | ||||||
Total interest expense | 1,215 | 1,366 | ||||||
Net interest income | 10,171 | 10,760 | ||||||
Provision for loan losses | 30 | - | ||||||
Net interest income after provision for loan losses | 10,141 | 10,760 | ||||||
Noninterest income: | ||||||||
Mortgage loan servicing fees | 486 | 550 | ||||||
Trust and investment services fees | 651 | 632 | ||||||
Service charges on deposits | 295 | 294 | ||||||
Net gain on sale of OREO | 328 | 258 | ||||||
Net gain on sale of loans | - | 573 | ||||||
Net gain on sale of securities | - | - | ||||||
BOLI income | 91 | - | ||||||
Mortgage referral fee income | 327 | - | ||||||
Other fees | 560 | 265 | ||||||
Other noninterest income | (21 | ) | 52 | |||||
Total noninterest income | 2,717 | 2,624 | ||||||
Noninterest expenses: | ||||||||
Salaries and employee benefits | 6,037 | 6,366 | ||||||
Occupancy | 686 | 839 | ||||||
Data processing | 1,374 | 660 | ||||||
Legal, professional, and accounting fees | 2,633 | 1,359 | ||||||
Amortization and valuation of MSRs | 238 | 1,171 | ||||||
Other noninterest expense | 2,902 | 2,258 | ||||||
Total noninterest expenses | 13,870 | 12,653 | ||||||
(Loss) income before (benefit) for income taxes | (1,012 | ) | 731 | |||||
(Benefit) provision for income taxes | (526 | ) | - | |||||
Net (loss) income | (486 | ) | 731 | |||||
Dividends and discount accretion on preferred shares | 771 | 1,034 | ||||||
Net loss available to common shareholders | $ | (1,257 | ) | $ | (303 | ) | ||
Basic loss per common share | $ | (0.10 | ) | $ | (0.05 | ) | ||
Diluted loss per common share | $ | (0.10 | ) | $ | (0.05 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
2
TRINITY CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
Three Months Ended March 31, | ||||||||
2017 | 2016 | |||||||
Net (loss) income | $ | (486 | ) | $ | 731 | |||
Other comprehensive income (loss): | ||||||||
Unrealized gains (losses) on securities available for sale | 630 | 3,457 | ||||||
Securities losses (gains) reclassified into earnings | - | - | ||||||
Related income tax benefit (expense) | (249 | ) | - | |||||
Other comprehensive income (loss) | 381 | 3,457 | ||||||
Total comprehensive (loss) income | $ | (105 | ) | $ | 4,188 |
The accompanying notes are an integral part of these consolidated financial statements.
3
TRINITY CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
Common stock | ||||||||||||||||||||||||||||
(In thousands, except per share data) | Issued | Held in treasury, at cost | Preferred stock | Additional paid-in capital | Retained earnings | Accumulated other comprehensive income (loss) | Total stockholders' equity | |||||||||||||||||||||
Balance, December 31, 2015 | $ | 6,836 | $ | (9,880 | ) | $ | 36,740 | $ | 1,153 | $ | 44,232 | $ | (2,781 | ) | $ | 76,300 | ||||||||||||
Net income | 731 | 731 | ||||||||||||||||||||||||||
Other comprehensive income | 3,457 | 3,457 | ||||||||||||||||||||||||||
Dividends declared on preferred shares | (1,034 | ) | (1,034 | ) | ||||||||||||||||||||||||
Amortization of preferred stock issuance costs | 45 | (45 | ) | - | ||||||||||||||||||||||||
Treasury shares issued for board compensation | 897 | (759 | ) | 138 | ||||||||||||||||||||||||
Net change in the fair value of stock owned by ESOP participants | 1 | 1 | ||||||||||||||||||||||||||
Balance, March 31, 2016 | $ | 6,836 | $ | (8,983 | ) | $ | 36,785 | $ | 394 | $ | 43,885 | $ | 676 | $ | 79,593 |
Common stock | ||||||||||||||||||||||||||||
(In thousands, except per share data) | Issued | Non-voting Issued | Preferred stock | Additional paid-in capital | Retained earnings | Accumulated other comprehensive income (loss) | Total stockholders' equity | |||||||||||||||||||||
Balance, December 31, 2016 | $ | 9,510 | $ | - | $ | 74,007 | $ | 694 | $ | 55,391 | $ | (5,495 | ) | $ | 134,107 | |||||||||||||
Net loss | (486 | ) | (486 | ) | ||||||||||||||||||||||||
Other comprehensive income | 381 | 381 | ||||||||||||||||||||||||||
Redemption of Series A Preferred shares | (35,068 | ) | (35,068 | ) | ||||||||||||||||||||||||
Redemption of Series B Preferred shares | (1,850 | ) | (1,850 | ) | ||||||||||||||||||||||||
Dividends declared on preferred shares | (373 | ) | (373 | ) | ||||||||||||||||||||||||
Series C preferred shares converted to non-voting common stock | 8,286 | (37,089 | ) | 28,803 | - | |||||||||||||||||||||||
Common stock issued for board compensation | 33 | 125 | 158 | |||||||||||||||||||||||||
Amortization of preferred stock issuance costs | - | (398 | ) | (398 | ) | |||||||||||||||||||||||
Q1 RSU compensation expense | 16 | 16 | ||||||||||||||||||||||||||
Balance, March 31, 2017 | $ | 9,543 | $ | 8,286 | $ | - | $ | 29,638 | $ | 54,134 | $ | (5,114 | ) | $ | 96,487 |
The accompanying notes are an integral part of these consolidated financial statements.
4
TRINITY CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31, | ||||||||
2017 | 2016 | |||||||
Cash Flows From Operating Activities | (Dollars in thousands) | |||||||
Net (loss) income | $ | (486 | ) | 731 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 1,904 | 1,076 | ||||||
Provision for loan losses | 30 | - | ||||||
Net (gain) loss on sale of investment securities | - | - | ||||||
Net gain on sale of loans | - | (573 | ) | |||||
Gains and write-downs on OREO, net | (321 | ) | (213 | ) | ||||
Loss on disposal of premises and equipment | - | 1 | ||||||
Decrease in deferred income tax assets | (739 | ) | - | |||||
Federal Home Loan Bank stock dividends received | (1 | ) | 1 | |||||
Net amortization of MSRs | 299 | 321 | ||||||
Change in mortgage servicing rights valuation allowance | (61 | ) | 850 | |||||
BOLI Income | (91 | ) | - | |||||
Compensation expense recognized for restricted stock units | 16 | - | ||||||
Decrease in accrued interest payable on sub debt | (9,676 | ) | - | |||||
Changes in operating assets and liabilities: | ||||||||
Other Assets | 483 | (98 | ) | |||||
Other Liabilities | (872 | ) | 1,035 | |||||
Net cash provided by operating activities before origination and gross sales of loans held for sale | (9,515 | ) | 3,131 | |||||
Gross sales of loans held for sale | - | (14,943 | ) | |||||
Origination of loans held for sale | - | 15,908 | ||||||
Net cash provided by operating activities | $ | (9,515 | ) | 4,096 |
Continued next page
5
TRINITY CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS CONTINUED
(Unaudited)
Three Months Ended March 31, | ||||||||
2017 | 2016 | |||||||
Cash Flows From Investing Activities | (Dollars in thousands) | |||||||
Proceeds from maturities and paydowns of investment securities, available for sale | $ | 14,264 | $ | 6,998 | ||||
Proceeds from sale of investment securities, available for sale | - | - | ||||||
Purchase of investment securities, available for sale | (26,823 | ) | (77,460 | ) | ||||
Proceeds from maturities and paydowns of investment securities, held to maturity | 822 | 35 | ||||||
Proceeds from sale of other real estate owned | 1,117 | 928 | ||||||
Loans paid down (funded), net | 6,615 | 15,987 | ||||||
Purchases of premises and equipment | (390 | ) | (4,559 | ) | ||||
Net cash provided by (used in) investing activities | (4,395 | ) | (58,071 | ) | ||||
Cash Flows From Financing Activities | ||||||||
Net increase in demand deposits, NOW accounts and savings accounts | 11,772 | 42,312 | ||||||
Net decrease in time deposits | (20,377 | ) | (10,298 | ) | ||||
Redemption of Preferred stock | (37,316 | ) | - | |||||
Issuance of common stock for stock option plan | 158 | 138 | ||||||
Cash dividends paid on preferred stock | (12,965 | ) | - | |||||
Net cash provided by (used in) financing activities | (58,728 | ) | 32,152 | |||||
Net increase (decrease) in cash and cash equivalents | (72,638 | ) | (21,823 | ) | ||||
Cash and cash equivalents: | ||||||||
Beginning of period | 119,335 | 188,875 | ||||||
End of period | $ | 46,697 | $ | 167,052 | ||||
Supplemental Disclosures of Cash Flow Information | ||||||||
Cash payments for: | ||||||||
Interest | $ | 10,928 | $ | 699 | ||||
Non-cash investing and financing activities: | ||||||||
Transfers from loans to other real estate owned | 433 | 1,543 | ||||||
Sales of other real estate owned financed by loans | - | 971 | ||||||
Transfer from Venture Capital to Loans | 150 | - | ||||||
Conversion of Preferred C stock to non-voting common stock | 37,089 | - | ||||||
Dividends declared on preferred stock | - | 1,034 |
The accompanying notes are an integral part of these consolidated financial statements.
6
Note 1. Basis of Presentation
Consolidation: 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"), 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. Trinity owns all of the outstanding common securities of the Trusts. The Trusts are considered variable interest entities ("VIEs") under Accounting Standards Codification ("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. Title Guaranty & Insurance Company ("Title Guaranty") was acquired in 2000 and its assets were subsequently sold in August 2012. As of December 31, 2013, all operations of Title Guaranty had ended. The Company is in the process of dissolving Title Guaranty. TCC Funds was dissolved in January 2017.
Basis of presentation: The accompanying unaudited consolidated financial statements include the accounts of the Company and its subsidiaries. Significant intercompany items and transactions have been eliminated in consolidation. The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America ("GAAP") 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 then ended. Actual results could differ from those estimates.
The accompanying unaudited consolidated financial statements have been prepared in accordance with GAAP for financial information and with the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the statements reflect all adjustments necessary for a fair presentation of the financial position, results of operations and cash flows of the Company on a consolidated basis, and all such adjustments are of a normal recurring nature. These financial statements and the notes thereto should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2016 (the "2016 Form 10-K"). Operating results for the three-month period ended March 31, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017 or any other period.
Reclassifications: Some items in the prior year financial statements were reclassified to conform to the current presentation. Reclassifications had no effect on prior year net income or shareholders' equity.
Note 2. Earnings (Loss) Per Share Data
Average number of shares used in calculation of basic and diluted earnings (loss) per common share were as follows for the three months ended March 31, 2017 and 2016:
Three Months Ended March 31, | ||||||||
2017 | 2016 | |||||||
(In thousands, except share and per share data) | ||||||||
Net (loss) income | $ | (486 | ) | $ | 731 | |||
Dividends and discount accretion on preferred shares | 771 | 1,034 | ||||||
Net loss available to common shareholders | $ | (1,257 | ) | $ | (303 | ) | ||
Weighted average common shares issued | 13,017,045 | 6,856,800 | ||||||
LESS: Weighted average treasury stock shares | - | (332,014 | ) | |||||
Weighted average common shares outstanding, net | 13,017,045 | 6,524,786 | ||||||
Basic loss per common share | $ | (0.10 | ) | $ | (0.05 | ) | ||
Dilutive effect of stock-based compensation | - | - | ||||||
Weighted average common shares outstanding including dilutive shares | 13,017,045 | 6,524,786 | ||||||
Diluted loss per common share | $ | (0.10 | ) | $ | (0.05 | ) |
Certain restricted stock units were not included in the above calculation, as they would have had an anti-dilutive effect as there was a net loss for the period. The total number of shares excluded was approximately 33,000 shares and 12,000 shares for three months ended March 31, 2017 and March 31, 2016, respectively.
Note 3. Recent Accounting Pronouncements
Newly effective standards: In March 2016, the FASB issued ASU 2016-09, Compensation- Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This ASU was effective for annual periods and interim periods within those annual periods beginning after December 15, 2016. The Company has elected to account for forfeitures when they occur. The financial statement impact from this standard is immaterial.
Newly Issued But Not Effective Accounting Standards: In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). This update requires an entity to recognize revenue as performance obligations are met, in order to reflect the transfer of promised goods or services to customers in an amount that reflects the consideration the entity is entitled to receive for those goods or services. The following steps are applied in the updated guidance: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the entity satisfies a performance obligation. The FASB later issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606) – Deferral of the Effective Date. This update deferred the effective date by one year. The amended effective date is annual reporting periods beginning after December 15, 2017 including interim reporting periods within that reporting period. The Company's preliminary analysis suggests that the adoption of this accounting standard is not expected to have a material impact on the Company's consolidated financial statements. The FASB continues to release new accounting guidance related to the adoption of this standard, which could impact the Company's preliminary materiality analysis and may change the conclusions reached as to the application of this new guidance.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those periods using a modified retrospective approach and early adoption is permitted. The Company is currently in the process of evaluating the impact of adoption of ASU 2016-02 on its financial statements and disclosures, if any.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is currently in the process of evaluating the effects of ASU 2016-13 on its financial statements and disclosures.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. This ASU is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. The Company does not expect any material impact from this ASU on the Company's financial statements.
7
In February 2017, the FASB issued ASU 2017-05, Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets. This ASU is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. The Company does not expect any material impact from this ASU on the Company's financial statements.
In March 2017, the FASB issued ASU 2017-07, Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This ASU is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. The Company does not expect any material impact from this ASU on the Company's financial statements.
In March 2017, the FASB issued ASU 2017-08, Receivables-Nonrefundable Fees and Other Costs (Sub-Topic 310-20): Premium Amortization on Purchased Callable Debt Securities. This ASU is effective for the fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The company is currently in the process of evaluating the effects of ASU 2017-08 on its financial statements and disclosures, but does not expect any material impact on the Company's financial statements.
Note 4. Restrictions on Cash and Due From Banks
The Bank is required to maintain reserve balances in cash or on deposit with the Board of Governors of the Federal Reserve System ("FRB"), based on a percentage of deposits. As of March 31, 2017 and December 31, 2016, the reserve requirement on deposit at the FRB was $0 due to the large balance kept at the FRB.
The Company maintains some of its cash in bank deposit accounts at financial institutions other than its subsidiaries that, at times, may exceed federally insured limits. The Company may lose all uninsured balances if one of the correspondent banks fails without warning. The Company has not experienced any losses in such accounts. The Company believes it is not exposed to any significant credit risk on cash and cash equivalents.
Note 5. Investment Securities
Amortized cost and fair values of investment securities are summarized as follows:
Securities Available for Sale: | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||
(In thousands) | ||||||||||||||||
March 31, 2017 | ||||||||||||||||
U.S. Government sponsored agency | $ | 79,332 | $ | 59 | $ | (402 | ) | $ | 78,989 | |||||||
State and political subdivision | 51,705 | 107 | (1,277 | ) | 50,535 | |||||||||||
Residential mortgage backed security | 196,125 | 24 | (2,318 | ) | 193,831 | |||||||||||
Residential collateralized mortgage obligation | 14,069 | 72 | (92 | ) | 14,049 | |||||||||||
Commercial mortgage backed security | 115,810 | 98 | (2,886 | ) | 113,022 | |||||||||||
SBA pools | 674 | - | (11 | ) | 663 | |||||||||||
Totals | $ | 457,715 | $ | 360 | $ | (6,986 | ) | $ | 451,089 | |||||||
December 31, 2016 | ||||||||||||||||
U.S. Government sponsored agency | $ | 69,306 | $ | 20 | $ | (498 | ) | $ | 68,828 | |||||||
State and political subdivision | 38,718 | 42 | (1,417 | ) | 37,343 | |||||||||||
Residential mortgage backed security | 206,101 | 42 | (2,324 | ) | 203,819 | |||||||||||
Residential collateralized mortgage obligation | 14,828 | 77 | (89 | ) | 14,816 | |||||||||||
Commercial mortgage backed security | 117,272 | 57 | (3,157 | ) | 114,172 | |||||||||||
SBA pools | 681 | - | (9 | ) | 672 | |||||||||||
Totals | $ | 446,906 | $ | 238 | $ | (7,494 | ) | $ | 439,650 |
Securities Held to Maturity | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||
(In thousands) | ||||||||||||||||
March 31, 2017 | ||||||||||||||||
SBA pools | $ | 7,954 | $ | - | $ | (342 | ) | $ | 7,612 | |||||||
Totals | $ | 7,954 | $ | - | $ | (342 | ) | $ | 7,612 | |||||||
December 31, 2016 | ||||||||||||||||
SBA pools | $ | 8,824 | $ | - | $ | (211 | ) | $ | 8,613 | |||||||
Totals | $ | 8,824 | $ | - | $ | (211 | ) | $ | 8,613 |
As of March 31, 2017 and 2016 there were no realized net gains (losses) on sale and call of securities available for sale. The tax benefit (provision) related to these net realized gains and losses was $0 for both the three months ended March 31, 2017 and 2016.
