UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One) |
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ý Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | ||
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for the quarterly period ended September 30, 2005. | ||
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Or | ||
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o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | ||
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for the transition period from to | ||
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Commission File Number 000-50266 |
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TRINITY CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
New Mexico |
| 85-0242376 |
(State of incorporation) |
| (I.R.S. Employer Identification Number) |
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1200 Trinity Drive, Los Alamos, New Mexico 87544 | ||
(Address of principal executive offices) | ||
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(505) 662-5171 | ||
Telephone number |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes ý No o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 6,630,378 shares of common stock, no par value, outstanding as of October 27, 2005.
TRINITY CAPITAL CORPORATION AND SUBSIDIARIES
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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1
PART I – FINANCIAL INFORMATION
TRINITY CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 2005 and December 31, 2004
(Amounts in thousands, except share data)
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| September |
| December 31, |
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ASSETS |
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Cash and due from banks |
| $ | 23,691 |
| $ | 23,678 |
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Interest bearing deposits with banks |
| 62,211 |
| 96 |
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Federal funds sold and securities purchased under resell agreements |
| 655 |
| 40 |
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Cash and cash equivalents |
| $ | 86,557 |
| 23,814 |
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Investment securities available for sale |
| 40,760 |
| 44,105 |
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Investment securities held to maturity, at amortized cost (fair value of $32,846 at September 30, 2005 and $61,883 at December 31, 2004) |
| 32,880 |
| 61,658 |
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Other investments |
| 8,008 |
| 7,480 |
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Loans (net of allowance for loan losses of $9,850 at September 30, 2005 and $8,367 at December 31, 2004) |
| 995,647 |
| 885,954 |
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Loans held for sale |
| 15,666 |
| 8,634 |
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Premises and equipment, net |
| 24,700 |
| 25,450 |
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Accrued interest receivable |
| 6,282 |
| 5,941 |
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Mortgage servicing rights, net |
| 8,921 |
| 8,371 |
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Other real estate owned |
| 330 |
| 6,438 |
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Other assets |
| 3,115 |
| 2,548 |
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Total assets |
| $ | 1,222,866 |
| $ | 1,080,393 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Liabilities |
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Deposits: |
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Noninterest bearing |
| $ | 92,392 |
| $ | 63,070 |
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Interest bearing |
| 929,161 |
| 817,511 |
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Total deposits |
| 1,021,553 |
| 880,581 |
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Short-term borrowings |
| — |
| 34,400 |
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Long-term borrowings |
| 84,261 |
| 60,006 |
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Junior subordinated debt owed to unconsolidated trusts |
| 32,992 |
| 22,682 |
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Borrowings made by Employee Stock Ownership Plan (ESOP) to outside parties |
| 1,214 |
| 1,686 |
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Accrued interest payable |
| 3,368 |
| 2,768 |
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Other liabilities |
| 3,229 |
| 5,314 |
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Total liabilities |
| 1,146,617 |
| 1,007,437 |
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Stock owned by Employee Stock Ownership Plan (ESOP) participants; 622,239 shares and 636,915 shares at September 30, 2005 and December 31, 2004, respectively, at fair value; net of unearned ESOP shares of 73,347 and 98,318 shares at September 30, 2005 and December 31, 2004, respectively, at historical cost |
| 16,316 |
| 18,078 |
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Commitments and contingencies |
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Stockholders’ equity |
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Common stock, no par, authorized 20,000,000 shares; issued 6,856,800 shares, shares outstanding 6,630,378 and 6,732,748 at September 30, 2005 and December 31, 2004, respectively |
| 6,836 |
| 6,836 |
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Additional paid-in capital |
| 1,098 |
| 997 |
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Retained earnings |
| 56,215 |
| 47,849 |
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Accumulated other comprehensive (loss) |
| (236 | ) | (200 | ) | ||
Total stockholders’ equity before treasury stock |
| 63,913 |
| 55,482 |
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Treasury stock, at cost, 153,075 shares and 25,734 shares at September 30, 2005 and December 31, 2004, respectively |
| (3,980 | ) | (604 | ) | ||
Total stockholders’ equity |
| 59,933 |
| 54,878 |
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Total liabilities and stockholders’ equity |
| $ | 1,222,866 |
| $ | 1,080,393 |
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The accompanying notes are an integral part of these unaudited consolidated financial statements.
2
TRINITY CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Three and Nine Months Ended September 30, 2005 and 2004
(Amounts in thousands except share and per share data)
(Unaudited)
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| Three Months Ended |
| Nine Months Ended |
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| September 30, |
| September 30, |
| September 30, |
| September 30, |
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Interest income: |
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Loans, including fees |
| $ | 16,505 |
| $ | 12,760 |
| $ | 46,202 |
| $ | 36,654 |
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Investment securities: |
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Taxable |
| 495 |
| 761 |
| 1,725 |
| 2,443 |
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Nontaxable |
| 199 |
| 150 |
| 558 |
| 471 |
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Federal funds sold |
| 1 |
| — |
| 9 |
| — |
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Other interest bearing deposits |
| 332 |
| 55 |
| 431 |
| 124 |
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Investment in unconsolidated trusts |
| 22 |
| 15 |
| 53 |
| 42 |
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Total interest income |
| 17,554 |
| 13,741 |
| 48,978 |
| 39,734 |
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Interest expense: |
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Deposits |
| 5,633 |
| 3,178 |
| 14,375 |
| 9,108 |
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Short-term borrowings |
| — |
| 51 |
| 123 |
| 146 |
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Long-term borrowings |
| 846 |
| 572 |
| 2,249 |
| 1,770 |
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Junior subordinated debt owed to unconsolidated trusts |
| 714 |
| 503 |
| 1,769 |
| 1,414 |
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Total interest expense |
| 7,193 |
| 4,304 |
| 18,516 |
| 12,438 |
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Net interest income |
| 10,361 |
| 9,437 |
| 30,462 |
| 27,296 |
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Provision for loan losses |
| 750 |
| 450 |
| 2,100 |
| 1,650 |
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Net interest income after provision for loan losses |
| 9,611 |
| 8,987 |
| 28,362 |
| 25,646 |
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Other income: |
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Mortgage loan servicing fees |
| 681 |
| 592 |
| 1,942 |
| 1,751 |
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Loan and other fees |
| 712 |
| 590 |
| 2,009 |
| 1,829 |
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Service charges on deposits |
| 401 |
| 377 |
| 1,100 |
| 1,047 |
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Gain on sale of loans |
| 665 |
| 374 |
| 1,766 |
| 2,373 |
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Gain on sale of securities |
| — |
| — |
| — |
| 272 |
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Other operating income |
| 414 |
| 164 |
| 809 |
| 692 |
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| 2,873 |
| 2,097 |
| 7,626 |
| 7,964 |
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Other expenses: |
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Salaries and employee benefits |
| 4,038 |
| 3,725 |
| 12,059 |
| 11,433 |
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Occupancy |
| 785 |
| 660 |
| 2,378 |
| 1,728 |
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Data processing |
| 486 |
| 508 |
| 1,391 | �� | 1,442 |
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Marketing |
| 403 |
| 433 |
| 1,133 |
| 983 |
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Amortization and valuation of mortgage servicing rights |
| (162 | ) | 1,230 |
| 902 |
| 1,120 |
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Supplies |
| 159 |
| 202 |
| 559 |
| 583 |
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Loss (gain) on sale of other real estate owned |
| 123 |
| (3 | ) | 950 |
| 125 |
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Postage |
| 142 |
| 143 |
| 452 |
| 416 |
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Other |
| 931 |
| 911 |
| 3,032 |
| 2,958 |
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| 6,905 |
| 7,809 |
| 22,856 |
| 20,788 |
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Income before income taxes |
| 5,579 |
| 3,275 |
| 13,132 |
| 12,822 |
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Income taxes |
| 2,205 |
| 1,147 |
| 4,949 |
| 4,885 |
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Net income |
| $ | 3,374 |
| $ | 2,128 |
| $ | 8,183 |
| $ | 7,937 |
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Basic earnings per common share |
| $ | 0.51 |
| $ | 0.32 |
| $ | 1.23 |
| $ | 1.18 |
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Diluted earnings per common share |
| $ | 0.50 |
| $ | 0.31 |
| $ | 1.22 |
| $ | 1.16 |
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The accompanying notes are an integral part of these unaudited consolidated financial statements.