8
A summary of unrealized loss information for investment securities, categorized by security type, as of March 31, 2017 and December 31, 2016 was as follows:
Less than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||
Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | |||||||||||||||||||
Securities Available for Sale: | ||||||||||||||||||||||||
March 31, 2017 | ||||||||||||||||||||||||
U.S. Government sponsored agency | $ | 62,043 | $ | (402 | ) | $ | - | $ | - | $ | 62,043 | $ | (402 | ) | ||||||||||
State and political subdivision | 37,167 | (1,277 | ) | - | - | 37,167 | (1,277 | ) | ||||||||||||||||
Residential mortgage backed security | 116,824 | (1,321 | ) | 67,630 | (997 | ) | 184,454 | (2,318 | ) | |||||||||||||||
Residential collateralized mortgage obligation | 9,065 | (90 | ) | 113 | (2 | ) | 9,178 | (92 | ) | |||||||||||||||
Commercial mortgage backed security | 95,055 | (2,886 | ) | - | - | 95,055 | (2,886 | ) | ||||||||||||||||
SBA pools | - | - | 663 | (11 | ) | 663 | (11 | ) | ||||||||||||||||
Totals | $ | 320,154 | $ | (5,976 | ) | $ | 68,406 | $ | (1,010 | ) | $ | 388,560 | $ | (6,986 | ) | |||||||||
December 31, 2016 | ||||||||||||||||||||||||
U.S. Government sponsored agency | $ | 53,877 | $ | (498 | ) | $ | - | $ | - | $ | 53,877 | $ | (498 | ) | ||||||||||
State and political subdivision | 33,833 | (1,417 | ) | - | - | 33,833 | (1,417 | ) | ||||||||||||||||
Residential mortgage backed security | 143,344 | (1,539 | ) | 50,474 | (785 | ) | 193,818 | (2,324 | ) | |||||||||||||||
Residential collateralized mortgage obligation | 8,413 | (87 | ) | 122 | (2 | ) | 8,535 | (89 | ) | |||||||||||||||
Commercial mortgage backed security | 96,222 | (3,157 | ) | - | - | 96,222 | (3,157 | ) | ||||||||||||||||
SBA pools | - | - | 673 | (9 | ) | 673 | (9 | ) | ||||||||||||||||
Totals | $ | 335,689 | $ | (6,698 | ) | $ | 51,269 | $ | (796 | ) | $ | 386,958 | $ | (7,494 | ) | |||||||||
Securities Held to Maturity: | ||||||||||||||||||||||||
March 31, 2017 | ||||||||||||||||||||||||
SBA Pools | $ | - | $ | - | $ | 7,612 | $ | (342 | ) | $ | 7,612 | $ | (342 | ) | ||||||||||
Totals | $ | - | $ | - | $ | 7,612 | $ | (342 | ) | $ | 7,612 | $ | (342 | ) | ||||||||||
December 31, 2016 | ||||||||||||||||||||||||
SBA Pools | $ | 8,613 | $ | (211 | ) | $ | - | $ | - | $ | 8,613 | $ | (211 | ) | ||||||||||
Totals | $ | 8,613 | $ | (211 | ) | $ | - | $ | - | $ | 8,613 | $ | (211 | ) |
As of March 31, 2017 the Company's security portfolio consisted of 125 securities, 90 of which were in an unrealized loss position. As of March 31, 2017, $388.6 million in investment securities had unrealized losses with aggregate depreciation of 1.77% of the Company's amortized cost basis. Of these securities, $68.4 million had a continuous unrealized loss position for twelve months or longer with an aggregate depreciation of 1.45%. 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 likely that it will not 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, 2017, 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 | |||||||||||||||
Amortized Cost | Fair Value | Amortized Cost | Fair Value | |||||||||||||
(In thousands) | ||||||||||||||||
One year or less | $ | 10,203 | $ | 10,198 | $ | - | $ | - | ||||||||
One to five years | 41,111 | 40,791 | - | - | ||||||||||||
Five to ten years | 31,234 | 31,284 | - | - | ||||||||||||
Over ten years | 49,163 | 47,914 | 7,954 | 7,612 | ||||||||||||
Subtotal | 131,711 | 130,187 | 7,954 | 7,612 | ||||||||||||
Residential mortgage backed security | 196,125 | 193,831 | - | - | ||||||||||||
Residential collateralized mortgage obligation | 14,069 | 14,049 | - | - | ||||||||||||
Commercial mortgage backed security | 115,810 | 113,022 | ||||||||||||||
Total | $ | 457,715 | $ | 451,089 | $ | 7,954 | $ | 7,612 |
Securities with carrying amounts of $84.9 million and $87.9 million as of March 31, 2017 and December 31, 2016, respectively, were pledged as collateral on public deposits and for other purposes as required or permitted by law.
Note 6. Loans and Allowance for Loan Losses
As of March 31, 2017 and December 31, 2016, loans consisted of:
March 31, 2017 | December 31, 2016 | |||||||
Commercial | $ | 74,637 | $ | 69,161 | ||||
Commercial real estate | 407,317 | 405,900 | ||||||
Residential real estate | 205,381 | 214,726 | ||||||
Construction real estate | 73,128 | 75,972 | ||||||
Installment and other | 19,547 | 21,053 | ||||||
Total loans | 780,010 | 786,812 | ||||||
Unearned income | (1,354 | ) | (1,322 | ) | ||||
Gross loans | 778,656 | 785,490 | ||||||
Allowance for loan losses | (14,187 | ) | (14,352 | ) | ||||
Net loans | $ | 764,469 | $ | 771,138 |
9
Loan Origination/Risk Management. The Company has certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. Management and the Board of Directors review and approve these policies and procedures on an annual basis. A reporting system supplements the review process by providing management with reports related to loan production, loan quality, concentrations of credit, loan delinquencies and non-performing and potential problem loans. Management has identified the following categories in its loan portfolios:
Commercial loans: These loans are underwritten after evaluating and understanding the borrower's ability to operate profitably and prudently expand its business. Underwriting standards are designed to promote relationship banking rather than transactional banking. Management examines current and projected cash flows to determine the ability of the borrower to repay their obligations as agreed. Commercial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial and industrial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.
Commercial real estate loans: These loans are subject to underwriting standards and processes similar to commercial loans, in addition to those of other real estate loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher original amounts than other types of loans and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Company's commercial real estate portfolio are geographically concentrated in the markets in which the Company operates. Management monitors and evaluates commercial real estate loans based on collateral, location and risk grade criteria. The Company also utilizes third-party sources to provide insight and guidance about economic conditions and trends affecting market areas it serves. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans. As of March 31, 2017, 26.0% of the outstanding principal balances of the Company's commercial real estate loans were secured by owner-occupied properties.
With respect to loans to developers and builders that are secured by non-owner occupied properties that the Company may originate from time to time, the Company generally requires the borrower to have had an existing relationship with the Company and have a proven record of success.
Construction real estate loans: These loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analysis of absorption and lease rates and financial analysis of the developers and property owners. Construction real estate loans are generally based upon estimates of costs and values associated with the completed project and often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing.
Residential real estate loans: Underwriting standards for residential real estate and home equity loans are heavily influenced by statutory requirements, which include, but are not limited to, maximum loan-to-value levels, debt-to-income levels, collection remedies, the number of such loans a borrower can have at one time and documentation requirements.
Installment loans: The Company originates consumer loans utilizing a credit scoring analysis to supplement the underwriting process. To monitor and manage consumer loan risk, policies and procedures are developed and modified, as needed. This activity, coupled with relatively small loan amounts that are spread across many individual borrowers, minimizes risk. Additionally, trend and outlook reports are reviewed by management on a regular basis.
The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Company's policies and procedures, which include periodic internal reviews and reports to identify and address risk factors developing within the loan portfolio. The Company engages external independent loan reviews that assess and validate the credit risk program on a periodic basis. Results of these reviews are presented to and reviewed by management and the Board of Directors.
The following table presents the contractual aging of the recorded investment in current and past due loans by class of loans as of March 31, 2017 and December 31, 2016, including nonaccrual loans:
Current | 30-59 Days Past Due | 60-89 Days Past Due | Loans past due 90 days or more | Total Past Due | Total | |||||||||||||||||||
March 31, 2017 | (In thousands) | |||||||||||||||||||||||
Commercial | $ | 73,666 | $ | 602 | $ | 15 | $ | 354 | $ | 971 | $ | 74,637 | ||||||||||||
Commercial real estate | 405,821 | - | 188 | 1,308 | 1,496 | 407,317 | ||||||||||||||||||
Residential real estate | 202,323 | 1,033 | 365 | 1,660 | 3,058 | 205,381 | ||||||||||||||||||
Construction real estate | 67,979 | 256 | 202 | 4,691 | 5,149 | 73,128 | ||||||||||||||||||
Installment and other | 19,345 | 49 | 150 | 3 | 202 | 19,547 | ||||||||||||||||||
Total loans | $ | 769,134 | $ | 1,940 | $ | 920 | $ | 8,016 | $ | 10,876 | $ | 780,010 | ||||||||||||
Nonaccrual loan classification, included above | $ | 8,192 | $ | 212 | $ | 555 | $ | 7,756 | $ | 8,523 | $ | 16,715 | ||||||||||||
December 31, 2016 | ||||||||||||||||||||||||
Commercial | $ | 67,562 | $ | 1,010 | $ | 221 | $ | 368 | $ | 1,599 | $ | 69,161 | ||||||||||||
Commercial real estate | 399,861 | 4,564 | - | 1,475 | 6,039 | 405,900 | ||||||||||||||||||
Residential real estate | 208,200 | 3,089 | 1,355 | 2,082 | 6,526 | 214,726 | ||||||||||||||||||
Construction real estate | 67,310 | 378 | 43 | 8,241 | 8,662 | 75,972 | ||||||||||||||||||
Installment and other | 20,860 | 135 | 38 | 20 | 193 | 21,053 | ||||||||||||||||||
Total loans | $ | 763,793 | $ | 9,176 | $ | 1,657 | $ | 12,186 | $ | 23,019 | $ | 786,812 | ||||||||||||
Nonaccrual loan classification, included above | $ | 8,331 | $ | 249 | $ | 712 | $ | 12,186 | $ | 13,147 | $ | 21,478 |
10
The following table presents the recorded investment in nonaccrual loans and loans past due 90 days or more and still accruing interest by class of loans as of March 31, 2017 and December 31, 2016:
March 31, 2017 | December 31, 2016 | |||||||||||||||
Nonaccrual | Loans past due 90 days or more and still accruing interest | Nonaccrual | Loans past due 90 days or more and still accruing interest | |||||||||||||
(In thousands) | ||||||||||||||||
Commercial | $ | 917 | $ | - | $ | 1,192 | $ | - | ||||||||
Commercial real estate | 3,623 | - | 5,823 | - | ||||||||||||
Residential real estate | 3,807 | - | 4,247 | - | ||||||||||||
Construction real estate | 8,359 | 258 | 10,159 | - | ||||||||||||
Installment and other | 9 | 3 | 57 | - | ||||||||||||
Total | $ | 16,715 | $ | 261 | $ | 21,478 | $ | - |
The Company utilizes an internal asset classification system as a means of reporting problem and potential problem loans. Under the Company's risk rating system, problem and potential problem loans are classified as "Special Mention," "Substandard," and "Doubtful." Substandard loans include those characterized by the likelihood that the Company will sustain some loss if the deficiencies are not corrected. Loans classified as Doubtful have all the weaknesses inherent in those classified as Substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Loans that do not currently expose the Company to sufficient risk to warrant classification in one of the aforementioned categories, but possess weaknesses that deserve management's close attention are deemed to be Special Mention. Any time a situation warrants, the risk rating may be reviewed.
Loans not meeting the criteria above that are analyzed individually are considered to be pass-rated loans. The following table presents the risk category by class of loans based on the most recent analysis performed as of March 31, 2017 and December 31, 2016:
Pass | Special Mention | Substandard | Doubtful | Total | ||||||||||||||||
March 31, 2017 | (In thousands) | |||||||||||||||||||
Commercial | $ | 65,170 | $ | 444 | $ | 9,023 | $ | - | $ | 74,637 | ||||||||||
Commercial real estate | 382,452 | 11,493 | 13,372 | - | 407,317 | |||||||||||||||
Residential real estate | 200,598 | 156 | 4,627 | - | 205,381 | |||||||||||||||
Construction real estate | 62,042 | 1,210 | 9,876 | - | 73,128 | |||||||||||||||
Installment and other | 19,500 | 4 | 43 | - | 19,547 | |||||||||||||||
Total | $ | 729,762 | $ | 13,307 | $ | 36,941 | $ | - | $ | 780,010 | ||||||||||
December 31, 2016 | ||||||||||||||||||||
Commercial | $ | 56,611 | $ | 1,046 | $ | 11,504 | $ | - | $ | 69,161 | ||||||||||
Commercial real estate | 380,777 | 11,573 | 13,550 | - | 405,900 | |||||||||||||||
Residential real estate | 209,049 | 588 | 5,089 | - | 214,726 | |||||||||||||||
Construction real estate | 60,848 | 5,378 | 9,746 | - | 75,972 | |||||||||||||||
Installment and other | 20,983 | 4 | 66 | - | 21,053 | |||||||||||||||
Total | $ | 728,268 | $ | 18,589 | $ | 39,955 | $ | - | $ | 786,812 |
The following table shows all loans, including nonaccrual loans, by risk category and aging as of March 31, 2017 and December 31, 2016:
Pass | Special Mention | Substandard | Doubtful | Total | ||||||||||||||||
March 31, 2017 | (In thousands) | |||||||||||||||||||
Current | $ | 728,326 | $ | 13,050 | $ | 27,758 | $ | - | $ | 769,134 | ||||||||||
Past due 30-59 days | 1,247 | - | 693 | - | 1,940 | |||||||||||||||
Past due 60-89 days | 186 | - | 734 | - | 920 | |||||||||||||||
Past due 90 days or more | 3 | 257 | 7,756 | - | 8,016 | |||||||||||||||
Total | $ | 729,762 | $ | 13,307 | $ | 36,941 | $ | - | $ | 780,010 | ||||||||||
December 31, 2016 | (In thousands) | |||||||||||||||||||
Current | $ | 724,075 | $ | 13,956 | $ | 25,762 | $ | - | $ | 763,793 | ||||||||||
Past due 30-59 days | 3,383 | 4,633 | 1,160 | - | 9,176 | |||||||||||||||
Past due 60-89 days | 810 | - | 847 | - | 1,657 | |||||||||||||||
Past due 90 days or more | - | - | 12,186 | - | 12,186 | |||||||||||||||
Total | $ | 728,268 | $ | 18,589 | $ | 39,955 | $ | - | $ | 786,812 |
As of March 31, 2017 and December 31, 2016, nonaccrual loans totaling $13.9 million and $18.4 million were classified as Substandard, respectively.
11
The following table presents loans individually evaluated for impairment by class of loans as of March 31, 2017 and December 31, 2016, showing the unpaid principal balance, the recorded investment of the loan (reflecting any loans with partial charge-offs), and the amount of allowance for loan losses specifically allocated for these impaired loans (if any):
March 31, 2017 | December 31, 2016 | |||||||||||||||||||||||
Unpaid Principal Balance | Recorded Investment | Allowance for Loan Losses Allocated | Unpaid Principal Balance | Recorded Investment | Allowance for Loan Losses Allocated | |||||||||||||||||||
(In thousands) | (In thousands) | |||||||||||||||||||||||
With no related allowance recorded: | ||||||||||||||||||||||||
Commercial | $ | 1,858 | $ | 1,811 | $ | 2,203 | $ | 2,166 | ||||||||||||||||
Commercial real estate | 4,116 | 3,933 | 6,368 | 6,136 | ||||||||||||||||||||
Residential real estate | 5,012 | 4,425 | 5,176 | 4,494 | ||||||||||||||||||||
Construction real estate | 9,399 | 7,933 | 7,522 | 6,031 | ||||||||||||||||||||
Installment and other | 303 | 303 | 313 | 313 | ||||||||||||||||||||
With an allowance recorded: | ||||||||||||||||||||||||
Commercial | 13,884 | 13,882 | $ | 526 | 13,988 | 13,988 | $ | 350 | ||||||||||||||||
Commercial real estate | 6,330 | 6,330 | 897 | 6,376 | 6,376 | 911 | ||||||||||||||||||
Residential real estate | 8,087 | 8,087 | 1,192 | 8,601 | 8,598 | 1,424 | ||||||||||||||||||
Construction real estate | 3,167 | 3,167 | 220 | 5,288 | 5,251 | 237 | ||||||||||||||||||
Installment and other | 377 | 377 | 39 | 433 | 433 | 88 | ||||||||||||||||||
Total | $ | 52,533 | $ | 50,248 | $ | 2,874 | $ | 56,268 | $ | 53,786 | $ | 3,010 |
The following table presents loans individually evaluated for impairment by class of loans for the three months ended March 31, 2017 and 2016, showing the average recorded investment and the interest income recognized:
Three Months Ended | ||||||||||||||||
March 31, 2017 | March 31, 2016 | |||||||||||||||
Average Recorded Investment | Interest Income Recognized | Average Recorded Investment | Interest Income Recognized | |||||||||||||
(In thousands) | ||||||||||||||||
With no related allowance recorded: | ||||||||||||||||
Commercial | $ | 1,989 | $ | 14 | $ | 8,091 | $ | 106 | ||||||||
Commercial real estate | 5,035 | 10 | 1,317 | 16 | ||||||||||||
Residential real estate | 4,459 | 22 | 846 | 9 | ||||||||||||
Construction real estate | 6,982 | 88 | 2,423 | 29 | ||||||||||||
Installment and other | 308 | 3 | 335 | 4 | ||||||||||||
With an allowance recorded: | ||||||||||||||||
Commercial | 13,935 | 186 | 16,681 | 257 | ||||||||||||
Commercial real estate | 6,353 | 67 | 19,364 | 285 | ||||||||||||
Residential real estate | 8,343 | 81 | 17,248 | 209 | ||||||||||||
Construction real estate | 4,209 | 40 | 8,696 | 110 | ||||||||||||
Installment and other | 405 | 3 | 685 | 5 | ||||||||||||
Total | $ | 52,018 | $ | 514 | $ | 75,686 | $ | 1,030 |
If nonaccrual loans outstanding had been current in accordance with their original terms, approximately $211.4 thousand and $502.2 thousand would have been recorded as loan interest income during the three months ended March 31, 2017 and 2016, respectively. Interest income recognized in the above table was primarily recognized on a cash basis.