3
TRINITY CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2005 and 2004
(Amounts in thousands)
(Unaudited)
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| September 30, 2005 |
| September 30, 2004 |
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Cash Flows From Operating Activities |
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Net income |
| $ | 8,183 |
| $ | 7,937 |
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Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
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Depreciation and amortization |
| 1,937 |
| 1,627 |
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Net amortization of: |
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Mortgage servicing rights |
| 2,069 |
| 2,016 |
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Premiums and discounts on investment securities |
| 722 |
| 1,055 |
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Junior subordinated debt owed to unconsolidated trusts issuance costs |
| 15 |
| 15 |
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Provision for loan losses |
| 2,100 |
| 1,650 |
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Recovery of mortgage servicing rights |
| (1,167 | ) | (896 | ) | ||
Loss on disposal of premises and equipment |
| 143 |
| — |
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Gain on sale of available for sale securities |
| — |
| (272 | ) | ||
Federal Home Loan Bank (FHLB) stock dividends received |
| (146 | ) | (67 | ) | ||
Gain on sale of loans |
| (1,766 | ) | (2,373 | ) | ||
Loss on disposal of other real estate owned |
| 157 |
| 148 |
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Write-down of value of other real estate owned |
| 793 |
| 61 |
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(Increase) decrease in other assets |
| (923 | ) | 1,877 |
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Increase (decrease) in other liabilities |
| 312 |
| (518 | ) | ||
Tax benefit recognized for exercise of stock options |
| 272 |
| 53 |
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Release of Employee Stock Ownership Plan (ESOP) shares |
| 913 |
| 950 |
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Net cash provided by operating activities before originations and gross sales of loans |
| 13,614 |
| 13,263 |
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Gross sales of loans held for sale |
| 139,032 |
| 178,432 |
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Origination of loans held for sale |
| (145,750 | ) | (178,989 | ) | ||
Net cash provided by operating activities |
| 6,896 |
| 12,706 |
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Cash Flows From Investing Activities |
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Proceeds from maturities and paydowns of investment securities, available for sale |
| 7,075 |
| 44,760 |
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Proceeds from maturities and paydowns of investment securities, held to maturity |
| 28,357 |
| 5,166 |
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Proceeds from maturities and paydowns of investment servurities, other |
| 325 |
| 300 |
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Proceeds from sale of investment securities, available for sale |
| — |
| 28,388 |
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Purchase of investment securities available for sale |
| (4,090 | ) | (28,095 | ) | ||
Purchase of investment securities other |
| (707 | ) | (1,327 | ) | ||
Proceeds from sale of other real estate owned |
| 5,633 |
| 2,604 |
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Loans funded, net of repayments |
| (112,268 | ) | (110,028 | ) | ||
Purchases of premises and equipment |
| (1,430 | ) | (8,281 | ) | ||
Proceeds from sale of premises and equipment |
| 100 |
| — |
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Net cash used in investing activities |
| (77,005 | ) | (66,513 | ) | ||
Cash Flows From Financing Activities |
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Net increase in demand deposits, NOW accounts and savings accounts |
| 36,464 |
| 40,815 |
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Net increase (decrease) increase in time deposits |
| 104,508 |
| (8,327 | ) | ||
Proceeds from issuances of borrowings |
| 30,000 |
| 481,700 |
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Repayment of borrowings |
| (40,145 | ) | (456,017 | ) | ||
Repayment of ESOP debt |
| (472 | ) | (471 | ) | ||
Proceeds from issuance of trust preferred securities |
| 10,310 |
| 6,186 |
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Purchase of treasury stock |
| (4,422 | ) | (117 | ) | ||
Issuance of common stock for stock option plan |
| 666 |
| 72 |
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Dividend payments |
| (4,057 | ) | (4,098 | ) | ||
Net cash provided by financing activities |
| 132,852 |
| 59,743 |
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Net increase in cash and cash equivalents |
| 62,743 |
| 5,936 |
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Cash and cash equivalents: |
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Beginning of year |
| 23,814 |
| 43,111 |
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End of period |
| $ | 86,557 |
| $ | 49,047 |
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Supplemental Disclosures of Cash Flow Information |
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Cash payments for: |
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Interest |
| $ | 17,916 |
| $ | 12,741 |
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Income taxes |
| 5,245 |
| 2,562 |
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Non-cash investing and financing activities: |
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Transfers from loans to other real estate owned |
| 475 |
| 2,158 |
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Dividends declared, not yet paid |
| 3 |
| — |
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Change in unrealized gain on investment securities, net of taxes |
| (36 | ) | (166 | ) |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
4
TRINITY CAPITAL CORPORATION & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements include the consolidated balances and results of operations of Trinity Capital Corporation (“Trinity” or the “Company”) and its wholly owned subsidiaries: Los Alamos National Bank (the “Bank”) and Title Guaranty & Insurance Company (“Title Guaranty”), collectively referred to as the “Company.” Trinity Capital Trust I (“Trust I”), Trinity Capital Trust II (“Trust II”), Trinity Capital Trust III (“Trust III”), and Trinity Capital Trust IV (“Trust IV”), collectively referred to as the “Trusts”, which are also wholly owned subsidiaries of Trinity, are not consolidated in these financial statements. The business activities of the Company consist solely of the operations of its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods have been made. The results of operations for the three and nine months ended September 30, 2005 are not necessarily indicative of the results to be expected for the entire fiscal year.
The unaudited interim consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and industry practice. Certain information in footnote disclosure normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America and industry practice has been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s December 31, 2004 audited financial statements filed on Form 10-K.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions which affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements, as well as the reported amounts of income and expenses during the reported periods. Actual results could differ from those estimates.
Note 2. Comprehensive Income
Comprehensive income includes net income, as well as the change in net unrealized gain on investment securities available for sale, net of tax. Comprehensive income was $3.4 million and $2.3 million for the three month periods ended September 30, 2005 and 2004, respectively, and $8.1 million and $7.8 million for the nine month periods ended September 30, 2005 and 2004, respectively.
Note 3. Earnings Per Share Data
The following table sets forth the computation of basic and diluted earnings per share for the periods indicated:
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| Three Months Ended |
| Nine Months Ended |
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| September 30, |
| September 30, |
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| 2005 |
| 2004 |
| 2005 |
| 2004 |
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| (Unaudited; in thousands, except share and per share data) |
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Net income |
| $ | 3,374 |
| $ | 2,128 |
| $ | 8,183 |
| $ | 7,937 |
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Weighted average common shares issued |
| 6,856,800 |
| 6,856,800 |
| 6,856,800 |
| 6,856,800 |
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LESS: Weighted average treasury stock shares |
| (153,075 | ) | (25,734 | ) | (142,414 | ) | (27,951 | ) | ||||
LESS: Weighted average unearned Employee Stock Ownership Plan (ESOP) stock shares |
| (73,348 | ) | (99,748 | ) | (75,085 | ) | (101,582 | ) | ||||
Weighted average common shares outstanding, net |
| 6,630,377 |
| 6,731,318 |
| 6,639,301 |
| 6,727,267 |
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Basic earnings per common share |
| $ | 0.51 |
| $ | 0.32 |
| $ | 1.23 |
| $ | 1.18 |
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Weighted average dilutive shares from stock option plan |
| 59,354 |
| 108,718 |
| 65,228 |
| 111,035 |
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Weighted average common shares outstanding including dilutive shares |
| 6,689,731 |
| 6,840,036 |
| 6,704,529 |
| 6,838,302 |
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Diluted earnings per common share |
| $ | 0.50 |
| $ | 0.31 |
| $ | 1.22 |
| $ | 1.16 |
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5
Note 4. Recent Accounting Pronouncements and Regulatory Developments
In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment, which is an Amendment of FASB Statement Nos. 123 and 95. SFAS No. 123R changes, among other things, the manner in which share-based compensation, such as stock options, will be accounted for by both public and non-public companies. For public companies, the cost of employee services received in exchange for equity instruments including options and restricted stock awards generally will be measured at fair value at the grant date. The grant date fair value will be estimated using option-pricing models adjusted for the unique characteristics of those options and instruments, unless observable market prices for the same or similar options are available. The cost will be recognized over the requisite service period, often the vesting period.
The changes in accounting will replace existing requirements under SFAS No. 123, Accounting for Stock-Based Compensation, and will eliminate the ability to account for share-based compensation transactions using APB Opinion No. 25, Accounting for Stock Issued to Employees, which does not require companies to expense options if the exercise price is equal to the trading price at the date of grant. The accounting for similar transactions involving parties other than employees or the accounting for employee stock ownership plans that are subject to AICPA Statement of Position 93-6, Employers’ Accounting for Employee Stock Ownership Plans, would remain unchanged. See Note 9 below for the Company’s current application of SFAS No. 123.
On April 14, 2005, the Securities and Exchange Commission (SEC) announced the adoption of a new rule that amends the compliance dates for SFAS No. 123R. Under SFAS No. 123R, the Company would have been required to implement the standard as of the beginning of the first interim period that begins after June 15, 2005. The SEC’s new rule allows companies to implement SFAS No. 123R at the beginning of their next fiscal year (beginning January 1, 2006, in the case of the Company), instead of the next reporting period that begins after June 15, 2005. The SEC’s new rule does not change the accounting required by SFAS No. 123R; it changes only the dates for compliance with the standard.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, which provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes, unless impracticable, retrospective application as the required method for reporting a change in accounting principle in the absence of explicit transition requirements specific to the newly adopted accounting principle. The reporting of a correction of an error by restating previously issued financial statements is also addressed by this statement. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005.
Note 5. Short Term Borrowings
The Company had no Federal Home Loan Bank advances with maturities of less than one year as of September 30, 2005. As of December 31, 2004, the Company had Federal Home Loan Bank advances with maturities of less than one year of $34.4 million.
Note 6. Long Term Borrowings
The Company had Federal Home Loan Bank advances with maturity dates greater than one year of $84.3 million and $60.0 million as of September 30, 2005 and December 31, 2004, respectively. As of September 30, 2005, the advances had fixed interest rates ranging from 3.22% to 6.34%.
6
Note 7. Junior Subordinated Debt Owed to Unconsolidated Trusts
The following table presents details on the junior subordinated debt owed to unconsolidated trusts as of September 30, 2005:
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| Trust I |
| Trust II |
| Trust III |
| Trust IV |
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| (Dollars in thousands) |
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Date of issue |
| March 23, 2000 |
| November 28, 2001 |
| May 11, 2004 |
| June 29, 2005 |
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Amount of trust preferred securities issued |
| $ | 10,000 |
| $ | 6,000 |
| $ | 6,000 |
| $ | 10,000 |
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Rate on trust preferred securities |
| 10.875 | % | 9.95 | % | 6.57% (variable | ) | 6.88 | % | ||||
Maturity |
| March 8, 2030 |
| December 8, 2031 |
| September 8, 2034 |
| November 23, 2035 |
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Date of first redemption |
| March 8, 2010 |
| December 8, 2006 |
| September 8, 2009 |
| August 23, 2010 |
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Common equity securities issued |
| $ | 310 |
| $ | 186 |
| $ | 186 |
| $ | 310 |
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Junior subordinated deferrable interest debentures owed |
| $ | 10,310 |
| $ | 6,186 |
| $ | 6,186 |
| $ | 10,310 |
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Rate on junior subordinated deferrable interest debentures |
| 10.875 | % | 9.95 | % | 6.57% (variable | ) | 6.88 | % |
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 the Company at any time after the date of first redemption indicated above, with the approval of the Federal Reserve Board and in whole at any time upon the occurrence of certain events affecting their tax or regulatory capital treatment. The Trusts also issued common equity securities to Trinity in the amounts indicated above. The Trusts used the proceeds of the offering of the trust preferred securities to purchase junior subordina ted deferrable interest debentures (the “debentures”) issued by the Company, which have terms substantially similar to the trust preferred securities. The Company has the right to defer payments of interest on the debentures at any time or from time to time for a period of up to ten consecutive semi-annual periods with respect to each interest payment deferred. Under the terms of the debentures, under certain circumstances of default or the Company has elected to defer interest on the debentures, the Company may not, with certain exceptions, declare or pay any dividends or distributions on its capital stock or purchase or acquire any of its capital stock. The Company used the majority of the proceeds from the sale of the debentures to add to Tier 1 or Tier 2 capital in order to support its growth and to purchase treasury stock.