Recorded investment balances in the above tables exclude accrued interest income and unearned income as such amounts were immaterial.
12
Allowance for Loan Losses:
For the three months ended March 31, 2017 and 2016, activity in the allowance for loan losses was as follows:
Commercial | Commercial real estate | Residential real estate | Construction real estate | Installment and other | Unallocated | Total | ||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||
Three Months Ended March 31, 2017: | ||||||||||||||||||||||||||||
Beginning balance | $ | 1,449 | $ | 6,472 | $ | 4,524 | $ | 1,119 | $ | 715 | $ | 73 | $ | 14,352 | ||||||||||||||
Provision (benefit) for loan losses | 320 | 13 | (209 | ) | (27 | ) | 4 | (71 | ) | 30 | ||||||||||||||||||
Charge-offs | (186 | ) | - | (244 | ) | (16 | ) | (137 | ) | - | (583 | ) | ||||||||||||||||
Recoveries | 173 | 88 | 55 | 10 | 62 | - | 388 | |||||||||||||||||||||
Net charge-offs | (13 | ) | 88 | (189 | ) | (6 | ) | (75 | ) | - | (195 | ) | ||||||||||||||||
Ending balance | $ | 1,756 | $ | 6,573 | $ | 4,126 | $ | 1,086 | $ | 644 | $ | 2 | $ | 14,187 | ||||||||||||||
Three Months Ended March 31, 2016: | ||||||||||||||||||||||||||||
Beginning balance | $ | 2,442 | $ | 6,751 | $ | 6,082 | $ | 1,143 | $ | 940 | $ | 34 | $ | 17,392 | ||||||||||||||
Provision (benefit) for loan losses | (227 | ) | (41 | ) | 359 | 2 | (84 | ) | (9 | ) | - | |||||||||||||||||
Charge-offs | (181 | ) | (4 | ) | (324 | ) | (18 | ) | (170 | ) | - | (697 | ) | |||||||||||||||
Recoveries | 351 | 14 | 37 | 97 | 111 | - | 610 | |||||||||||||||||||||
Net charge-offs | 170 | 10 | (287 | ) | 79 | (59 | ) | - | (87 | ) | ||||||||||||||||||
Ending balance | $ | 2,385 | $ | 6,720 | $ | 6,154 | $ | 1,224 | $ | 797 | $ | 25 | $ | 17,305 | ||||||||||||||
Allocation of the allowance for loan losses (as well as the total loans in each allocation method), disaggregated on the basis of the Company's impairment methodology, is as follows:
Commercial | Commercial real estate | Residential real estate | Construction real estate | Installment and other | Unallocated | Total | ||||||||||||||||||||||
March 31, 2017 | (In thousands) | |||||||||||||||||||||||||||
Allowance for loan losses allocated to: | ||||||||||||||||||||||||||||
Loans individually evaluated for impairment | $ | 526 | $ | 897 | $ | 1,192 | $ | 220 | $ | 39 | $ | - | $ | 2,874 | ||||||||||||||
Loans collectively evaluated for impairment | 1,230 | 5,676 | 2,934 | 866 | 605 | 2 | 11,313 | |||||||||||||||||||||
Ending balance | $ | 1,756 | $ | 6,573 | $ | 4,126 | $ | 1,086 | $ | 644 | $ | 2 | $ | 14,187 | ||||||||||||||
Loans: | ||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 15,693 | $ | 10,263 | $ | 12,512 | $ | 11,100 | $ | 680 | $ | - | $ | 50,248 | ||||||||||||||
Collectively evaluated for impairment | 58,944 | 397,054 | 192,869 | 62,028 | 18,867 | - | 729,762 | |||||||||||||||||||||
Total ending loans balance | $ | 74,637 | $ | 407,317 | $ | 205,381 | $ | 73,128 | $ | 19,547 | $ | - | $ | 780,010 | ||||||||||||||
December 31, 2016 | ||||||||||||||||||||||||||||
Allowance for loan losses allocated to: | ||||||||||||||||||||||||||||
Loans individually evaluated for impairment | $ | 350 | $ | 911 | $ | 1,424 | $ | 237 | $ | 88 | $ | - | $ | 3,010 | ||||||||||||||
Loans collectively evaluated for impairment | 1,099 | 5,561 | 3,100 | 882 | 627 | 73 | 11,342 | |||||||||||||||||||||
Ending balance | $ | 1,449 | $ | 6,472 | $ | 4,524 | $ | 1,119 | $ | 715 | $ | 73 | $ | 14,352 | ||||||||||||||
Loans: | ||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 16,154 | $ | 12,512 | $ | 13,092 | $ | 11,282 | $ | 746 | $ | - | $ | 53,786 | ||||||||||||||
Collectively evaluated for impairment | 53,007 | 393,388 | 201,634 | 64,690 | 20,307 | - | 733,026 | |||||||||||||||||||||
Total ending loans balance | $ | 69,161 | $ | 405,900 | $ | 214,726 | $ | 75,972 | $ | 21,053 | $ | - | $ | 786,812 |
Troubled debt restructurings ("TDRs") are defined as those loans where: (1) the borrower is experiencing financial difficulties and (2) the restructuring includes a concession by the Bank to the borrower.
13
The following table presents loans restructured during the three months ended March 31, 2017.
Three Months Ended March 31, 2017 | ||||||||||||||||
Number of Contracts | Pre- Modification Outstanding Recorded Investment | Post-Modification Outstanding Recorded Investment | Specific reserves allocated | |||||||||||||
Construction real estate | 1 | $ | 10 | $ | 10 | $ | - | |||||||||
Total | 1 | $ | 10 | $ | 10 | $ | - |
There were no loans restructured during the three months ended March 31, 2016.
The following table presents loans by class modified as TDRs for which there was a payment default within twelve months following the modification during the three months ended March 31, 2017 and 2016:
Three Months Ended March 31, 2017 | ||||||||||||
Number of Contracts | Pre- Modification Outstanding Recorded Investment | Specific reserves allocated | ||||||||||
Construction real estate | 1 | $ | 61 | $ | - | |||||||
Total | 1 | $ | 61 | $ | - |
Three Months Ended March 31, 2016 | ||||||||||||
Number of Contracts | Pre- Modification Outstanding Recorded Investment | Specific reserves allocated | ||||||||||
Construction real estate | 2 | $ | 807 | $ | 10 | |||||||
Total | 2 | $ | 807 | $ | 10 |
Impairment analyses are prepared on TDRs in conjunction with the normal allowance for loan loss process. TDRs did not require any specific reserves at the three months ended March 31, 2017 and 2016, respectively. TDRs resulted in charge-offs of $19.6 thousand and $36.8 thousand during the three months ended March 31, 2017 and 2016, respectively. The TDRs that subsequently defaulted required a provision of $0 and $10 thousand to the allowance for loan losses for the three months ended March 31, 2017 and 2016, respectively.
The following table presents total TDRs, both in accrual and nonaccrual status:
March 31, 2017 | December 31, 2016 | |||||||||||||||
Number of contracts | Amount | Number of contracts | Amount | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Accrual | $ | 126 | $ | 36,383 | $ | 127 | $ | 35,158 | ||||||||
Nonaccrual | 23 | 6,267 | 23 | 7,909 | ||||||||||||
Total | $ | 149 | $ | 42,650 | $ | 150 | $ | 43,067 |
Specific reserves on TDRs at March 31, 2017 and December 31, 2016 were $2.5 million and $2.6 million, respectively.
As of March 31, 2017, the Bank had a total of $1.6 million in commitments to lend additional funds on four commercial loans classified as TDRs.
Loan principal balances to executive officers and directors of the Company were $324.0 thousand and $347.8 thousand as of March 31, 2017 and December 31, 2016, respectively. Total credit available, including companies in which these individuals have management control or beneficial ownership, was $494.8 million and $513.6 million as of March 31, 2017 and December 31, 2016, respectively. An analysis of the activity related to these loans as of March 31, 2017 and December 31, 2016 is as follows:
March 31, 2017 | December 31, 2016 | |||||||
(in thousands) | ||||||||
Balance, beginning | $ | 348 | $ | 1,933 | ||||
Additions | - | 158 | ||||||
Changes in Board composition | - | (648 | ) | |||||
Principal payments and other reductions | (24 | ) | (1,095 | ) | ||||
Balance, ending | $ | 324 | $ | 348 |
Note 7. Loan Servicing and Mortgage Servicing Rights ("MSRs")
Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid balance of these loans as of March 31, 2017 and December 31, 2016 is summarized as follows:
March 31, 2017 | December 31, 2016 | |||||||
(In thousands) | ||||||||
Mortgage loan portfolios serviced for: | ||||||||
Federal National Mortgage Association ("Fannie Mae") | $ | 747,964 | $ | 780,348 | ||||
Totals | $ | 747,964 | $ | 780,348 |
During the three months ended March 31, 2017 and 2016, substantially all of the loans serviced for others had a contractual servicing fee of 0.25% on the unpaid principal balance. These fees are recorded as "mortgage loan servicing fees" under "noninterest income" on the consolidated statements of operations.
14
Late fees on the loans serviced for others totaled $18 thousand and $36 thousand during the three months ended March 31, 2017 and 2016, respectively. These fees are recorded included in "noninterest income" on the consolidated statements of operations.
Custodial balances on deposit at the Bank in connection with the foregoing loan servicing were approximately $7.0 million and $4.8 million as of March 31, 2017 and December 31, 2016, respectively. There were no custodial balances on deposit with other financial institutions as of March 31, 2017 and December 31, 2016.
An analysis of changes in the MSR asset for the three months ended March 31, 2017 and 2016 follows:
Three Months Ended March 31, | ||||||||
2017 | 2016 | |||||||
(In thousands) | ||||||||
Balance at beginning of period | $ | 7,903 | $ | 8,777 | ||||
Servicing rights originated and capitalized | - | 158 | ||||||
Amortization | (299 | ) | (321 | ) | ||||
Balance at end of period | $ | 7,604 | $ | 8,614 |
Below is an analysis of changes in the MSR asset valuation allowance for the three months ended March 31, 2017 and 2016:
Three Months Ended March 31, | ||||||||
2017 | 2016 | |||||||
(In thousands) | ||||||||
Balance at beginning of period | $ | (998 | ) | $ | (1,895 | ) | ||
Aggregate reduction credited to operations | 90 | 210 | ||||||
Aggregate additions charged to operations | (29 | ) | (1,060 | ) | ||||
Balance at end of period | $ | (937 | ) | $ | (2,745 | ) |
The fair values of the MSRs were $6.7 million and $5.9 million for the three months ended March 31, 2017 and 2016, respectively.
A valuation allowance is used to recognize impairments of MSRs. An MSR is considered impaired when the fair value of the MSR is below the amortized book value of the MSR. MSRs are accounted for 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.
The following assumptions were used to calculate the fair value of the MSRs as of March 31, 2017 and December 31, 2016:
March 31, 2017 | December 31, 2016 | ||||
Weighted Average Public Securities Association (PSA) speed | 191.96% | 193.93% | |||
Weighted Average Discount rate | 10.50 | 10.50 | |||
Weighted Average Earnings rate | 2.05 | 1.97 |
Note 8. Other Real Estate Owned ("OREO")
OREO consists of property acquired due to foreclosure on real estate loans. As of March 31, 2017 and December 31, 2016, total OREO consisted of:
March 31, 2017 | December 31, 2016 | |||||||
(In thousands) | ||||||||
Commercial real estate | $ | 2,014 | $ | 2,181 | ||||
Residential real estate | 2,509 | 2,734 | ||||||
Construction real estate | 3,468 | 3,521 | ||||||
Total | $ | 7,991 | $ | 8,436 |
The following table presents a summary of OREO activity for the three months ended March 31, 2017 and 2016:
Three Months Ended March 31, | ||||||||
2017 | 2016 | |||||||
(In thousands) | ||||||||
Balance at beginning of period | $ | 8,436 | $ | 8,346 | ||||
Transfers in at fair value | 433 | 1,543 | ||||||
Write-down of value | (82 | ) | - | |||||
Gain (loss) on disposal | 321 | 213 | ||||||
Cash received upon disposition | (1,117 | ) | (928 | ) | ||||
Sales financed by loans | - | (971 | ) | |||||
Balance at end of period | $ | 7,991 | $ | 8,203 |
15
Note 9. Deposits
As of March 31, 2017 and December 31, 2016, deposits consisted of:
March 31, 2017 | December 31, 2016 | |||||||
(In thousands ) | ||||||||
Demand deposits, noninterest bearing | $ | 163,110 | $ | 181,974 | ||||
NOW and money market accounts | 429,775 | 405,268 | ||||||
Savings deposits | 413,735 | 407,606 | ||||||
Time certificates, $250,000 or more | 25,606 | 28,531 | ||||||
Other time certificates | 174,258 | 191,710 | ||||||
Total | $ | 1,206,484 | $ | 1,215,089 |
Deposits from executive officers, directors and their affiliates as of March 31, 2017 and December 31, 2016 were $1.7 million and $1.6 million, respectively.
Note 10. Borrowings
Notes payable to the Federal Home Loan Bank ("FHLB") as of March 31, 2017 and December 31, 2016 were secured by a blanket assignment of mortgage loans or other collateral acceptable to FHLB, and generally had a fixed rate of interest, interest payable monthly and principal due at end of term, unless otherwise noted. As of March 31, 2017, $784.7 thousand in loans were pledged under the blanket assignment. Investment securities are held in safekeeping at the FHLB with $2.3 million pledged as collateral for outstanding advances and letters of credit. An additional $99.7 million in advances is available based on the March 31, 2017 value of the remaining unpledged investment securities.
The following table details borrowings as of March 31, 2017 and December 31, 2016.
Maturity Date | Rate | Type | Principal due | March 31, 2017 | December 31, 2016 | |||||||||
(In thousands) | ||||||||||||||
April 27, 2021 | 6.343 | % | Fixed | At maturity | 2,300 | 2,300 | ||||||||
Total | $ | 2,300 | $ | 2,300 |
Note 11. Junior Subordinated Debt
The following table presents details on the junior subordinated debt as of March 31, 2017:
Trust I | Trust III | Trust IV | Trust V | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Date of Issue | March 23, 2000 | May 11, 2004 | June 29, 2005 | September 21, 2006 | ||||||||||||
Amount of trust preferred securities issued | $ | 10,000 | $ | 6,000 | $ | 10,000 | $ | 10,000 | ||||||||
Rate on trust preferred securities | 10.875 | % | 3.7546% (variable) | 6.88 | % | 2.7812% (variable) | ||||||||||
Maturity | March 8, 2030 | September 8, 2034 | November 23, 2035 | December 15, 2036 | ||||||||||||
Date of first redemption | March 8, 2010 | September 8, 2009 | August 23, 2010 | September 15, 2011 | ||||||||||||
Common equity securities issued | $ | 310 | $ | 186 | $ | 310 | $ | 310 | ||||||||
Junior subordinated deferrable interest debentures owed | $ | 10,310 | $ | 6,186 | $ | 10,310 | $ | 10,310 | ||||||||
Rate on junior subordinated deferrable interest debentures | 10.875 | % | 3.7546% (variable) | 6.88 | % | 2.7812% (variable) |
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, with the approval of the FRB. 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 (or twenty consecutive quarterly periods in the case of Trusts with quarterly interest payments) with respect to each interest payment deferred. During a period of deferral, unpaid accrued interest is compounded.
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 common stock or purchase or acquire any of its common stock.
In the second quarter of 2013, Trinity began to defer the interest payments on $37.1 million of junior subordinated debentures that are held by the Trusts that it controls. Interest accrued and unpaid to securities holders totaled $9.8 million as of December 31, 2016. In the first quarter of 2017, upon receiving regualtory approval, all deferred interest was paid in full and the Company is no longer deferring interest payments on the junior subordinated debentures. As of March 31, 2017, there was $172.8 thousand in interest accrued and unpaid to security holders.
As of March 31, 2017 and December 31, 2016, the Company's trust preferred securities, subject to certain limitations, qualified as Tier 1 Capital for regulatory capital purposes.
Payments of distributions on the trust preferred securities and payments on redemption of the trust preferred securities are guaranteed by Trinity. 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.
16
Note 12. Income Taxes
For the three months ended March 31, 2017, the Company recorded a tax benefit of $526 thousand. There was no income tax expense or benefit recorded for the three months ended March 31, 2016 because the Company had a full valuation allowance against the deferred tax assets on that date.
A deferred tax asset ("DTA") or liability is recognized to reflect the net tax effects of temporary differences between the carrying amounts of existing assets and liabilities for financial reporting purposes and the amounts used for income tax reporting purposes. A valuation allowance is established when it is more likely than not that all or a portion of a net deferred tax asset will not be realized. As discussed in Note 14 "Income Taxes" in Item 8, "Financial Statements and Supplementary Data" of the 2016 Form 10-K, the Company had a valuation allowance on part of the net DTAs, most of which was reversed during 2016. As of March 31, 2017 there remained a $387 thousand valuation allowance.
Note 13. Commitments 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.
As of March 31, 2017 and December 31, 2016, the following credit-related commitments were outstanding:
Contract Amount | ||||||||
March 31, 2017 | December 31, 2016 | |||||||
(In thousands) | ||||||||
Unfunded commitments under lines of credit | $ | 131,178 | $ | 118,252 | ||||
Commercial and standby letters of credit | 7,043 | 7,152 | ||||||
Commitments to make loans | - | 5,835 |
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 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.
The Company had outstanding loan commitments, excluding undisbursed portions of loans in process and equity lines of credit, of approximately $131.2 million as of March 31, 2017 and $125.4 million as of December 31, 2016, respectively. Of these commitments outstanding, the breakdown between fixed rate and adjustable rate loans is as follows:
March 31, 2017 | December 31, 2016 | |||||||
(In thousands) | ||||||||
Fixed rate | $ | 30,054 | $ | 19,663 | ||||
Adjustable rate | 101,124 | 105,741 | ||||||
Total | $ | 131,178 | $ | 125,404 |
The fixed loan commitments as of March 31, 2017 have interest rates ranging from 2.3% to 5.5% and maturities ranging from on demand to 9 years.
FHLB requires a blanket assignment of mortgage loans or other collateral acceptable to the FHLB to secure the Company's short and long-term borrowings from FHLB. The amount of collateral with the FHLB at March 31, 2017 was $102.0 million.
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. As of both March 31, 2017 and December 31, 2016, $575 thousand had been recorded as liabilities for the Company's potential losses 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 $22 thousand and $26 thousand as of March 31, 2017 and December 31, 2016, respectively, and are included in "other liabilities" on the consolidated balance sheets.
17
Note 14. Preferred Equity Issues
The Company had no outstanding preferred shares as of March 31, 2017 as all outstanding preferred shares were either redeemed or converted to non-voting common stock in the first quarter of 2017, as further described below.
On March 27, 2009, the Company issued two series of preferred stock to the U.S. Treasury under the Capital Purchase Program ("CPP"). On December 19, 2016, the Company issued 82,862 shares of Series C Convertible Preferred Stock pursuant to a private placement. Below is a table disclosing the information on the three series as of December 31, 2016:
Number of shares issued | Dividend rate | Liquidation value per share | Original cost, in thousands | |||||||||||||
Series A cumulative perpetual preferred shares | 35,539 | 5% for first 5 years; thereafter 9% | $ | 1,000.00 | $ | 33,437 | ||||||||||
Series B cumulative perpetual preferred shares | 1,777 | 9 | % | 1,000.00 | 2,102 | |||||||||||
Series C cumulative perpetual convertible preferred shares | 82,862 | - | 475.00 | 39,359 |
The difference between the liquidation value of the preferred stock and the original cost is accreted (for the Series B Preferred Stock) or amortized (for the Series A Preferred Stock) over 10 years and is reflected, on a net basis, as an increase to the carrying value of preferred stock and decrease to retained earnings. For the three months ended March 31, 2017 and March 31, 2016, a net amount of $398 thousand and $44 thousand, respectively, was recorded for amortization.
Dividends and discount accretion on preferred stock reduce the amount of net income available to common shareholders. For the three months ended March 31, 2017 and March 31, 2016 the total of these amounts were $771 thousand and $1 million, respectively.
Private Placement to Certain Institutional and Accredited Investors
On December 19, 2016, the Company closed its previously announced $52 million private placement with Castle Creek Capital Partners VI, L.P. ("Castle Creek"), Patriot Financial Partners II, L.P., Patriot Financial Partners Parallel II, L.P. (collectively, "Patriot") and Strategic Value Bank Partners, L.P., through its fund Strategic Value Investors LP, pursuant to which the Company issued 2,661,239 shares of its common stock, no par value per share, at $4.75 per share, and 82,862 shares of a new series of convertible perpetual non-voting preferred stock, Series C, no par value per share, at $475.00 per share ("Series C Preferred Stock"). The Company used a portion of the net proceeds from the private placement to redeem its outstanding Series A Preferred Stock (as defined below) and Series B Preferred Stock (as defined below), which it completed on January 25, 2017, and used the remaining net proceeds to pay the deferred interest on its trust preferred securities, and for general corporate purposes.
In connection with the private placement and in accordance with the terms of a stock purchase agreement, dated September 9, 2016 (the "Stock Purchase Agreement"), the Company entered into a registration rights agreement (the "Registration Rights Agreement") with each of Castle Creek and Patriot. Pursuant to the terms of the Registration Rights Agreement, the Company has agreed to file a resale registration statement for the purpose of registering the resale of the shares of the Common Stock and Series C Preferred Stock issued in the private placement and the underlying shares of Common Stock or non-voting Common Stock into which the shares of Series C Preferred Stock are convertible, as appropriate. The Company is obligated to file the registration statement no later than the third anniversary after the closing of the private placement.
Pursuant to the terms of the Stock Purchase Agreement, Castle Creek and Patriot entered into side letter agreements with us. Under the terms of the side letter agreements, each of Castle Creek and Patriot is entitled to have one representative appointed to our Board of Directors for so long as such investor, together with its respective affiliates, owns, in the aggregate, 5% or more of all of our outstanding shares of common stock (including shares of common stock issuable upon conversion of the Series C Preferred Stock or non-voting common stock).
Redemption of Series A Preferred Stock and Series B Preferred Stock
On March 27, 2009, Trinity participated in the TARP Capital Purchase Program by issuing 35,539 shares of Trinity's Fixed Rate Cumulative Perpetual Preferred Stock, Series A Preferred Stock to the Treasury for a purchase price of $35.5 million in cash and issued warrants that were immediately exercised by the Treasury for 1,777 shares of Trinity's Fixed Rate Cumulative Perpetual Preferred Stock, Series B Preferred Stock. Using part of the proceeds from the private placement described above, the Company redeemed all of its outstanding Series A Preferred Stock and Series B Preferred Stock effective January 25, 2017.
Conversion of Series C Preferred Stock to Non-Voting Common Stock
At December 31, 2016, the Company had outstanding 82,862 shares of Series C Preferred Stock that were issued in connection with the private placement. Following shareholder approval of an amendment to the Company's articles of incorporation to authorize a class of non-voting common stock, and the subsequent filing of such amendment with the New Mexico Secretary of State, all outstanding shares of Series C Preferred Stock were automatically converted into 8,286,200 shares of non-voting common stock at a conversion price of $4.75 per share of non-voting common stock pursuant to the private placement. This conversion was completed on February 2, 2017. The non-voting common stock will rank pari passu with the Company's voting common stock with respect to the payment of dividends or distributions.
Note 15. 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 may use as part of its interest rate risk management strategy include mandatory forward delivery commitments and rate lock commitments.
As a result of using derivative instruments, the Bank has potential exposure to credit loss in the event of non-performance by the counterparties. The Bank manages this credit risk by spreading the credit risk among counterparties that the Company believes are well established and financially strong 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 a 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 had no derivative instruments outstanding as of March 31, 2017.
18
Note 16. 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.
The Company uses valuation techniques that are consistent with the sales comparison 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.
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 it has 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 fair value are recorded in current earnings.
The following table summarizes the Company's financial assets and off-balance-sheet instruments measured at fair value on a recurring basis as of March 31, 2017 and December 31, 2016, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
March 31, 2017 | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
(In thousands) | ||||||||||||||||
Financial Assets: | ||||||||||||||||
Investment securities available for sale: | ||||||||||||||||
U.S. Government sponsored agency | $ | 78,989 | $ | - | $ | 78,989 | $ | - | ||||||||
States and political subdivision | 50,535 | - | 50,535 | - | ||||||||||||
Residential mortgage backed security | 193,831 | - | 193,831 | - | ||||||||||||
Residential collateralized mortgage obligation | 14,049 | - | 14,049 | - | ||||||||||||
Commercial mortgage backed security | 113,022 | - | 113,022 | - | ||||||||||||
SBA Pools | 663 | - | 663 | - | ||||||||||||
Total | $ | 451,089 | $ | - | $ | 451,089 | $ | - |
December 31, 2016 | ||||||||||||||||
Financial Assets: | ||||||||||||||||
Investment securities available for sale: | ||||||||||||||||
U.S. Government sponsored agency | $ | 68,828 | $ | - | $ | 68,828 | $ | - | ||||||||
States and political subdivision | 37,343 | - | 37,343 | - | ||||||||||||
Residential mortgage backed security | 203,819 | - | 203,819 | - | ||||||||||||
Residential collateralized mortgage obligation | 14,816 | - | 14,816 | - | ||||||||||||
Commercial mortgage backed security | 114,172 | - | 114,172 | - | ||||||||||||
SBA Pools | 672 | - | 672 | - | ||||||||||||
Total | $ | 439,650 | $ | - | $ | 439,650 | $ | - |
There were no financial assets or financial liabilities 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. There were no transfers between the levels used on any asset classes during the three months ended March 31, 2017 or the year ended December 31, 2016.
Assets and Liabilities 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 GAAP.
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, 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.
19
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 collateral dependent 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.
OREO. OREO is adjusted to fair value at the time the loans are transferred to OREO. Subsequently, OREO is carried at the lower of the carrying value or fair value. Fair value is determined based upon independent market prices, appraised values of the collateral or management's estimation of the value of the collateral. The fair value of OREO was computed based on third party appraisals, which are level 3 valuation inputs.
As of March 31, 2017, impaired loans with a carrying value of $31.8 million had a valuation allowance of $2.9 million. As of December 31, 2016, impaired loans with a carrying value of $34.6 million had a valuation allowance of $3.0 million recorded during 2016.
In the table below, OREO had write-downs during the three months ended March 31, 2017 of $82 thousand. In the table below, OREO had writedowns during the year ended December 31, 2016 of $63 thousand. The valuation adjustments on OREO have been recorded through earnings.
Assets measured at fair value on a nonrecurring basis as of March 31, 2017 and December 31, 2016 are included in the table below:
` | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
(In thousands) | ||||||||||||||||
March 31, 2017 | ||||||||||||||||
Financial Assets | ||||||||||||||||
Impaired loans | $ | 28,969 | $ | - | $ | - | $ | 28,969 | ||||||||
MSRs | 6,667 | - | - | 6,667 | ||||||||||||
Financial Assets | ||||||||||||||||
OREO | 584 | - | - | 584 | ||||||||||||
December 31, 2016 | ||||||||||||||||
Financial Assets | ||||||||||||||||
Impaired loans | $ | 31,636 | $ | - | $ | - | $ | 31,636 | ||||||||
MSRs | 6,905 | - | - | 6,905 | ||||||||||||
Non-Financial Assets | ||||||||||||||||
OREO | 582 | - | - | 582 |
See Note 7 for assumptions used to determine the fair value of MSRs. Assumptions used to determine impaired loans and OREO are presented below by classification, measured at fair value and on a nonrecurring basis as of March 31, 2017 and December 31, 2016:
Fair value | Valuation Technique(s) | Unobservable Input(s) | Adjustment Range, Weighted Average | ||||
March 31, 2017 | (In thousands) | ||||||
Impaired loans | |||||||
Commercial | $ | 13,356 | Sales comparison | Adjustments for differences of comparable sales | (0.00)% to (150.00)%, (6.31)% | ||
Commercial real estate | 5,433 | Sales comparison | Adjustments for differences of comparable sales | (4.25) to (7.62), (5.96) | |||
Residential real estate | 6,895 | Sales comparison | Adjustments for differences of comparable sales | (3.13) to (37.50), (6.77) | |||
Construction real estate | 2,947 | Sales comparison | Adjustments for differences of comparable sales | (4.00) to (40.00), (7.36) | |||
Installment and other | 338 | Sales comparison | Adjustments for differences of comparable sales | (4.13) to (8.00), (6.58) | |||
Total impaired loans | $ | 28,969 | |||||
OREO | |||||||
Residential real estate | $ | 584 | Sales comparison | Adjustments for differences of comparable sales | (3.16)% to (23.08)%,(12.29)% | ||
584 |
December 31, 2016 | |||||||
Impaired loans | |||||||
Commercial | $ | 13,638 | Sales comparison | Adjustments for differences of comparable sales | (0.00)% to (7.75)%, (5.79)% | ||
Commercial real estate | 5,465 | Sales comparison | Adjustments for differences of comparable sales | (4.25) to (7.62), (5.96) | |||
Residential real estate | 7,174 | Sales comparison | Adjustments for differences of comparable sales | (3.13) to (37.50), (6.73) | |||
Construction real estate | 5,014 | Sales comparison | Adjustments for differences of comparable sales | (4.00) to (7.50), (5.79) | |||
Installment and other | 345 | Sales comparison | Adjustments for differences of comparable sales | (0.00) to (37.50), (7.70) | |||
Total impaired loans | $ | 31,636 | |||||
OREO | |||||||
Residential real estate | 483 | Sales comparison | Adjustments for differences of comparable sales | (3.16) to (11.76) (9.29) | |||
Construction real estate | 99 | Sales comparison | Adjustments for differences of comparable sales | (12.00) to (12.00) (12.00) | |||
Total OREO | $ | 582 |
20
Fair Value Assumptions
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 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 and are classified as Level 1.
Securities purchased under resell agreements: The carrying amounts reported in the balance sheet approximate fair value and are classified as Level 1.
Investment Securities: The fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2), using matrix pricing. Matrix pricing is a mathematical technique commonly used to price debt securities that are not actively traded, values 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 (Level 2 inputs). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). See below for additional discussion of Level 3 valuation methodologies and significant inputs.
Non-marketable equity securities: It is not practical to determine the fair value of FHLB stock due to restrictions placed on its transferability.
Loans held for sale: The fair values disclosed are based upon the values of loans with similar characteristics purchased in secondary mortgage markets and are classified as Level 3.
Loans: 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. The fair value of loans is classified as Level 3 within the fair value hierarchy.
Noninterest-bearing deposits: The fair values disclosed are equal to their balance sheet carrying amounts, which represent the amount payable on demand, and are classified as Level 1.
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, and are classified as Level 2. 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.
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, and are classified as Level 2.
Junior subordinated debt: The fair values of the Company's junior subordinated debt 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, and are classified as Level 3.
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. It is the opinion of management that the fair value of these commitments would approximate their carrying value, if drawn upon, and are classified as Level 2.
Accrued interest: The carrying amounts of accrued interest approximate fair value resulting in a Level 2 or Level 3 classification.