Trinity owns all of the outstanding common securities of the Trusts. The Trusts are considered variable interest entities (VIEs) under Financial Accounting Standards Board Interpretation (FIN) No. 46, “Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51”, as revised. Prior to FIN 46, VIEs were generally consolidated by an enterprise when the enterprise had a controlling financial interest through ownership of a majority of voting interest in the entity. Under FIN 46, a VIE should be consolidated by its primary beneficiary. The Company implemented FIN 46 during the fourth quarter of 2003. Because Trinity is not the primary beneficiary of the Trusts, the financial statements of the Trusts are no longer included in the consolidated financial statem ents of the Company. The Company’s prior financial statements have been reclassified to de-consolidate the Company’s investment in the Trusts.
In March 2005, the Board of Governors of the Federal Reserve System issued a final rule allowing bank holding companies to continue to include qualifying trust preferred securities in their Tier 1 Capital for regulatory capital purposes, subject to a 25% limitation to all core (Tier I) capital elements, net of goodwill less any associated deferred tax liability. The final rule provides a five-year transition period, ending March 31, 2009, for application of the aforementioned quantitative limitation. As of September 30, 2005, 79% of the trust preferred securities noted in the table above qualified as Tier I capital and 21% qualified as Tier 2 capital under the final rule adopted in March 2005.
Payments of distributions on the trust preferred securities and payments on redemption of the trust preferred securities are guaranteed by the Company on a limited basis. The Company 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 the Company 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 the Company of the Trusts’ obligations under the trust preferred securities.
Issuance costs of $615 thousand related to the first three trust preferred securities issues were deferred and are being amortized over the period until mandatory redemption of the securities in March 2030, December 2031 and September 2034, respectively. During each of the three month periods ended September 30, 2005 and 2004, $5 thousand of these issuance costs were amortized. During each of
7
the nine month periods ended September 30, 2005 and 2004, $15 thousand of these issuance costs were amortized. Unamortized issuance costs were $524 thousand and $539 thousand at September 30, 2005 and December 31, 2004, respectively. There were no issuance costs associated with the fourth trust preferred security issue.
Dividends accrued and unpaid to securities holders totaled $364 thousand and $282 thousand on September 30, 2005 and 2004, respectively.
8
Note 8. Commitments, Contingencies and Off-Balance Sheet Activities
Credit-related financial instruments: The Company is a party to credit-related commitments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These credit-related commitments include commitments to extend credit, standby letters of credit and commercial letters of credit. Such credit-related commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets.
The Company’s exposure to credit loss is represented by the contractual amount of these credit-related commitments. The Company follows the same credit policies in making credit-related commitments as it does for on-balance-sheet instruments.
At September 30, 2005 and December 31, 2004, the following credit-related commitments were outstanding whose contract amounts represent credit risk:
|
| Contract Amount |
| ||||
|
| September |
| December |
| ||
|
| (In thousands) |
| ||||
Unfunded commitments under lines of credit |
| $ | 175,974 |
| $ | 168,794 |
|
Commercial and standby letters of credit |
| 37,059 |
| 33,319 |
| ||
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require a payment of a fee. The commitments for equity lines of credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by the Company, is based on management’s credit evaluation of the customer. Unfunded commitments under commercial lines of credit, revolving credit lines and overdraft protection agreements are commitments for possible future extensions of credit to existing customers. Overdraft protection agreements are uncollateralized, but most other unfunded commitments have collateral. These unfunded lines of credit usually do not contain a specified maturity date and may not necessarily be drawn upon to the total extent to which the Company is committed.
Commercial and standby letters of credit are conditional credit-related commitments issued by the Company to guarantee the performance of a customer to a third party. 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 Company generally holds collateral supporting those credit-related commitments. In the event the customer does not perform in accordance with the terms of the agreement with the third party, the Company would be required to fund the credit-related commitment. The maximum potential amount of future payments the Company could be required to make is represented by the contractual amount shown in the summary above. If the credit-related commitment is funded, the Company would be entitled to seek recovery from the customer. At September 30, 2005 and December 31, 2004, no amounts have been recorded as liabilities for the Company’s potential obligations under these credit-related commitments. The fair value of these credit-related commitments is approximately equal to the fees collected when granting these letters of credit. These fees collected were $97 thousand and $60 thousand as of September 30, 2005 and December 31, 2004, respectively, and are included in “other liabilities” on the Company’s balance sheets.
Concentrations of credit risk: The majority of the loans, commitments to extend credit, and standby letters of credit have been granted to customers in Los Alamos and surrounding communities. Although the Company has a diversified loan portfolio, a substantial portion of its loans are made to businesses and individuals associated with, or employed by, Los Alamos National Laboratory (“the Laboratory”). The ability of such borrowers to honor their contracts is predominately dependent upon the continued operation and funding of the Laboratory. Investments in securities issued by states and political subdivisions involve governmental entities within the State of New Mexico. The distribution of types of commitments to extend credit approximates the distribution of loans outstanding. Standby letters of credit were granted primarily to commercial borrowers.
Contingencies: In the normal course of business, the Company is involved in various legal proceedings. In the opinion of management, after consulting with counsel, probable liabilities resulting from such proceedings would not have a material adverse effect on the Company’s consolidated financial statements.