21
The carrying amount and estimated fair values of other financial instruments as of March 31, 2017 and December 31, 2016 are as follows:
Carrying amount | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
March 31, 2017 | ||||||||||||||||||||
Financial assets: | ||||||||||||||||||||
Cash and due from banks | $ | 12,716 | $ | 12,716 | $ | - | $ | - | $ | 12,716 | ||||||||||
Interest-bearing deposits with banks | 33,981 | 33,981 | - | - | 33,981 | |||||||||||||||
Securities purchased under resell agreements | - | - | - | - | - | |||||||||||||||
Investments: | ||||||||||||||||||||
Available for sale | 451,089 | - | 451,089 | - | 451,089 | |||||||||||||||
Held to maturity | 7,954 | - | 7,612 | - | 7,612 | |||||||||||||||
Non-marketable equity securities | 3,621 | N/A | N/A | N/A | N/A | |||||||||||||||
Loans held for sale | - | - | - | - | - | |||||||||||||||
Loans, net | 764,469 | - | - | 762,364 | 762,364 | |||||||||||||||
Accrued interest receivable on securities | 1,678 | - | 1,678 | - | 1,678 | |||||||||||||||
Accrued interest receivable on loans | 3,784 | - | - | 3,784 | 3,784 | |||||||||||||||
Accrued interest receivable other | 6 | 6 | 6 | |||||||||||||||||
Off-balance-sheet instruments: | ||||||||||||||||||||
Loan commitments and standby letters of credit | $ | 22 | $ | - | $ | 22 | $ | - | $ | 22 | ||||||||||
Financial liabilities: | ||||||||||||||||||||
Non-interest bearing deposits | $ | 163,110 | $ | 163,110 | $ | - | $ | - | $ | 163,110 | ||||||||||
Interest bearing deposits | 1,043,374 | - | 1,047,962 | - | 1,047,962 | |||||||||||||||
Borrowings | 2,300 | - | 2,802 | - | 2,802 | |||||||||||||||
Junior subordinated debt | 36,931 | - | - | 21,380 | 21,380 | |||||||||||||||
Accrued interest payable | 406 | - | 233 | 173 | 406 |
December 31, 2016 | ||||||||||||||||||||
Financial assets: | ||||||||||||||||||||
Cash and due from banks | $ | 13,537 | $ | 13,537 | $ | - | $ | - | $ | 13,537 | ||||||||||
Interest-bearing deposits with banks | 105,798 | 105,798 | - | - | 105,798 | |||||||||||||||
Securities purchased under resell agreements | - | - | - | - | - | |||||||||||||||
Investments: | - | - | - | - | - | |||||||||||||||
Available for sale | 439,650 | - | 439,650 | - | 439,650 | |||||||||||||||
Held to maturity | 8,824 | - | 8,613 | - | 8,613 | |||||||||||||||
Non-marketable equity securities | 3,812 | N/A | N/A | N/A | N/A | |||||||||||||||
Loans held for sale | - | - | - | - | - | |||||||||||||||
Loans, net | 771,138 | - | - | 770,254 | 770,254 | |||||||||||||||
Accrued interest receivable on securities | 1,873 | - | 1,873 | - | 1,873 | |||||||||||||||
Accrued interest receivable on loans | 3,874 | - | - | 3,874 | 3,874 | |||||||||||||||
Accrued interest receivable other | 296 | - | - | 296 | 296 | |||||||||||||||
Off-balance-sheet instruments: | ||||||||||||||||||||
Loan commitments and standby letters of credit | $ | 26 | $ | - | $ | 26 | $ | - | $ | 26 | ||||||||||
Financial liabilities: | ||||||||||||||||||||
Non-interest bearing deposits | $ | 181,974 | $ | 181,974 | $ | - | $ | - | $ | 181,974 | ||||||||||
Interest bearing deposits | 1,033,115 | - | 1,040,560 | - | 1,040,560 | |||||||||||||||
Long-term borrowings | 2,300 | - | 2,698 | - | 2,698 | |||||||||||||||
Junior subordinated debt | 37,116 | - | - | 20,582 | 20,582 | |||||||||||||||
Accrued interest payable | 10,119 | - | 270 | 9,849 | 10,119 |
Note 17. Regulatory Matters
The payment of dividends by any financial institution is affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations, and a financial institution generally is prohibited from paying any dividends if, following payment thereof, the institution would be undercapitalized.
The Company is subject to statutory and regulatory restrictions on the payment of dividends and generally cannot pay dividends that exceed its net income or which may weaken its financial health. The Company's primary source of cash is dividends from the Bank. Generally, the Bank is subject to certain restrictions on dividends that it may declare without prior regulatory approval. The Bank cannot pay dividends in any calendar year that, in the aggregate, exceed the Bank's year-to-date net income plus its retained income for the two preceding years. Additionally, the Bank cannot pay dividends that are in excess of the amount that would result in the Bank falling below the minimum required for capital adequacy purposes.
Trinity was placed under a Written Agreement by the FRB on September 26, 2013. The Written Agreement requires Trinity to serve as a source of strength to the Bank and restricts Trinity's ability, without written approval of the FRB, to make payments on the Company's junior subordinated debentures, incur or increase any debt, issue dividends and other capital distributions or to repurchase or redeem any Trinity stock. Additionally, the Bank was similarly prohibited from paying dividends to Trinity under the Formal Agreement issued by the Office of Comptroller of the Currency ("OCC") on November 30, 2012 and under the Consent Order, which replaced the Formal Agreement, issued on December 17, 2013. The Consent Order requires that the Bank maintain certain capital ratios and receive approval from the OCC prior to declaring dividends. The Company and the Bank are taking actions to address the provisions of the enforcement actions.
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory—and additional discretionary—actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company's and the Bank's assets, liabilities, and certain off-balance-sheet items are calculated under regulatory accounting practices. The Company's and the Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Prompt corrective action provisions are not applicable to bank holding companies.
22
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined in the regulations), and of Tier 1 capital (as defined in the regulations) to average assets (as defined in the regulations). The Company and the Bank met all capital adequacy requirements to which they were subject as of March 31, 2017 and December 31, 2016.
The statutory requirements and actual amounts and ratios for the Company and the Bank are presented below:
Actual | For Capital Adequacy Purposes | To be well capitalized under prompt corrective action provisions | Minimum Levels Under Order Provisions | |||||||||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||||
March 31, 2017 | ||||||||||||||||||||||||||||||||
Total capital (to risk-weighted assets): | ||||||||||||||||||||||||||||||||
Consolidated | $ | 143,350 | 16.0156 | % | $ | 71,605 | 8.00 | % | N/A | N/A | N/A | N/A | ||||||||||||||||||||
Bank only | 137,778 | 15.3694 | % | 71,716 | 8.00 | % | $ | 89,644 | 10.00 | % | $ | 98,609 | 11.00 | % | ||||||||||||||||||
Tier 1 capital (to risk weighted assets): | ||||||||||||||||||||||||||||||||
Consolidated | 122,294 | 13.6632 | % | 53,704 | 6.00 | % | N/A | N/A | N/A | N/A | ||||||||||||||||||||||
Bank only | 126,517 | 14.1132 | % | 53,787 | 6.00 | % | 71,716 | 8.00 | % | N/A | N/A | |||||||||||||||||||||
Common Equity Tier 1 Capital (to risk weighted assets): | ||||||||||||||||||||||||||||||||
Consolidated | 97,821 | 10.9289 | % | 40,278 | 4.50 | % | N/A | N/A | N/A | N/A | ||||||||||||||||||||||
Bank only | 126,517 | 14.1132 | % | 40,340 | 4.50 | % | 58,269 | 6.50 | % | N/A | N/A | |||||||||||||||||||||
Tier 1 leverage (to average assets): | ||||||||||||||||||||||||||||||||
Consolidated | 122,294 | 9.0656 | % | 53,960 | 4.00 | % | N/A | N/A | N/A | N/A | ||||||||||||||||||||||
Bank only | 126,517 | 9.3414 | % | 54,175 | 4.00 | % | 67,718 | 5.00 | % | 108,349 | 8.00 | % |
N/A—not applicable
Actual | For Capital Adequacy Purposes | To be well capitalized under prompt corrective action provisions | Minimum Levels Under Order Provisions | |||||||||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||||
December 31, 2016 | ||||||||||||||||||||||||||||||||
Total capital (to risk-weighted assets): | ||||||||||||||||||||||||||||||||
Consolidated | $ | 178,906 | 20.0509 | % | $ | 71,381 | 8.00 | % | N/A | N/A | N/A | N/A | ||||||||||||||||||||
Bank only | 137,873 | 15.3793 | % | 71,719 | 8.00 | % | $ | 89,649 | 10.00 | % | $ | 98,614 | 11.00 | % | ||||||||||||||||||
Tier 1 capital (to risk weighted assets): | ||||||||||||||||||||||||||||||||
Consolidated | 167,290 | 18.7490 | % | 53,536 | 6.00 | % | N/A | N/A | N/A | N/A | ||||||||||||||||||||||
Bank only | 126,598 | 14.1216 | % | 53,789 | 6.00 | % | 71,719 | 8.00 | % | N/A | N/A | |||||||||||||||||||||
Common Equity Tier 1 Capital (to risk weighted assets): | ||||||||||||||||||||||||||||||||
Consolidated | 60,840 | 6.8186 | % | 40,152 | 4.50 | % | N/A | N/A | N/A | N/A | ||||||||||||||||||||||
Bank only | 126,598 | 14.1216 | % | 40,342 | 4.50 | % | 58,272 | 6.50 | % | N/A | N/A | |||||||||||||||||||||
Tier 1 leverage (to average assets): | ||||||||||||||||||||||||||||||||
Consolidated | 167,290 | 12.0120 | % | 35,690 | 4.00 | % | N/A | N/A | N/A | N/A | ||||||||||||||||||||||
Bank only | 126,598 | 9.1596 | % | 35,859 | 4.00 | % | 44,824 | 5.00 | % | 71,719 | 8.00 | % |
N/A - not applicable
While the Bank's capital ratios fall into the category of "well-capitalized," the Bank cannot be considered "well-capitalized" due to the requirement to meet and maintain a specific capital level in the Consent Order pursuant to the prompt corrective action rules. The Bank is required to maintain (i) a leverage ratio of Tier 1 Capital to total assets of at least 8%; and (ii) a ratio of Total Capital to total risk-weighted assets of at least 11%. As of March 31, 2017 and December 31, 2016 the Bank was in compliance with these requirements.
Trinity and the Bank are also required to maintain a "capital conservation buffer" of 2.5% above the regulatory minimum risk-based capital requirements. The purpose of the conservation buffer is to ensure that banks maintain a buffer of capital that can be used to absorb losses during periods of financial and economic stress. The capital conservation buffer began to be phased in beginning in January 2016 at 0.625% of risk-weighted assets and will increase by that amount each year until fully implemented in January 2019. An institution would be subject to limitations on certain activities, including payment of dividends, share repurchases and discretionary bonuses to executive officers, if its capital level is below the buffered ratio. Factoring in the fully phased-in conservation buffer increases the minimum ratios described above to 7.0% for Common Equity Tier 1, 8.5% for Tier 1 Capital and 10.5% for Total Capital. At March 31, 2017 the Bank's capital conservation buffer was 7.3694% and the consolidated capital conservation buffer was 6.4289%. At December 31, 2016 the Bank's capital conservation buffer was 7.3793% and the consolidated capital conservation buffer was 2.3186%.
23
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Management's Discussion and Analysis of Financial Condition and Results of Operations analyzes the major elements of the Company's balance sheets and statements of income. This section should be read in conjunction with the Company's consolidated financial statements and accompanying notes included elsewhere in this Quarterly Report on Form 10-Q ("Form 10-Q") and with the consolidated financial statements and accompanying notes and other detailed information appearing elsewhere in the Company's Annual Report on Form 10-K for the year ended December 31, 2016 ("Form 10-K").
Special Note Concerning Forward-Looking Statements
This Form 10-Q 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 are based upon the reasonable 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 Form 10-Q, 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, except as required by law.
The Company's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. The factors, which could cause actual results to differ materially from those expressed in, or implied by, the forward-looking statements and 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 2016 Form 10-K. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.
Overview
Trinity Capital Corporation, a bank holding company organized under the laws of the State of New Mexico, is the sole stockholder of Los Alamos National Bank (the "Bank"), a national banking organization created under the laws of the United States of America. The Bank is regulated by the OCC. Trinity is also the sole shareholder of Title Guarantee & Insurance Company ("Title Guarantee"). The Bank is the sole stockholder of TCC Advisors Corporation ("TCC Advisors"), the sole member of Triscensions ABQ, LLC, a New Mexico limited liability company, and the sole member of FNM Investment Fund IV, LLC, a Delaware Limited Liability Company ("FNM Investment Fund IV"). The Bank is also a member of Cottonwood Technology Group, LLC ("Cottonwood"), a management consulting and counseling company for technology startup companies, which is also designed to manage venture capital funds. FNM Investment Fund IV is a member of Finance New Mexico—Investor Series IV, LLC, a New Mexico Limited Liability Company ("FNM CDE IV"), an entity created by the Bank to fund loans and investments in a New Market Tax Credit project.
The Bank provides a full range of financial services for deposit customers and lends money to creditworthy borrowers at competitive interest rates. The Bank's products include certificates of deposit, checking and saving accounts, on-line banking, Individual Retirement Accounts, loans, mortgage loan servicing, trust and investment services, international services and safe deposit boxes. These business activities make up the Bank's three key processes: investment of funds, generation of funds and service-for-fee income. The profitability of operations depends primarily on the Bank's net interest income, which is the difference between total interest earned on interest-earning assets and total interest paid on interest-bearing liabilities, and its ability to maintain efficient operations. In addition to the Bank's net interest income, it produces income through mortgage servicing operations and noninterest income processes, such as trust and investment services.
The Company's net loss available to common shareholders increased $954 thousand from net loss of $303 thousand for the three months ended March 31, 2016 to net loss of $1.3 million for the three months ended March 31, 2017. This decrease was primarily attributable to an increase of $1.3 million in legal, professional, and account fees due to the finalizing the 2016 financial statement audit, a decrease of $823 thousand in loan interest income, an increase of $714 thousand in data processing expenses, a decrease of $573 thousand in gains on sale of loans, and an increase in other losses of $312 thousand due to the write off of state income tax receivables that were determined to be uncollectable. These were partially offset by a decrease of $933 thousand in amortization and valuation on MSRs, an increase of $622 thousand in other fees, a decrease of $424 thousand in FDIC insurance premiums, a decrease of $329 thousand in salaries and benefits, a decrease of $263 thousand in dividends and discount accretion on preferred shares due to the redemption of Series A Preferred Stock shares and Series B Preferred Stock shares in the quarter, and a decrease of $164 thousand in deposit interest expense.
The Company continues to experience challenges in its loan portfolio, with high levels of non-performing loans and foreclosed properties. In response to these challenges and to proactively position the Company to meet these challenges, we continue to reduce our concentrations in the construction real estate portfolio and have taken other steps in compliance with the regulatory enforcement actions taken against the Company and the Bank.
Regulatory Actions against the Company and the Bank.
As discussed in the Part I, Item 1, of the 2016 Form 10-K, the FRB entered into the Written Agreement with Trinity. The Written Agreement requires Trinity to serve as a source of strength to the Bank and restricts Trinity's ability to issue dividends and other capital distributions and to repurchase or redeem any Trinity stock without the prior written approval of the FRB. The Written Agreement further requires that Trinity implement a capital plan, subject to approval by the FRB, and submit cash flow projections to the FRB. Finally, the Written Agreement requires Trinity to comply with all applicable laws and regulations and to provide quarterly progress reports to the FRB. Additionally, the Bank entered into a Consent Order with the OCC. The Consent Order focuses on improving the Bank's credit administration, credit underwriting, internal controls, compliance and management supervision. Additionally, the Consent Order requires that the Bank maintain certain capital ratios and receive approval of the OCC prior to declaring dividends. The Consent Order requires the Bank to maintain the following minimum capital ratios: (i) a leverage ratio of Tier 1 Capital to total assets of at least 8%; and (ii) a ratio of Total Capital to total risk-weighted assets of at least 11%. The Company continues to take action to ensure the satisfaction of the requirements under the Consent Order and the Written Agreement.
Critical Accounting Policies
Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. We believe that the most critical accounting policies upon which our financial condition and results of operation depend, and which involve the most complex subjective decisions or assessments, are included in the discussion entitled "Critical Accounting Policies" in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," in the 2016 Form 10-K, and all amendments thereto, as filed with the Securities and Exchange Commission. There have been no material changes to the critical accounting policies disclosed in the 2016 Form 10-K.
Results of Operations
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 noninterest income and noninterest expenses.
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. 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. Noninterest income and noninterest expenses are impacted by growth of operations and growth in the number of accounts. Noninterest expenses are impacted by additional employees, branch facilities and promotional marketing expenses. A number of accounts affect noninterest income, including service fees as well as noninterest expenses such as computer services, supplies, postage, telecommunications and other miscellaneous expenses.
24
Net Income (Loss). Net loss available to common shareholders for the three months ended March 31, 2017 was $1.3 million, or a diluted loss per common share of $0.10, compared to net loss available to common shareholders of $303 thousand for the three months ended March 31, 2016, or diluted loss per common share of $0.05, an increase of $954 thousand in net losses and an increase in diluted loss per common share of $0.05. This increase in net loss available to common shareholders was primarily due to an increase of $1.3 million in legal, professional, and account fees due to the finalizing the 2016 financial statement audit, a decrease of $823 thousand in loan interest income, an increase of $714 thousand in data processing expenses, a decrease of $573 thousand in gains on sale of loans, and an increase in other losses of $312 thousand due to the write off of state income tax receivables that were determined to be uncollectable. These were partially offset by a decrease of $933 thousand in amortization and valuation on MSRs, an increase of $622 thousand in other fees, a decrease of $424 thousand in FDIC insurance premiums, a decrease of $329 thousand in salaries and benefits, a decrease of $263 thousand in dividends and discount accretion on preferred shares due to the redemption of Series A Preferred Stock shares and Series B Preferred Stock shares in the first quarter of 2017, and a decrease of $164 thousand in deposit interest expense.
Net Interest Income. The following table presents 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 for the periods indicated:
Three Months Ended March 31, | ||||||||||||||||||||||||
2017 | 2016 | |||||||||||||||||||||||
Average Balance | Interest | Yield /Rate | Average Balance | Interest | Yield /Rate | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Interest-earning Assets: | ||||||||||||||||||||||||
Loans(1) | $ | 779,447 | $ | 9,307 | 4.84 | % | $ | 829,795 | $ | 10,130 | 4.91 | % | ||||||||||||
Taxable investment securities | 416,521 | 1,672 | 1.63 | % | 376,444 | 1,731 | 1.85 | % | ||||||||||||||||
Investment securities exempt from federal income taxes | 42,122 | 246 | 2.37 | % | 3,427 | 17 | 2.00 | % | ||||||||||||||||
Securities purchased under resell agreements | - | - | 0.00 | % | 12,477 | 45 | 1.45 | % | ||||||||||||||||
Other interest-bearing deposits | 51,866 | 106 | 0.83 | % | 128,958 | 150 | 0.47 | % | ||||||||||||||||
Non-marketable equity securities | 4,004 | 55 | 5.57 | % | 3,999 | 53 | 5.33 | % | ||||||||||||||||
Total interest-earning assets | 1,293,960 | 11,386 | 3.57 | % | 1,355,100 | 12,126 | 3.60 | % | ||||||||||||||||
Non-interest-earning assets | 57,906 | 57,211 | ||||||||||||||||||||||
Total assets | $ | 1,351,866 | $ | 1,412,311 | ||||||||||||||||||||
Interest-bearing Liabilities: | ||||||||||||||||||||||||
Deposits: | ||||||||||||||||||||||||
NOW deposits | $ | 392,990 | $ | 62 | 0.06 | % | $ | 392,336 | $ | 66 | 0.07 | % | ||||||||||||
Money market deposits | 17,652 | 4 | 0.09 | % | 43,168 | 5 | 0.05 | % | ||||||||||||||||
Savings deposits | 409,958 | 82 | 0.08 | % | 387,571 | 81 | 0.08 | % | ||||||||||||||||
Time deposits over $100,000 | 131,638 | 200 | 0.62 | % | 151,934 | 290 | 0.77 | % | ||||||||||||||||
Time deposits under $100,000 | 77,591 | 111 | 0.58 | % | 127,287 | 181 | 0.57 | % | ||||||||||||||||
Short-term borrowings | - | - | 0.00 | % | - | - | 0.00 | % | ||||||||||||||||
Long-term borrowings | 2,300 | 36 | 6.35 | % | 2,300 | 36 | 6.30 | % | ||||||||||||||||
Long-term capital lease obligation | 2,211 | - | 0.00 | % | 2,211 | - | 0.00 | % | ||||||||||||||||
Junior subordinated debt | 37,116 | 720 | 7.87 | % | 37,116 | 707 | 7.66 | % | ||||||||||||||||
Total interest-bearing liabilities | 1,071,456 | 1,215 | 0.46 | % | 1,143,923 | 1,366 | 0.48 | % | ||||||||||||||||
Demand deposits, noninterest-bearing | 160,790 | 157,779 | ||||||||||||||||||||||
Other noninterest-bearing liabilities | 14,163 | 30,070 | ||||||||||||||||||||||
Stockholders' equity, including stock owned by ESOP | 105,457 | 80,539 | ||||||||||||||||||||||
Total liabilities and stockholders equity | $ | 1,351,866 | $ | 1,412,311 | ||||||||||||||||||||
Net interest income/interest rate spread (2) | $ | 10,171 | 3.11 | % | $ | 10,760 | 3.12 | % | ||||||||||||||||
Net interest margin (3) | 3.19 | % | 3.19 | % |
(1) | Average loans include nonaccrual loans of $16.1 million and $25.0 million for the three months ended March 31, 2017 and 2016, respectively. Interest income includes loan origination fees of $275 thousand and $355 thousand for the three months ended March 31, 2017 and 2016, respectively. |
(2) | Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. |
(3) | Net interest margin represents net interest income as a percentage of average interest-earning assets. |
Net interest income decreased $589.0 thousand to $10.2 million as of March 31, 2017 from $10.8 million as of March 31, 2016 due to lower interest income of $740 thousand offset by a decrease in interest expense of $151 thousand from 2016. Net interest income decreased primarily due to a lower average volume of loans of $50.3 million partially offset by an increase in average taxable investment securities of $40.1 million. The decrease volume of loans and earning assets in general partially offset by the higher volume of securities resulted in the average yield on earning assets decreasing three basis points to 3.57% for the three months ended March 31, 2017 from 3.60% for the three months ended March 31, 2016. The decrease in interest expense was primarily due to a decrease in the average volume of time deposits of $70.0 million, a decrease in average volume of $25.5 million in money market deposits, partially offset by an increase in average savings deposits of $22.4 million. The shift in deposit mix caused the cost of interest-bearing liabilities to decline two basis points to 0.46% for the three months ended March 31, 2017 from 0.48% for the three months ended March 31, 2016. The decrease in the cost of funds on interest-bearing liabilities is a result of an effort by management to decrease the cost of funds and increase the overall net interest margin, causing existing deposits to reprice at lower interest rates, and causing new deposits to be priced at lower interest rates. Net interest margin remained flat at 3.19% for the three months ended March 31, 2017 and March 31, 2016.
25
Volume, Mix and Rate Analysis of Net Interest Income. The following table presents the extent to which changes in volume and interest rates of interest-earning assets and interest-bearing liabilities have affected 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) and (ii) changes attributable to changes in interest rate (changes in rate times the prior period 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, | ||||||||||||
2017 Compared to 2016 | ||||||||||||
Change Due to Volume | Change Due to Rate | Total Change | ||||||||||
(In thousands) | ||||||||||||
Interest-earning Assets: | ||||||||||||
Loans | $ | (615 | ) | $ | (208 | ) | $ | (823 | ) | |||
Taxable investment securities | 184 | (243 | ) | (59 | ) | |||||||
Investment securities exempt from federal income taxes | 192 | 37 | 229 | |||||||||
Securities purchased under resell agreements | (45 | ) | - | (45 | ) | |||||||
Other interest bearing deposits | (90 | ) | 46 | (44 | ) | |||||||
Non-marketable equity securities | - | 2 | 2 | |||||||||
Total (decrease) increase in interest income | $ | (374 | ) | $ | (366 | ) | $ | (740 | ) | |||
Interest-bearing Liabilities: | ||||||||||||
Now deposits | $ | - | $ | (4 | ) | $ | (4 | ) | ||||
Money market deposits | (3 | ) | 2 | (1 | ) | |||||||
Savings deposits | 5 | (4 | ) | 1 | ||||||||
Time deposits over $100,000 | (39 | ) | (51 | ) | (90 | ) | ||||||
Time deposits under $100,000 | (71 | ) | 1 | (70 | ) | |||||||
Short-term borrowings | - | - | - | |||||||||
Long-term borrowings | - | - | - | |||||||||
Capital long-term lease obligation | - | - | - | |||||||||
Junior subordinated debt | - | 13 | 13 | |||||||||
Total increase (decrease) in interest expense | $ | (108 | ) | $ | (43 | ) | $ | (151 | ) | |||
Increase (decrease) in net interest income | $ | (266 | ) | $ | (323 | ) | $ | (589 | ) |
Noninterest Income. Changes in noninterest income were as follows for the periods indicated:
Three Months Ended March 31, 2017, | ||||||||||||
2017 | 2016 | Net difference | ||||||||||
(In thousands) | ||||||||||||
Noninterest income: | ||||||||||||
Mortgage loan servicing fees | $ | 486 | $ | 550 | $ | (64 | ) | |||||
Trust and investment services fees | 651 | 632 | 19 | |||||||||
Service charges on deposits | 295 | 294 | 1 | |||||||||
Net gain (loss) on sale of OREO | 328 | 258 | 70 | |||||||||
Net gain on sale of loans | - | 573 | (573 | ) | ||||||||
Net gain (loss) on sale of securities | - | - | - | |||||||||
BOLI income | 91 | - | 91 | |||||||||
Mortgage referral fees | 327 | - | 327 | |||||||||
Other fees | 560 | 265 | 295 | |||||||||
Other noninterest income | (21 | ) | 52 | (73 | ) | |||||||
Total noninterest income | $ | 2,717 | $ | 2,624 | $ | 93 |
Noninterest income increased $93 thousand to $2.7 million for the three months ended March 31, 2017 from $2.6 million for the three months ended March 31, 2016, primarily attributable to an increase of $360 thousand in interchange fees from MasterCard due to a one-time true up of fees, an increase of $327 thousand in mortgage referral fee income, an increase of $91 thousand in BOLI income, and an increase of $70 thousand in gain on sale of OREO. Those increases were partially offset by decrease in gains on sale of loans of $573 thousand, a decrease of $64 thousand in mortgage loan servicing fees, and a decrease of $43 thousand in venture capital investments.
26
Impact of Inflation and Changing Prices. The primary impact of inflation on our operations is increased operating costs. Unlike industrial companies, nearly all of our assets and liabilities are monetary in nature. As a result, interest rates have a greater impact on our performance than do the effects of general levels of inflation. Over short periods of time, interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services.
Noninterest Expenses. Changes in noninterest expenses were as follows for the periods indicated:
Three Months Ended March 31, | ||||||||||||
2017 | 2016 | Net difference | ||||||||||
(In thousands) | ||||||||||||
Noninterest expenses: | ||||||||||||
Salaries and employee benefits | $ | 6,037 | $ | 6,366 | $ | (329 | ) | |||||
Occupancy | 686 | 839 | (153 | ) | ||||||||
Data processing | 1,374 | 660 | 714 | |||||||||
Legal, professional, and accounting fees | 2,633 | 1,359 | 1,274 | |||||||||
Amortization and valuation of MSRs | 238 | 1,171 | (933 | ) | ||||||||
Other noninterest expenses: | ||||||||||||
Marketing | 258 | 258 | - | |||||||||
Supplies | 77 | 109 | (32 | ) | ||||||||
Postage | 197 | 166 | 31 | |||||||||
FDIC insurance premiums | 311 | 735 | (424 | ) | ||||||||
Collection expenses | 209 | 132 | 77 | |||||||||
Other | 1,850 | 858 | 992 | |||||||||
Total other noninterest expenses | 2,902 | 2,258 | 644 | |||||||||
Total noninterest expenses | $ | 13,870 | $ | 12,653 | $ | 1,217 |
Noninterest expenses increased $1.2 million to $13.9 million for the three months ended March 31, 2017 from $12.7 million for the three months ended March 31, 2016. This increase was primarily attributable to an increase of $1.3 million in legal, professional, and accounting fees due to finalizing the 2016 financial statement audit, an increase of $714 thousand in data processing, a total increase in the other category of $992 thousand primarily due to an increase of $163 thousand in customer perks and sponsorships, an increase of $98 thousand in director fees and expenses, an increase of $89 thousand in loan closing fees, an increase of $77 thousand in collection expenses, an increase of $51 thousand in shareholder expenses, an increase in losses of $43 thousand, and an increase of $31 thousand in postage. These increases were partially offset by a decrease of $933 thousand in amortization and valuation of MSRs, and a decrease of $424 thousand in FDIC insurance premiums.
Income Taxes. Benefit for income taxes increased $526 thousand for the three months ended March 31, 2017 from the three months ended March 31, 2016. There was a benefit for taxes for the three months ended March 31, 2017 of $526 thousand. No provision or tax benefit was recognized in 2016.
Financial Condition
Balance Sheet-General. Total assets as of March 31, 2017 were $1.36 billion, decreasing $69.4 million from $1.43 billion as of December 31, 2016. During 2017, interest bearing deposits with banks decreased $71.8 million and net loans decreased $6.7 million, but were partially offset by an increase in investment securities available for sale of $11.4 million. During the same period total liabilities decreased to $1.26 billion, an decrease of $31.7 million. Stockholders' equity (excluding stock owned by the ESOP) decreased $37.6 million to $96.5 million as of March 31, 2017 compared to $134.1 million as of December 31, 2016 primarily due to the redemption of the Series A Preferred Stock and Series B Preferred Stock.
Investment Securities. We primarily utilize our investment portfolio to provide a source of earnings, to manage 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 "Sources of Funds" included in Item 7 and "Asset Liability Management" included under Item 7A of the 2016 Form 10-K.
The following table sets forth the amortized cost and fair value of our securities portfolio as of the dates indicated:
At March 31, 2017 | At December 31, 2016 | |||||||||||||||
Amortized Cost | Fair Value | Amortized Cost | Fair Value | |||||||||||||
(In thousands) | ||||||||||||||||
Securities Available for Sale: | ||||||||||||||||
U.S. Government sponsored agency | $ | 79,332 | $ | 78,989 | $ | 69,306 | $ | 68,828 | ||||||||
State and political subdivision | 51,705 | 50,535 | 38,718 | 3,734 | ||||||||||||
Residential mortgage-backed security | 196,125 | 193,831 | 206,101 | 203,819 | ||||||||||||
Residential collateralized mortgage obligation | 14,069 | 14,049 | 14,828 | 14,816 | ||||||||||||
Commercial mortgage backed security | 115,810 | 113,022 | 117,272 | 114,172 | ||||||||||||
SBA pools | 674 | 663 | 681 | 672 | ||||||||||||
Totals | $ | 457,715 | $ | 451,089 | $ | 446,906 | $ | 406,041 | ||||||||
Securities Held to Maturity: | ||||||||||||||||
SBA pools | $ | 7,954 | $ | 7,612 | $ | 8,824 | $ | 8,613 | ||||||||
Totals | $ | 7,954 | $ | 7,612 | $ | 8,824 | $ | 8,613 |
U.S. government sponsored agency securities generally consist of fixed rate securities with maturities from four months to six years. States and political subdivision investment securities consist of a local issue rated "Aa1" by Moody's Investment Services with maturities of four months to fifteen years.
27
The Company had a total of $14.0 million in residential collateralized mortgage obligations as of March 31, 2017. The residential collateralized mortgage obligations were private label issued or issued by U.S. government sponsored agencies. At the time of purchase, the ratings of these securities ranged from AAA to Aaa. As of March 31, 2017, the ratings of these securities were Aaa, which are considered "Investment Grade" (rating of "BBB" or higher). At the time of purchase and on a monthly basis, the Company reviews these securities for impairment on an other than temporary basis. The Company utilizes several external sources to evaluate prepayments, delinquencies, loss severity, and other factors in determining if there is impairment. As of March 31, 2017, 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.
As of March 31, 2017 and December 31, 2016, securities of no single issuer exceeded 10% of stockholders' equity, except for U.S. government sponsored agency securities.
The following table sets forth certain information regarding contractual maturities and the weighted average yields of our securities portfolio as of the date indicated:
Due in One Year or Less | Due after One Year through Five Years | Due after Five Years through Ten Years | Due after Ten Years or no stated Maturity | |||||||||||||||||||||||||||||
Balance | Weighted Average Yield | Balance | Weighted Average Yield | Balance | Weighted Average Yield | Balance | Weighted Average Yield | |||||||||||||||||||||||||
As of March 31, 2017 | (Dollars in thousands) | |||||||||||||||||||||||||||||||
Securities Available for Sale: | ||||||||||||||||||||||||||||||||
U.S. Government sponsored agency | $ | 9,997 | 0.80 | % | $ | 39,484 | 1.73 | % | $ | 29,508 | 2.14 | % | $ | - | 0.00 | % | ||||||||||||||||
States and political subdivision (1) | 201 | 1.10 | % | 1,307 | 1.71 | % | 1,776 | 2.45 | % | 47,251 | 2.47 | % | ||||||||||||||||||||
Mortgage backed | - | 0.00 | % | 21,818 | 1.71 | % | 87,169 | 2.25 | % | 211,915 | 2.16 | % | ||||||||||||||||||||
SBA pools | - | 0.00 | % | - | 0.00 | % | - | 0.00 | % | 663 | 1.55 | % | ||||||||||||||||||||
Asset-backed security | - | 0.00 | % | - | 0.00 | % | - | 0.00 | % | - | 2.35 | % | ||||||||||||||||||||
Totals | $ | 10,198 | 0.53 | % | $ | 62,609 | 0.80 | % | $ | 118,453 | 2.13 | % | $ | 259,829 | 1.65 | % | ||||||||||||||||
Securities Held to Maturity: | ||||||||||||||||||||||||||||||||
SBA pools | $ | - | 0.00 | % | $ | - | 0.00 | % | $ | - | 0.00 | % | $ | 7,954 | 3.29 | % | ||||||||||||||||
Totals | $ | - | 0.00 | % | $ | - | 0.00 | % | $ | - | 0.00 | % | $ | 7,954 | 3.29 | % |
(1) | Yield is reflected adjusting for federal and state exemption of interest income and certain other permanent income tax differences. |
Loan Portfolio. With management's focus on reducing the amount of non-performing loans, levels of total loans decreased steadily from 2012 to 2017. The total amounts in the residential real estate and construction real estate loan portfolios have steadily decreased primarily due to the Bank's strategy to diversify its portfolio.