9
Note 9. Pro Forma Impact of Stock-Based Compensation Plans
As allowed under SFAS No. 123, Accounting for Stock-Based Compensation, the Company measures stock-based compensation cost in accordance with the methods prescribed in Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees. As stock options are granted at fair value, there are no charges to earnings associated with stock options granted. Accordingly, no compensation cost has been recognized for grants made to date. Had compensation cost been determined based on the fair value method prescribed in FASB Statement No. 123, reported net income and earnings per common share would have been reduced to the pro forma amounts shown below (dollars in thousands, except earnings per share data):
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||
|
| 2005 |
| 2004 |
| 2005 |
| 2004 |
| ||||
|
| (Unaudited; in thousands except per share data) |
| ||||||||||
Net income as reported |
| $ | 3,374 |
| $ | 2,128 |
| $ | 8,183 |
| $ | 7,937 |
|
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects |
| 57 |
| 28 |
| 114 |
| 85 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Pro forma net income |
| $ | 3,317 |
| $ | 2,100 |
| $ | 8,069 |
| 7,852 |
| |
|
|
|
|
|
|
|
|
|
| ||||
Earnings per share: |
|
|
|
|
|
|
|
|
| ||||
Basic – as reported |
| $ | 0.51 |
| $ | 0.32 |
| $ | 1.23 |
| $ | 1.18 |
|
Basic – pro forma |
| $ | 0.50 |
| $ | 0.31 |
| $ | 1.22 |
| $ | 1.17 |
|
|
|
|
|
|
|
|
|
|
| ||||
Diluted – as reported |
| $ | 0.50 |
| $ | 0.31 |
| $ | 1.22 |
| $ | 1.16 |
|
Diluted – pro forma |
| $ | 0.50 |
| $ | 0.31 |
| $ | 1.20 |
| $ | 1.15 |
|
10
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This discussion is intended to focus on certain financial information regarding the Company and the Bank and is written to provide the reader with a more thorough understanding of its financial statements. The following discussion and analysis of the Company’s financial position and results of operations should be read in conjunction with the information set forth in Item 3, Quantitative and Qualitative Disclosures about Market Risk and the annual audited consolidated financial statements filed on Form 10-K.
Special Note Concerning Forward-Looking Statements
This Form 10-Q contains, and future oral and written statements of the Company may contain, forward-looking statements, within the meaning of such term in the Private Securities Litigation Reform Act of 1995, with respect to the financial condition, results of operations, plans, objectives, future performance and business of the Company. Forward-looking statements, which may be based upon beliefs, expectations and assumptions of our management and on information currently available to management, are generally identifiable by the use of words such as “believe,” “expect,” “anticipate,” “plan,” “intend,” “estimate,” “may,” “will,” “would,” “could,” “should” or other similar expressions. Additionally, all statements in this document, including forward-looking statements, speak only as of the date they are made, and we undertake no obligation to update any statement in light of new information or future events.
Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on our operations and future prospects include, but are not limited to, the following:
• The strength of the United States economy in general and the strength of the local economies in which we conduct our operations which may be less favorable than expected and may result in, among other things, a deterioration in the credit quality and value of our assets.
• The economic impact of any future terrorist threats or attacks, and the response of the United States to any such threats and attacks.
• The effects of, and changes in, federal, state and local laws, regulations and policies affecting banking, securities, insurance and monetary and financial matters.
• The effects of changes in interest rates (including the effects of changes in the rate of prepayments of the Company’s assets) and the policies of the Board of Governors of the Federal Reserve System.
• Our ability to compete with other financial institutions as effectively as we currently intend due to increases in competitive pressures in the financial services sector.
• Our ability to obtain new customers and to retain existing customers.
• The timely development and acceptance in the market of products and services, including products and services offered through alternative delivery channels such as the Internet.
• Technological changes implemented by us and by other parties, including third party vendors, which may be more difficult or more expensive than anticipated or which may have unforeseen consequences to us and our customers.
• Our ability to develop and maintain secure and reliable electronic systems.
• Our ability to retain key executives and employees and the difficulty that we may experience in replacing key executives and employees in an effective manner.
• Consumer spending and saving habits which may change in a manner that affects our business adversely.
• Business combinations and the integration of acquired businesses which may be more difficult or expensive than expected.
• The costs, effects and outcomes of existing or future litigation.
11
• Changes in accounting policies and practices, as may be adopted by state and federal regulatory agencies and the Financial Accounting Standards Board.
• Our ability to manage the risks associated with the foregoing as well as anticipated.
• Changes in the management and national policy regarding Los Alamos National Laboratory (the “Laboratory”), including changes in the level of funding.
These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Additional information concerning the Company and our business, including other factors that could materially affect our financial results, will be included in our filings with the Securities and Exchange Commission.
Critical Accounting Policies
Allowance for Loan Losses: Management believes the allowance for loan losses accounting policy is critical to the portrayal and understanding of our financial condition and results of operations. As such, selection and application of this “critical accounting policy” involves judgments, estimates, and uncertainties that are susceptible to change. In the event that different assumptions or conditions were to prevail, and depending upon the severity of such changes, the possibility of materially different financial condition or results of operations is a reasonable likelihood.
The allowance for loan losses is maintained at an amount that management believes will be adequate to absorb probable losses on existing loans, based on an evaluation of the collectibility of loans and prior loss experience. This evaluation also takes into consideration such factors as changes in the nature and volume of the loan portfolio, the value of underlying collateral, overall portfolio quality, review of specific problem loans and current economic conditions that may affect the borrower’s ability to pay. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in these factors. In addition, as an integral part of their examination process regulatory agencies periodically review our allowance for loan losses and may require us to make changes to the allowance based on their evaluation of information available at the time of their examinations.
We maintain our allowance for loan losses at a level that management believes will be adequate to absorb probable losses on existing loans based on an evaluation of the collectibility of loans and prior loss experience. Three methods are used to evaluate the adequacy of the allowance for loan losses: (1) historical loss experience, based on loss experience by quality classification in the previous twelve calendar quarters; (2) specific identification, based upon management’s assessment of loans and the probability that a charge off will occur in the upcoming quarter; and (3) loan concentrations, based on current or expected economic factors in the geographic and industry sectors where management believes we may eventually experience some loan losses. While we believe that our allowance for loan losses was adequate to absorb estimated loan losses as of September 30, 2005, there can be no assurance that future losses will not exceed the estimated amounts or that we will not be required to make additional provisions for losses in the future.
Mortgage Servicing Right (MSR) Assets: Servicing residential mortgage loans for third-party investors represents a significant business activity of the Bank. As of September 30, 2005, mortgage loans serviced for others totaled $932.7 million. The MSRs on these loans totaled $8.9 million as of September 30, 2005. The expected and actual rates of mortgage loan prepayments are the most significant factors driving the value of MSRs. Increases in mortgage loan prepayments reduce estimated future net servicing cash flows because the life of the underlying loan is reduced. In determining the initial value of the MSRs, mortgage interest rates, which are used to determine prepayment rates and discount rates, are held constant over the estima ted life of the portfolio. Fair values of the MSRs are provided by an independent third-party broker of MSRs on a monthly basis. The values given by the broker are based upon current market conditions and assumptions, which incorporate the expected life of the loans, estimated costs to service the loans, servicing fees to be received and other factors. MSRs are carried at the lower of the initial capitalized amount, net of accumulated amortization, or fair value.
The fair value of the MSRs is driven primarily by the effect current mortgage interest rates have on the likelihood borrowers will prepay the underlying mortgages by refinancing at a lower rate. Accordingly, higher interest rates decrease the likelihood o f repayment, extending the life of the MSRs and increasing the value of these assets. Lower interest rates increase the likelihood of repayment, contracting the life of the MSRs and decreasing the value of these assets. This can have a significant impact on our income. There is no certainty on the direction and amount of interest rate changes looking forward, and therefore, there is no certainty on the amount or direction of the change in valuation.