The following table sets forth the composition of the loan portfolio:
March 31, 2017 | December 31, 2016 | |||||||||||||||
Amount | Percent | Amount | Percent | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Commercial | $ | 74,637 | 9.57 | % | $ | 69,161 | 8.79 | % | ||||||||
Commercial real estate | 407,317 | 52.21 | % | 405,900 | 51.58 | % | ||||||||||
Residential real estate | 205,381 | 26.33 | % | 214,726 | 27.29 | % | ||||||||||
Construction real estate | 73,128 | 9.38 | % | 75,972 | 9.66 | % | ||||||||||
Installment and other | 19,547 | 2.51 | % | 21,053 | 2.68 | % | ||||||||||
Total loans | 780,010 | 100.00 | % | 786,812 | 100.00 | % | ||||||||||
Unearned income | (1,354 | ) | (1,322 | ) | ||||||||||||
Gross loans | 778,656 | 785,490 | ||||||||||||||
Allowance for loan losses | (14,187 | ) | (14,352 | ) | ||||||||||||
Net loans | $ | 764,469 | $ | 771,138 |
Net loans decreased $6.7 million from $771.1 million as of December 31, 2016 to $764.5 million as of March 31, 2017. The largest decreases were in gross residential real estate loans of $9.3 million, construction real estate of $2.8 million, and installment and other loans of $1.5 million, partially offset by increases in gross commercial loans of $5.5 million and gross commercial real estate loans of $1.4 million.
Loan Maturities. The following table sets forth the maturity or repricing information for loans outstanding as of March 31, 2017:
Due in One Year or Less | Due after one Year through Five Years | Due after Five Years | Total | |||||||||||||||||||||||||||||
Fixed Rate | Variable Rate | Fixed Rate | Variable Rate | Fixed Rate | Variable Rate | Fixed Rate | Variable Rate | |||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||||
Commercial | $ | 8,341 | $ | 32,146 | $ | 23,807 | $ | 660 | $ | 9,683 | $ | - | $ | 41,831 | $ | 32,806 | ||||||||||||||||
Commercial real estate | 20,171 | 125,332 | 66,457 | 69,291 | 113,632 | 12,434 | 200,260 | 207,057 | ||||||||||||||||||||||||
Residential real estate | 813 | 101,398 | 5,002 | 18,234 | 78,139 | 1,795 | 83,954 | 121,427 | ||||||||||||||||||||||||
Construction real estate | 13,812 | 40,042 | 3,808 | 433 | 8,860 | 6,173 | 26,480 | 46,648 | ||||||||||||||||||||||||
Installment and other | 988 | 9,931 | 4,170 | - | 4,458 | - | 9,616 | 9,931 | ||||||||||||||||||||||||
Total loans | $ | 44,125 | $ | 308,849 | $ | 103,244 | $ | 88,618 | $ | 214,772 | $ | 20,402 | $ | 362,141 | $ | 417,869 |
28
Asset Quality. Over the past several years, the Bank experienced improvements in asset quality.
The following table sets forth the amounts of non-performing loans and non-performing assets as of the dates indicated:
March 31, | December 31, | |||||||
2017 | 2016 | |||||||
(Dollars in thousands) | ||||||||
Non-accruing loans | $ | 16,715 | $ | 21,478 | ||||
Loans 90 days or more past due, still accruing interest | 261 | - | ||||||
Total non-performing loans | 16,976 | 21,478 | ||||||
OREO | 7,991 | 8,436 | ||||||
Total non-performing assets | $ | 24,967 | $ | 29,914 | ||||
TDRs, still accruing interest | $ | 36,383 | $ | 35,158 | ||||
Total non-performing loans to total loans | 2.18 | % | 2.73 | % | ||||
Allowance for loan losses to non- performing loans | 83.57 | % | 66.82 | % | ||||
Total non-performing assets to total assets | 1.84 | % | 2.10 | % |
As of March 31, 2017, total non-performing assets decreased $4.9 million to $25.0 million from $29.9 million as of December 31, 2016 primarily due to an decrease in non-accruing loans of $4.8 million. Commercial real estate non-accruing loans decreased $2.2 million, construction loans decreased $1.8 million, residential real estate loans decreased $440 thousand and commercial loans decreased $275 thousand.
The following table presents data related to non-performing loans by dollar amount and category as of the dates indicated:
Commercial | Commercial real estate | Residential real estate | ||||||||||||||||||||||
Dollar Range | Number of Borrowers | Amount | Number of Borrowers | Amount | Number of Borrowers | Amount | ||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
March 31, 2017 | ||||||||||||||||||||||||
$5.0 million or more | - | $ | - | - | $ | - | - | $ | - | |||||||||||||||
$3.0 million to $4.9 million | - | - | - | - | - | - | ||||||||||||||||||
$1.5 million to $2.9 million | - | - | - | - | - | - | ||||||||||||||||||
Under $1.5 million | 11 | 917 | 12 | 3,623 | 51 | 3,807 | ||||||||||||||||||
Total | 11 | $ | 917 | 12 | $ | 3,623 | 51 | $ | 3,807 | |||||||||||||||
Percentage of individual loan category | 1.23 | % | 0.89 | % | 1.85 | % | ||||||||||||||||||
December 31, 2016 | ||||||||||||||||||||||||
$5.0 million or more | - | $ | - | - | $ | - | - | $ | - | |||||||||||||||
$3.0 million to $4.9 million | - | - | - | - | - | - | ||||||||||||||||||
$1.5 million to $2.9 million | - | - | 1 | 2,212 | - | - | ||||||||||||||||||
Under $1.5 million | 14 | 1,192 | 11 | 3,611 | 50 | 4,247 | ||||||||||||||||||
Total | 14 | $ | 1,192 | 12 | $ | 5,823 | 50 | $ | 4,247 | |||||||||||||||
Percentage of individual loan category | 1.69 | % | 1.43 | % | 1.99 | % |
Continued:
Construction real estate | Installment & other loans | Total | ||||||||||||||||||||||
Dollar Range | Number of Borrowers | Amount | Number of Borrowers | Amount | Number of Borrowers | Amount | ||||||||||||||||||
March 31, 2017 | ||||||||||||||||||||||||
$5.0 million or more | - | $ | - | - | $ | - | - | $ | - | |||||||||||||||
$3.0 million to $4.9 million | - | - | - | - | - | - | ||||||||||||||||||
$1.5 million to $2.9 million | 2 | 4,851 | - | - | 2 | 4,851 | ||||||||||||||||||
Under $1.5 million | 16 | 3,508 | 1 | 9 | 91 | 11,864 | ||||||||||||||||||
Total | 18 | $ | 8,359 | 1 | $ | 9 | 93 | $ | 16,715 | |||||||||||||||
Percentage of individual loan category | 11.43 | % | 0.05 | % | 2.14 | % | ||||||||||||||||||
December 31, 2016 | ||||||||||||||||||||||||
$5.0 million or more | - | $ | - | - | $ | - | - | $ | - | |||||||||||||||
$3.0 million to $4.9 million | - | - | - | - | - | - | ||||||||||||||||||
$1.5 million to $2.9 million | 3 | 6,596 | - | - | 4 | 8,808 | ||||||||||||||||||
Under $1.5 million | 17 | 3,563 | 4 | 57 | 96 | 12,670 | ||||||||||||||||||
Total | 20 | $ | 10,159 | 4 | $ | 57 | 100 | $ | 21,478 | |||||||||||||||
Percentage of individual loan category | 13.37 | % | 0.27 | % | 2.73 | % |
29
Non-performing loans include (i) loans accounted for on a nonaccrual basis and (ii) accruing loans contractually past due 90 days or more as to interest and principal. Management reviews the loan portfolio for problem loans on a regular basis with additional resources dedicated to resolving the non-performing loans. Additional internal controls were implemented to ensure the timely identification of signs of weaknesses in credits, facilitating efforts to rehabilitate or exit the relationship in a timely manner. External loan reviews, which have been conducted on a regular basis, were also revised to ensure a broad scope and reviewers have access to all elements of a relationship. In 2016 a significant portion of the loan portfolio was also examined by independent third party consultants.
The following table presents an analysis of the allowance for loan losses for the periods indicated:
Three Months Ended March 31, | ||||||||
2017 | 2016 | |||||||
(Dollars in thousands) | ||||||||
Balance at beginning of year | $ | 14,352 | 17,392 | |||||
Provision for loan losses | 30 | 0 | ||||||
Charge-offs: | ||||||||
Commercial | 186 | 181 | ||||||
Commercial real estate | - | 4 | ||||||
Residential real estate | 244 | 324 | ||||||
Construction real estate | 16 | 18 | ||||||
Installment and other | 137 | 170 | ||||||
Total charge-offs | 583 | 697 | ||||||
Recoveries : | ||||||||
Commercial | 173 | 351 | ||||||
Commercial real estate | 88 | 14 | ||||||
Residential real estate | 55 | 37 | ||||||
Construction real estate | 10 | 97 | ||||||
Installment and other | 62 | 111 | ||||||
Total recoveries | 388 | 610 | ||||||
Net charge-offs | 195 | 87 | ||||||
Balance at end of year | $ | 14,187 | 17,305 |
Net charge-offs for three months ended March 31, 2017 totaled $195 thousand, an increase of $108 thousand from three months ended March 31, 2016 primarily due to increases in net charge-offs in commercial loans of $183 thousand, construction loans of $85 thousand, and other loans of $16 thousand. These were partially offset by decreases in net charge-offs for residential real estate loans of $98 thousand and decreases in net charge-offs of commercial real estate loans of $78 thousand.
The following table sets forth the allocation of the allowance for loan losses and the percentage of loans in each classification to total loans for the periods indicated:
March 31, 2017 | December 31, 2016 | |||||||||||||||
Amount | Percent | Amount | Percent | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Commercial | $ | 1,756 | 12.38 | % | $ | 1,449 | 10.10 | % | ||||||||
Commercial real estate | 6,573 | 46.34 | % | 6,472 | 45.09 | % | ||||||||||
Residential real estate | 4,126 | 29.08 | % | 4,524 | 31.52 | % | ||||||||||
Construction real estate | 1,086 | 7.65 | % | 1,119 | 7.80 | % | ||||||||||
Installment and other | 644 | 4.54 | % | 715 | 4.98 | % | ||||||||||
Unallocated | 2 | 0.01 | % | 73 | 0.51 | % | ||||||||||
Total | $ | 14,187 | 100.00 | % | $ | 14,352 | 100.00 | % |
The allowance for loan losses decreased $165 thousand from $14.4 million as of December 31, 2016 to $14.2 million as of March 31, 2017. This reduction was largely due to increased net charge-offs. A $30 thousand provision for loan loss was required for the three months ended March 31, 2017. A $1.8 million provision for loan loss was required as of December 31, 2016. The decrease in provision was driven by the $6.7 million dollar decrease in the loan portfolio.
30
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 allocation of the allowance for impaired credits is equal to the recorded investment in the loan using 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 the loan. An impairment reserve that exceeds collateral value is charged to the allowance for loan losses in the period it is identified. Total loans which were deemed to have been impaired, including both performing and non-performing loans, as of March 31, 2017 and December 31, 2016 were $50.2 million and $53.8 million, respectively. Impaired loans that are deemed collateral dependent have been charged down to the value of the collateral (based upon the most recent valuations), less estimated disposition costs. Impaired loans with specifically identified allocations of allowance for loan losses had a total of $2.9 million and $3.0 million allocated in the allowance for loan losses as of March 31, 2017 and December 31, 2016, respectively.
TDRs are defined as those loans whose terms have been modified, due to deterioration in the financial condition of the borrower in which the Company grants concessions to the borrower in the restructuring that it would not otherwise consider. Total loans which were considered TDRs as of March 31, 2017 and December 31, 2016 were $42.7 million and $43.1 million, respectively. Of these, $36.4 million and $35.2 million were still performing in accordance with modified terms as of March 31, 2017 and December 31, 2016, respectively.
Although the Company believes the allowance for loan losses is sufficient to cover probable incurred 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. We utilize an internal asset classification system as a means of reporting problem and potential problem assets. At the scheduled meetings of the Board of Directors of the Bank, a watch list is presented, listing significant loan relationships as "Special Mention," "Substandard," "Doubtful" and "Loss." Substandard assets include those characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. Assets classified as Doubtful have all the weaknesses inherent in those classified as Substandard with the added characteristic that the weaknesses present make collection or liquidation in full highly questionable and improbable, on the basis of currently existing facts, conditions and values. Assets classified as "Loss" are those considered uncollectible and viewed as valueless assets and have been charged-off. Assets that do not currently expose us to sufficient risk to warrant classification in one of the aforementioned categories, but possess weaknesses that deserve management's close attention are deemed to be Special Mention.
Our determination as to the classification of our assets and the amount of our valuation allowances is subject to review by the OCC, which can order the establishment of additional general or specific loss allowances. There can be no assurance that regulators, in reviewing our loan portfolio, will not request us to materially adjust our allowance for loan losses. 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 establish effective systems and controls to identify, monitor and address asset quality problems; (ii) management has analyzed all significant factors that affect the collectability of the portfolio in a reasonable manner; and (iii) management established 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. We analyze our process regularly, with modifications made if needed, and report those results four times per year at meetings of our Audit Committee.
Although management believes that adequate specific and general allowance for loan losses have been established, actual losses are dependent upon future events and, as such, further additions to the level of specific and general allowance for loan losses may become necessary.
We define potential problem loans as performing loans rated Substandard that do not meet the definition of a non-performing loan.
The following table shows the amounts of performing but adversely classified assets and special mention loans as of the periods indicated:
March 31, | December 31, | |||||||
2017 | 2016 | |||||||
(In thousands) | ||||||||
Performing loans classified as: | ||||||||
Substandard | $ | 23,076 | $ | 22,573 | ||||
Total performing adversely classified loans | $ | 23,076 | $ | 22,573 | ||||
Special mention loans | $ | 13,307 | $ | 18,589 |
The table above does not include nonaccrual loans that are less than 30 days past due. Total performing adversely classified assets as of March 31, 2017 were $23.1 million, a decrease of $503 thousand from $22.6 million as of December 31, 2016. The declines were primarily in the commercial loan and residential real estate loan categories. In addition, special mention loans decreased $5.3 million. These declines were in all loan categories. For further discussion of loans, see Note 6 "Loans and Allowance for Loan Losses" in Part I, Item 1, "Financial Statements and Supplementary Data" of the 2016 Form 10-K.
31
Sources of Funds
General. Deposits, short-term and long-term borrowings, loan and investment security repayments and prepayments, proceeds from the sale of securities, and cash flows generated from operations are the primary sources of our funds for lending, investing and other general purposes. Loan repayments are a relatively predictable source of funds except during periods of significant interest rate declines, while deposit flows tend to fluctuate with prevailing interests rates, money market conditions, general economic conditions and competition.
Deposits. We offer a variety of deposit accounts with a range of interest rates and terms. Our core deposits consist of checking accounts, NOW accounts, MMDA, savings accounts and non-public certificates of deposit. These deposits, along with public fund deposits and short-term and long-term borrowings are used to support our asset base. Our deposits are obtained predominantly from our market areas. We rely primarily on competitive rates along with customer service and long-standing relationships with customers to attract and retain deposits; however, market interest rates and rates offered by competing financial institutions significantly affect our ability to attract and retain deposits.
The following table sets forth the maturities of time deposits of $250 thousand or more for the period indicated:
March 31, 2017 (In thousands) | ||||
Maturing within three months | $ | 4,774 | ||
After three but within six months | 2,060 | |||
After six but within twelve months | 8,317 | |||
After twelve but within three years | 4,234 | |||
After three years | 6,221 | |||
Total time deposits $250,000 and over | $ | 25,606 |
Borrowings. We have access to a variety of borrowing sources and use short-term and long-term borrowings to support our asset base. Short-term borrowings were advances from the FHLB with remaining maturities under one year. Long-term borrowings are advances from the FHLB with remaining maturities over one year.
There was $2.3 million outstanding in FHLB borrowings at March 31, 2017 and 2016.
Liquidity
Bank Liquidity. Liquidity management is monitored by the Asset/Liability Management Committee and Board of Directors of the Bank, which review historical funding requirements, current liquidity position, sources and stability of funding, marketability of assets, options for attracting additional funds, and anticipated future funding needs, including the level of unfunded commitments.
Our primary sources of funds are retail and commercial deposits, borrowings, public funds and funds generated from operations. Funds from operations include principal and interest payments received on loans and securities. While maturities and scheduled amortization of loans and securities provide an indication of the timing of the receipt of funds, changes in interest rates, economic conditions and competition strongly influence mortgage prepayment rates and deposit flows, reducing the predictability of the timing on sources of funds.