12
An analysis of changes in mortgage servicing rights follows:
|
| Three months ended |
| Nine months ended |
| ||||||||
|
| September 30, |
| September 30, |
| ||||||||
|
| 2005 |
| 2004 |
| 2005 |
| 2004 |
| ||||
|
| (In thousands) |
| ||||||||||
Balance, beginning of period |
| $ | 8,162 |
| $ | 9,278 |
| $ | 8,371 |
| $ | 7,792 |
|
Servicing rights originated and capitalized |
| 597 |
| 397 |
| 1,452 |
| 1,774 |
| ||||
Amortization |
| (689 | ) | (708 | ) | (2,069 | ) | (2,016 | ) | ||||
Valuation allowance due to changes in prepayment assumptions |
| 851 |
| (521 | ) | 1,167 |
| 896 |
| ||||
|
| $ | 8,921 |
| $ | 8,446 |
| $ | 8,921 |
| $ | 8,446 |
|
Overview
The Company’s net income substantially increased from the second quarter of 2005 to the third quarter of 2005. Net income increased $933 thousand (38.2%) in the third quarter of 2005. The Company’s net income also increased $1.2 million (58.6%) from the third quarter of 2004 to the third quarter of 2005. This increase was mainly due to a decrease in the valuation allowance of mortgage servicing rights due to an increase in interest rates between 2004 and 2005. The Company’s balance sheet growth continued to be strong, with total assets growing $142.5 million (13.2%) from December 31, 2004 to September 30, 2005.
Net income for the nine months ended September 30, 2005 increased by $246 thousand (3.1%) over the same period in 2004. This increase was primarily due to an increase in net interest income due to strong growth in earning assets, which was partially offset by increases in the provision for loan loss expense and other expenses.
Income Statement Analysis
Net Income-General. Net income for the three months ended September 30, 2005 was $3.4 million, compared to $2.1 million for the same period of 2004. Diluted earnings per share increased by $0.19 to $0.50 for the three months ended September 30, 2005 from $0.31 for the same period of 2004. This represented an increase in diluted earnings per share of 61.3%. The increase in net income was primarily the result of a decrease in the valuation allowance of mortgage servicing rights of $1.4 million due to an increase in interest rates between the two periods. Net interest income (not on a fully tax equivalent basis) also increased $924 thousand between the two periods, mainly due to an increase in average earning assets. The gain on sale of loans increased $291 thousand, due to an increase in the sale of loans between the two periods. Title insurance premiums increased $241 thousand mainly due to additional business generated from Title Guaranty’s new Santa Fe office. These items were partially offset by an increase in salaries and employee benefits expense of $313 thousand and an increase in the provision for loan losses expense of $300 thousand. The effect of these items, net of taxes, was an increase of $1.2 million in net income for the three months ended September 30, 2005 compared to the same period in 2004.
Net income for the nine months ended September 30, 2005 was $8.2 million, compared to $7.9 million for the same period of 2004. Diluted earnings per share increased by $0.06 to $1.22 for the nine months ended September 30, 2005 from $1.16 for the same period of 2004. This represented an increase in diluted earnings per share of 5.2%. The increase in net income was primarily the result of an increase in net interest income (not on a fully tax equivalent basis) of $3.2 million mainly due to an increase in average earning assets. This item was partially offset by an increase in the loss on sale of other real estate owned of $825 thousand, an increase in occupancy expense of $650 thousand, a decrease in the gain on sale of loans of $607 thousand, an increase in the provision for loan loss expense of $450 thousand and a decrease in the gain on sale of securities of $272 thousand. The increase in the loss on sale of other real estate owned was mainly due to the disposal of several residential real estate properties acquired in foreclosure. The gain on sale of loans decreased due to fewer loans being sold in the first nine months of 2005 compared to the same period in 2004. The increase in occupancy expense was mainly due to the Santa Fe Downtown office being opened for nine months in 2005 compared to just one month in 2004. The provision for loan losses increased due to an additional large relationship being placed on non-accrual status. The gain on sale of securities decreased to zero due to no sales of securities in 2005. The effect of these items, net of taxes, was an increase in net income of $246 thousand for the first nine months of 2005 compared to the same period in 2004.
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 affected by its provision for loan losses as well as other income and other expenses. The provision for loan losses reflects the amount thought to be adequate to cover probable credit losses in the loan portfolio. Non-interest income or other income consists of mortgage loan servicing fees, loan and other fees, service charges on deposits, gain on sale of loans, gain on sale of securities and other operating income. Other expenses include salaries and employee benefits, occupancy expenses, data processing expenses, marketing, amortization and valuation of mortgage servicing rights, supplies expense and other expenses.
13
The amount of net interest income is affected by changes in the volume and mix of interest earning assets, the level of interest rates earned on those assets, the volume and mix of interest bearing liabilities, and the level of interest rates paid on those interest bearing liabilities. The provision for loan losses is dependent on changes in the loan portfolio and management’s assessment of the collectibility of the loan portfolio, as well as economic and market conditions. Other income and other expenses are impacted by growth of operations and growth in the number of accounts through core banking business growth. Growth in operations affects other expenses as a result of additional employees, branch facilities and promotional marketing expense. Growth in the number of accounts affects other income including service fees as well as other expenses such as computer services, supplies, loss (gain) on sale of other real estate owned, postage, telecommunications and other miscellaneous expenses.