We adhere to a liquidity policy, approved by the Board of Directors, which requires that we maintain the following liquidity ratios:
· | Fed Funds Purchased are limited to 60% of the total Available Lines, leaving 40% available for emergency needs and potential funding needs. |
· | FHLB Advances are limited to 75% of the Total Collateral Advance Capacity leaving 25% available for emergency liquidity needs and potential funding needs. |
· | Wholesale Repurchase Agreements are limited, in aggregate, to no more than 10% of Total Funding (total assets). |
· | Total Borrowings are limited to no more than 25% of Total Funding (which is defined as equal to Total Assets). |
· | Wholesale Funds, as that term is defined above, is limited to no more than 25% of the Bank's Total Funding (total assets) |
· | Brokered funds are not to exceed 20% of total funding without the prior approval of the Board of Directors. |
· | The total aggregate balance of Wholesale Funds, Brokered Funds and Borrowings as defined above is limited to no more than 35% of Total Funding (total assets). |
· | The Liquidity Coverage Ratio is defined as the Anticipated Sources of Liquidity divided by the Anticipated Liquidity Needs must be greater than 1.15 |
· | Cumulative Liquidity Gap (% of cumulative net cash outflow over a six month period under a worst case scenario) at least 100% |
As of March 31, 2017 and December 31, 2016, we were in compliance with the foregoing policy.
As of March 31, 2017, we had outstanding loan origination commitments and unused commercial and retail lines of credit of $131.2 million and standby letters of credit of $7.0 million. We anticipate we will have sufficient funds available to meet current origination and other lending commitments. Certificates of deposit scheduled to mature within one year totaled $154.0 million as of March 31, 2017. As of March 31, 2017, total certificates of deposits declined $20.4 million or 9.25% from the prior year end.
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 the ability to borrow up to $20.0 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, 2017, we had the ability to borrow from the FHLB up to $99.7 million in additional funds. 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.
32
Company Liquidity. Trinity's main sources of liquidity at the holding company level are dividends from the Bank.
The Bank is subject to various regulatory capital requirements administered by federal and state banking agencies, as well as the restrictions imposed by the Consent Order, which affect its ability to pay dividends to Trinity. See "Business—Supervision and Regulation—Trinity—Dividends Payments" and "Business—Supervision and Regulation—The Bank—Dividend Payments" in Part I, Item 1 of the Company's annual report on Form 10-K for the year ended December 31, 2016. Failure to meet minimum capital requirements can initiate certain mandatory and discretionary actions by regulators that, if undertaken, could have a direct material effect on our financial statements. The Consent Order also requires that the Bank maintain (i) a leverage ratio of Tier 1 Capital to total assets of at least 8%; and (ii) a ratio of Total Capital to total risk-weighted assets of at least 11%. As of December 31, 2016, the Bank was in compliance with these requirements.
The Bank has an internal Capital Plan which identifies potential sources for additional capital should it be deemed necessary. For more information, see "Capital Resources" included in Item 7 and Note 20 "Regulatory Matters" in Item 8, "Financial Statements and Supplementary Data" of the 2016 Form 10-K.
Contractual Obligations, Commitments, and Off-Balance-Sheet Arrangements
We have various financial obligations, including contractual obligations and commitments, which may require future cash payments
Contractual Obligations. There have been no material changes to contractual obligations as of March 31, 2017. For information on the nature of each obligation, see Note 16 "Commitments and Off-Balance-Sheet Activities" in Item 8, "Financial Statements and Supplementary Data" of the 2016 Form 10-K.
Commitments. There have been no material changes to the commitments as of March 31, 2017. Further discussion of these commitments is included in Note 15 "Commitments and Off-Balance-Sheet Activities" in Item 8, "Financial Statements and Supplementary Data" of the 2016 Form 10-K.
Capital Resources
Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for bank, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. Under the prompt corrective action regulations, to be adequately capitalized a bank must maintain minimum ratios of total capital to risk-weighted assets of 8%, Tier 1 capital to risk-weighted assets of 6%, common equity Tier 1 capital to risk-weighted assets of 4.5%, and Tier 1 capital to total assets of 4%. A "well–capitalized" institution must maintain minimum ratios of total capital to risk-weighted assets of at least 10%, Tier 1 capital to risk-weighted assets of at least 8%, common equity Tier 1 capital to risk-weighted assets of at least 6.5%, and Tier 1 capital to total assets of at least 5% and must not be subject to any written order, agreement or directive requiring it to meet or maintain a specific capital level.
The Basel III rules also established a "capital conservation buffer" of 2.5% above the regulatory minimum risk-based capital requirements. The capital conservation buffer requirement phased in beginning January 1, 2016 at 0.625% of risk-weighted assets and will increase by that amount ear year until fully implemented in January 2019. An institution would be subject to limitations on certain activities including payment of dividends, share repurchases and discretionary bonuses to executive officers if its capital level is below the buffered ratio.
A certain amount of Trinity's Tier 1 Capital is in the form of trust preferred securities. See Note 10, "Junior Subordinated Debt" in Item 8, "Financial Statements and Supplementary Data" of the 2015 Form 10-K for details on the effect these have on risk based capital. See "Risk Factors" in Part I, Item 1A of the 2016 Form 10-K for further information regarding changes in the regulatory environment affecting capital.
As previously discussed, on December 17, 2013, the Bank entered into the Consent Order with the OCC, which replaced the Formal Agreement. The focus of the Consent Order is on improving the Bank's credit administration, credit underwriting, internal controls, compliance and management supervision. Additionally, the Consent Order requires that the Bank maintain certain capital ratios and receive approval of the OCC prior to declaring dividends. The Consent Order requires the Bank to maintain the following minimum capital ratios: (i) a leverage ratio of Tier 1 Capital to total assets of at least 8%; and (ii) a ratio of Total Capital to total risk-weighted assets of at least 11%. While the Bank's capital ratios fall into the category of "well-capitalized," the Bank cannot be considered "well-capitalized" due to the requirement to meet and maintain a specific capital level in the Consent Order pursuant to the prompt corrective action rules. As of March 31, 2017, the Bank was in compliance with these requirements. The required and actual amounts and ratios for Trinity and the Bank as of March 31, 2017 are presented below:
Actual | For Capital Adequacy Purposes | To be well capitalized under prompt corrective action provisions | Minimum Levels Under Order Provisions | |||||||||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||||||||
(Dollars in thousands ) | ||||||||||||||||||||||||||||||||
March 31, 2017 | ||||||||||||||||||||||||||||||||
Total capital (to risk-weighted assets): | ||||||||||||||||||||||||||||||||
Consolidated | $ | 143,350 | 16.0156 | % | $ | 71,605 | 8.00 | % | N/A | N/A | N/A | N/A | ||||||||||||||||||||
Bank only | 137,778 | 15.3694 | % | 71,716 | 8.00 | % | $ | 89,644 | 10.00 | % | $ | 98,609 | 11.00 | % | ||||||||||||||||||
Tier 1 capital (to risk weighted assets): | ||||||||||||||||||||||||||||||||
Consolidated | 122,294 | 13.6632 | % | 53,704 | 6.00 | % | N/A | N/A | N/A | N/A | ||||||||||||||||||||||
Bank only | 126,517 | 14.1132 | % | 53,787 | 6.00 | % | 71,716 | 8.00 | % | N/A | N/A | |||||||||||||||||||||
Common Equity Tier 1 Capital (to risk weighted assets): | ||||||||||||||||||||||||||||||||
Consolidated | 97,821 | 10.9289 | % | 40,278 | 4.50 | % | N/A | N/A | N/A | N/A | ||||||||||||||||||||||
Bank only | 126,517 | 14.1132 | % | 40,340 | 4.50 | % | 58,269 | 6.50 | % | N/A | N/A | |||||||||||||||||||||
Tier 1 leverage (to average assets): | ||||||||||||||||||||||||||||||||
Consolidated | 122,294 | 9.0656 | % | 53,960 | 4.00 | % | N/A | N/A | N/A | N/A | ||||||||||||||||||||||
Bank only | 126,517 | 9.3414 | % | 54,175 | 4.00 | % | 67,718 | 5.00 | % | 108,349 | 8.00 | % |
N/A—not applicable
At March 31, 2017 the Bank's capital conservation buffer was 7.3694 % and the consolidated Company's capital conservation buffer was 6.4289 %.
33
Item 3. Quantitative and Qualitative Disclosures about Market Risk
This item has been omitted based on the Company's status as a smaller reporting company.
Item 4. Controls and Procedures
As discussed in the 2016 Form 10-K, filed on April 14, 2017, subsequent to the issuance of the Company's consolidated financial statements as of and for the quarterly period ended June 30, 2012, the Company's management determined that the Bank had not properly recognized certain losses and risks inherit in its loan portfolio on a timely basis as disclosed in the Company's Current Report on Form 8-K Current Reports filed on November 13, 2012, April 26, 2013 and October 27, 2014 with the Securities and Exchange Commission ("SEC"). This failure was caused by the override of controls by certain former members of management and material weaknesses in internal control over financial reporting.
Management anticipates that its remedial actions, and further actions that are being developed, will strengthen the Company's internal control over financial reporting and will, over time, address the material weaknesses that were identified. Certain of the remedial measures, primarily those associated with information technology systems, infrastructure and controls, may require ongoing effort and investment. Management has made technological improvements with the implementation of the new core systems in July 2016. These new enhanced core systems will allow management to redesign processes and enhance controls. Because some of these remedial actions take place on a quarterly basis, their successful implementation must be further evaluated before management is able to conclude that a material weakness has been remediated. The Company cannot provide any assurance that these remediation efforts will be successful or that the Company's internal control over financial reporting will be effective as a result of these efforts. Our management, with the oversight of the Audit Committee, will continue to identify and take steps to remedy known material weaknesses as expeditiously as possible and enhance the overall design and capability of our control environment.
To address the material weaknesses described below, the Company performed extensive procedures to ensure the reliability of its financial reporting. These procedures included independent review of loan grading, TDR recognition, accrual status, collateral valuations, impairment and required loan loss reserves. Additional procedures were conducted relating to accounts payable, journal entries and reconciliations, and access controls. The additional procedures were conducted at a detailed level and included the dedication of a significant amount of internal resources and external consultants. As a result, management believes that the consolidated financial statements and other financial information included in this Form 10-Q fairly present, in all material respects, the Company's financial condition, results of operations, and cash flows for the periods presented in accordance with GAAP.
Controls and Procedures
The Company maintains controls and procedures that are designed to ensure that information required to be disclosed in the Company's Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to the Company's management to allow timely decisions regarding required disclosure based on the definition of "disclosure controls and procedures" in Rules 13a-15 (e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended (the "Exchange Act").
The Company does not expect that its disclosure controls and procedures and internal control over financial reporting will prevent all errors or fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control procedure are met and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns in controls or procedures can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any control procedure is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and not be detected.
As of the end of the period covered by this Form 10-Q, we conducted an evaluation under the supervision and with the participation of our management including our Chief Executive Officer ("CEO") and our Chief Financial Officer ("CFO") of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms, including to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is accumulated and communicated to management to allow timely decisions regarding required disclosure. Our disclosure controls include some, but not all, components of our internal control over financial reporting.
Based on that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were not effective as of March 31, 2017, as a result of the material weakness in internal control over financial reporting as discussed below.
Internal Control over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Internal control over financial reporting is defined in Rule 13a-15(f) under the Exchange Act as a process designed by, or under the supervision of, the Company's principal executive and principal financial officers and effected by the Company's Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements. Management's assessment of the effectiveness of internal control over financial reporting is based on the criteria established in the 1992 Internal Control —Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
All internal control systems, no matter how well designed, have inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements will not be prevented or detected on a timely basis by internal control over financial reporting. Further, because of changes in conditions, the effectiveness of internal control may vary over time. A material weakness is a deficiency, or a combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis.
Material weaknesses in the Company's internal control over financial reporting was disclosed in Item 9A, Controls and Procedures, of the 2016 Form 10-K. In connection with the preparation of our financial statements for inclusion in this Form 10-Q, the Company's management evaluated the effectiveness of the Company's internal control over financial reporting as of March 31, 2017. Based on this evaluation, management has concluded that many of the control deficiencies identified in the Company's internal control over financial reporting report in the 2016 Form 10-K as being present at December 31, 2016, were still present, which individually or in combination were considered material weaknesses as of March 31, 2017. Management has identified the following material weaknesses in the Company's internal control over financial reporting as of March 31, 2017. Many of these weaknesses continue to be present.
34
(1) | Internal Control Environment. Weaknesses in the control environment resulted in an environment in which management was able to override controls in the past, including: |
· | An internal control matrix has not been established to define the internal controls "key" to ensuring financial statements are free of material misstatement. As a result the work performed to test key internal controls was not sufficient to comply with all of the Company's obligations under Section 112 of the Federal Deposit Insurance Corporation Improvement Act (FDICIA). |
· | Management has not yet adopted COSO's 2013 Integrated Framework, and is still reporting under the 1992 Integrated Framework. |
· | Management has not yet implemented input and file maintenance controls over financially significant systems to detect errors in initial input and unauthorized changes. |
(2) | Information Systems and Reports. Weaknesses in the control environment over implementation, change management and monitoring of in-house systems were present, including: |
· | In many cases management has relied on outputs from financially significant systems (such as accrued interest receivable / payable calculations, trust fees, days past due, average balances) without completing a periodic review / testing of these outputs to corroborate system accuracy. These calculations are critical to ensuring accurate revenue and expense recognition. |
· | A review of user access to all financial significant applications was not performed in calendar year 2016. In addition, security events were not being tracked through available application logs for several applications. |
· | During the year many financially significant applications were converted to another application. Management indicated work had been performed to validate the accurate transfer of the data, however for a few financially significant applications much of the documentation supporting this review was not retained. |
(3) | Financial Reporting. Management reviews of control procedures designed to validate and detect errors at period end were informal in some cases and in most cases lacked the precision necessary to identify material errors: |
· | Segregation of duties were not in place in several financially significant areas. |
· | Review controls over financial significant, manually prepared reports and calculations, as well as reports from third parties, were not sufficiently documented to evidence a precise review occurred which would detect a material misstatement. |
· | The preparation of memorandums supporting conclusions are imprecise and lack detailed documentation. Additionally, evidence reviewed suggested that these memos were not being reviewed in a precise enough manner to detect misstatements. |
· | Management has not yet developed a formal and sufficiently precise review control over the preparation of financial and regulatory reports, which includes a thorough review for material misstatements, clerical errors, formatting errors, transpositions, or noncompliance with GAAP / SEC / regulatory reporting requirements. |
· | Although management implemented a reconciliation checklist in the current year, the reconciliations tracked within the checklist were not completed in a timely manner, and included stale reconciling items. |
(4) | Allowance for Loan Losses. Processes and controls designed to monitor loan quality and determine the allowance for loan loss reserve were inadequate as follows: |
· | Reserve calculations and reports utilized to estimate required reserves were subject to informal control procedures, leading to weaknesses in the quality of documentation utilized by management to support loan impairments, specific reserve requirements, and qualitative adjustments. |
· | Reports utilized by the Loan Risk Rating Committee were not subject to formal reviews to ensure that decisions are being made based on accurate and complete information. |
· | Review of the allowance for loan loss calculation was informal and insufficiently precise. |
No changes in the Company's internal control over financial reporting occurred during the fiscal quarter ended March 31, 2017 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
35
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
The Company and its subsidiaries are subject, to various legal actions as described in the 2016 Form 10-K. There are no material developments in the legal actions described in the 2016 Form 10-K. The Company may become a party to legal proceedings. Except as described above, we are not presently involved in any litigation, nor to our knowledge is any litigation threatened against us, that in management's opinion would result in any material adverse effect on our financial position or results of operations or that is not expected to be covered by insurance.
Item 1A. Risk Factors
Not applicable.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the first quarter of 2017, we made no repurchases or unregistered sales of any class of our equity securities.
Item 3. Defaults Upon Senior Securities
None
Item 4. Mine Safety Disclosures
Not Applicable
Item 5. Other Information
None
36
Item 6. Exhibits
3.1 | Tenth Articles of Amendment to the Articles of Incorporation of Trinity Capital Corporation to authorize the Non-Voting Common Stock (incorporated herein by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed February 2, 2017 (File No. 000-50266)) | |
31.1 | Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a) | |
31.2 | Certification on 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 | |
101 | Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets as of March 31, 2017 and December 31, 2016; (ii) Consolidated Statements of Operations for the three months ended March 31, 2017 and 2016; (iii) Consolidated Statements of Changes in Stockholders' Equity for the three months ended March 31, 2017 and 2016; (iv) Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016; and ( ) Notes to Consolidated Financial Statements, tagged as blocks of text |
37
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 15, 2017 | |||
By: | /s/ John S. Gulas | ||
John S. Gulas Chief Executive Officer and President | |||
By: | /s/ Michael Shuler | ||
Michael Shuler | |||
Interim Chief Financial Officer |