14
Net Interest Income. The following tables present, for the periods indicated, the total dollar amount of interest income from average interest earning assets and the resultant yields, as well as the interest expense on average interest bearing liabilities, and the resultant costs, expressed both in dollars and rates:
|
| Three Months Ended September 30, |
| ||||||||||||||
|
| 2005 |
| 2004 |
| ||||||||||||
|
| Average |
| Interest |
| Yield/Rate |
| Average |
| Interest |
| Yield/Rate |
| ||||
|
| (Dollars in thousands) |
| ||||||||||||||
Interest Earning Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Loans(1)(2) |
| $ | 1,006,309 |
| $ | 16,505 |
| 6.51 | % | $ | 819,202 |
| $ | 12,760 |
| 6.20 | % |
Taxable investment securities |
| 67,565 |
| 495 |
| 2.91 |
| 105,049 |
| 761 |
| 2.88 |
| ||||
Investment securities exempt from federal income |
| 20,482 |
| 320 |
| 6.20 |
| 19,936 |
| 227 |
| 4.53 |
| ||||
Federal funds sold and securities purchased under resell agreements |
| 1,132 |
| 1 |
| 0.35 |
| 40 |
| — |
| 1.11 |
| ||||
Other interest bearing deposits |
| 36,946 |
| 332 |
| 3.57 |
| 16,115 |
| 55 |
| 1.36 |
| ||||
Investment in unconsolidated trust subsidiaries |
| 992 |
| 22 |
| 8.80 |
| 682 |
| 15 |
| 8.75 |
| ||||
Total interest earning assets |
| 1,133,426 |
| 17,675 |
| 6.19 |
| 961,024 |
| 13,818 |
| 5.72 |
| ||||
Non-interest earning assets |
| 60,897 |
|
|
|
|
| 69,926 |
|
|
|
|
| ||||
Total assets |
| $ | 1,194,323 |
|
|
|
|
| $ | 1,030,950 |
|
|
|
|
| ||
Interest Bearing Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
NOW and money market deposit |
| $ | 81,140 |
| $ | 307 |
| 1.50 | % | $ | 114,304 |
| $ | 312 |
| 1.09 | % |
Savings deposit |
| 366,670 |
| 1,540 |
| 1.67 |
| 348,514 |
| 923 |
| 1.05 |
| ||||
Time deposits |
| 432,890 |
| 3,786 |
| 3.47 |
| 324,895 |
| 1,943 |
| 2.38 |
| ||||
Short-term borrowings |
| — |
| — |
| — |
| 10,153 |
| 51 |
| 2.00 |
| ||||
Long-term borrowings |
| 86,164 |
| 846 |
| 3.90 |
| 62,604 |
| 572 |
| 3.63 |
| ||||
Junior subordinated debt owed to unconsolidated trusts |
| 32,992 |
| 714 |
| 8.59 |
| 22,682 |
| 503 |
| 8.82 |
| ||||
Total interest bearing liabilities |
| 999,856 |
| 7,193 |
| 2.85 |
| 883,152 |
| 4,304 |
| 1.94 |
| ||||
Demand deposits—non-interest bearing |
| 32,390 |
|
|
|
|
| 51,771 |
|
|
|
|
| ||||
Other non-interest bearing liabilities |
| 87,044 |
|
|
|
|
| 23,808 |
|
|
|
|
| ||||
Stockholders’ equity, including stock owned by ESOP |
| 75,033 |
|
|
|
|
| 72,219 |
|
|
|
|
| ||||
Total liabilities and stockholders equity |
| $ | 1,194,323 |
|
|
|
|
| $ | 1,030,950 |
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net interest income/interest rate Spread(4) |
|
|
| $ | 10,482 |
| 3.34 | % |
|
| $ | 9,514 |
| 3.78 | % | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net interest margin on a fully tax equivalent basis(5) |
|
|
|
|
| 3.67 | % |
|
|
|
| 3.94 | % | ||||
Net interest margin(5) |
|
|
|
|
| 3.63 | % |
|
|
|
| 3.91 | % |
(1) Includes non-accrual loans of $10.9 million and $3.4 million for the three months ended September 30, 2005 and 2004, respectively.
(2) Interest income includes loan origination fees of $888 thousand and $896 thousand for the three months ended September 30, 2005 and 2004, respectively.
(3) Non-taxable investment income is presented on a fully tax equivalent basis, adjusting for federal and state exemption of interest income and certain other permanent income tax differences.
(4) Interest rate spread represents the difference between the average yield on interest earning assets and the average cost of interest bearing liabilities and is presented on a fully tax equivalent basis.
(5) Net interest margin represents net interest income as a percentage of average interest earning assets.
15
For the third quarter of 2005, net interest income on a fully tax equivalent basis increased $968 thousand (10.2%) to $10.5 million from $9.5 million for the third quarter of 2004. The increase in net interest income resulted from an increase in interest income on a fully tax equivalent basis of $3.9 million (27.9%), which was partially offset by an increase in interest expense of $2.9 million (67.1%). Interest income increased mainly due to an increase in average earning assets of $172.4 million (17.9%), which accounted for a increase in interest income on a fully tax equivalent basis of $2.9 million. There was also an increase in rate on earning assets of 47 basis points, which accounted for an increase of $954 thousand in interest income on a fully tax equivalent basis. Interest expense increased mainly due to an increase in the cost of interest-bearing liabilities of 91 basis points, which accounted for $1.8 million of the increase. In addition, total interest-bearing liabilities increased $116.7 million (13.2%), accounting for $1.1 million of the increase in interest expense. The net interest margin expressed on a fully tax equivalent basis decreased 27 basis points to 3.67% for 2005 from 3.94% for 2004.
|
| Nine Months Ended September 30, |
| ||||||||||||||
|
| 2005 |
| 2004 |
| ||||||||||||
|
| Average |
| Interest |
| Yield/Rate |
| Average |
| Interest |
| Yield/Rate |
| ||||
|
| (Dollars in thousands ) |
| ||||||||||||||
Interest Earning Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Loans(1)(2) |
| $ | 966,584 |
| $ | 46,202 |
| 6.39 | % | $ | 790,113 |
| $ | 36,654 |
| 6.20 | % |
Taxable investment securities |
| 78,375 |
| 1,725 |
| 2.94 |
| 114,422 |
| 2,443 |
| 2.85 |
| ||||
Investment securities exempt from federal income taxes(3) |
| 18,342 |
| 866 |
| 6.31 |
| 20,586 |
| 734 |
| 4.76 |
| ||||
Federal funds sold |
| 998 |
| 9 |
| 1.21 |
| 40 |
| — |
| 0.89 |
| ||||
Other interest bearing deposits |
| 17,236 |
| 431 |
| 3.34 |
| 15,217 |
| 124 |
| 1.09 |
| ||||
Investment in unconsolidated trust subsidiaries |
| 789 |
| 53 |
| 8.98 |
| 593 |
| 42 |
| 9.46 |
| ||||
Total interest earning assets |
| 1,082,324 |
| 49,286 |
| 6.09 |
| 940,971 |
| 39,997 |
| 5.68 |
| ||||
Non-interest earning assets |
| 64,775 |
|
|
|
|
| 72,601 |
|
|
|
|
| ||||
Total assets |
| $ | 1,147,099 |
|
|
|
|
| $ | 1,013,572 |
|
|
|
|
| ||
Interest Bearing Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
NOW and money market deposit |
| $ | 95,860 |
| $ | 829 |
| 1.16 | % | $ | 140,836 |
| $ | 966 |
| 0.92 | % |
Savings deposit |
| 377,491 |
| 4,030 |
| 1.43 |
| 307,109 |
| 2,275 |
| 0.99 |
| ||||
Time deposits |
| 405,366 |
| 9,516 |
| 3.14 |
| 328,976 |
| 5,867 |
| 2.38 |
| ||||
Short-term borrowings |
| 6,133 |
| 123 |
| 2.68 |
| 11,108 |
| 146 |
| 1.76 |
| ||||
Long-term borrowings |
| 77,934 |
| 2,249 |
| 3.86 |
| 64,453 |
| 1,770 |
| 3.67 |
| ||||
Junior subordinated debt owed to unconsolidated trusts |
| 26,232 |
| 1,769 |
| 9.02 |
| 19,724 |
| 1,414 |
| 9.58 |
| ||||
Total interest bearing liabilities |
| 989,016 |
| 18,516 |
| 2.50 |
| 872,206 |
| 12,438 |
| 1.90 |
| ||||
Demand deposits—non-interest bearing |
| 35,434 |
|
|
|
|
| 51,970 |
|
|
|
|
| ||||
Other non-interest bearing liabilities |
| 49,089 |
|
|
|
|
| 19,755 |
|
|
|
|
| ||||
Stockholders’ equity, including stock owned by ESOP |
| 73,560 |
|
|
|
|
| 69,641 |
|
|
|
|
| ||||
Total liabilities and stockholders equity |
| $ | 1,147,099 |
|
|
|
|
| $ | 1,013,572 |
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net interest income/interest rate Spread(4) |
|
|
| $ | 30,770 |
| 3.59 | % |
|
| $ | 27,559 |
| 3.77 | % | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net interest margin on a fully tax equivalent basis(5) |
|
|
|
|
| 3.80 | % |
|
|
|
| 3.91 | % | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net interest margin(5) |
|
|
|
|
| 3.76 | % |
|
|
|
| 3.87 | % |
(1) Includes non-accrual loans of $7.3 million and $3.3 million for the nine months ended September 30, 2005 and 2004, respectively.
(2) Interest income includes loan origination fees of $2.4 million and $2.3 million for the nine months ended September 30, 2005 and 2004, respectively.
(3) Non-taxable investment income is presented on a fully tax equivalent basis, adjusting for federal and state exemption of interest income and certain other permanent income tax differences.
(4) Interest rate spread represents the difference between the average yield on interest earning assets and the average cost of interest bearing liabilities and is presented on a fully tax equivalent basis.
(5) Net interest margin represents net interest income as a percentage of average interest earning assets.
16
For the nine months ended September 30, 2005, net interest income on a fully tax equivalent basis increased $3.2 million (11.7%) to $30.8 million from $27.6 million for the nine months ended September 30, 2004. The increase in net interest income resulted from an increase in interest income on a fully tax equivalent basis of $9.3 million (23.2%), which was partially offset by an increase in interest expense of $6.1 million (48.9%). The increase in interest income on a fully tax equivalent basis was mainly due to an increase in total interest earning assets of $141.4 million (15.0%), which accounted for $7.6 million of the increase. The yield on interest earning assets also increased 41 basis points, which increased interest income on a fully tax equivalent basis by $1.7 million. The increase in interest expense was due to an increase in the yield on interest bearing liabilities of 60 basis points, which accounted for an increase in interest expense of $3.5 million. In addition, average interest-bearing liabilities increased a total of $116.8 million (13.4%), which increased interest expense by $2.5 million. The net interest margin expressed on a fully tax equivalent basis decreased 11 basis points to 3.80% for 2005 from 3.91% for 2004.
Volume, Mix and Rate Analysis of Net Interest Income. The following tables present the extent to which changes in volume, changes in interest rates, and changes in the interest rates times the changes in volume of interest earning assets and interest bearing liabilities have affected our interest income and interest expense during the periods indicated. Information is provided on changes in each category due to (i) changes attributable to changes in volume (change in volume times the prior period interest rate), (ii) changes attributable to changes in interest rate (changes in rate times the prior period volume) and (iii) changes attributable to changes in rate/volume (changes in interest rate times changes in volume). Changes attributable to the combined impact of volume and rate have been allocated proportionally to the changes due to volume and the changes due to rate:
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, |
| ||||||||||||||
|
| 2005 Compared to 2004 |
| 2005 Compared to 2004 |
| ||||||||||||||
|
| Change Due |
| Change Due |
| Total |
| Change Due |
| Change Due |
| Total |
| ||||||
|
| (In thousands) |
| ||||||||||||||||
Interest Earning Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Loans |
| $ | 3,038 |
| $ | 707 |
| $ | 3,745 |
| $ | 8,405 |
| $ | 1,143 |
| $ | 9,548 |
|
Taxable investment securities |
| (273 | ) | 7 |
| (266 | ) | (791 | ) | 73 |
| (718 | ) | ||||||
Investment securities exempt from federal income taxes(1) |
| 6 |
| 87 |
| 93 |
| (87 | ) | 219 |
| 132 |
| ||||||
Federal funds sold |
| 1 |
| — |
| 1 |
| 9 |
| — |
| 9 |
| ||||||
Other interest bearing deposits |
| 123 |
| 154 |
| 277 |
| 18 |
| 289 |
| 307 |
| ||||||
Investment in unconsolidated trust subsidiaries |
| 8 |
| (1 | ) | 7 |
| 13 |
| (2 | ) | 11 |
| ||||||
Total increase (decrease) in interest income |
| 2,903 |
| 954 |
| 3,857 |
| 7,567 |
| 1,722 |
| 9,289 |
| ||||||
Interest Bearing Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
NOW and money market deposit accounts |
| $ | (105 | ) | $ | 100 |
| $ | (5 | ) | $ | (353 | ) | $ | 216 |
| $ | (137 | ) |
Savings deposits |
| 50 |
| 567 |
| 617 |
| 600 |
| 1,155 |
| 1,755 |
| ||||||
Time deposits |
| 771 |
| 1,072 |
| 1,843 |
| 1,544 |
| 2,105 |
| 3,649 |
| ||||||
Short-term borrowings |
| (51 | ) | — |
| (51 | ) | (82 | ) | 59 |
| (23 | ) | ||||||
Long-term borrowings |
| 228 |
| 46 |
| 274 |
| 385 |
| 94 |
| 479 |
| ||||||
Junior subordinated debt owed to unconsolidated trusts |
| 223 |
| (12 | ) | 211 |
| 443 |
| (88 | ) | 355 |
| ||||||
Total increase (decrease) in interest expense |
| 1,116 |
| 1,773 |
| 2,889 |
| 2,537 |
| 3,541 |
| 6,078 |
| ||||||
Increase (decrease) in net interest income |
| $ | 1,787 |
| $ | (819 | ) | $ | 968 |
| $ | 5,030 |
| $ | (1,819 | ) | $ | 3,211 |
|
(1) Non-taxable investment income is presented on a fully tax equivalent basis, adjusting for federal and state exemption of interest income and certain other permanent income tax differences.
17
Other Income. Changes in other income between the three months ended September 30, 2005 and 2004, and between the nine months ended September 30, 2005 and 2004, were as follows:
|
| Three Months Ended |
|
|
| Nine Months Ended |
|
|
| ||||||||||
|
| September 30, |
| Net |
| September 30, |
| Net |
| ||||||||||
|
| 2005 |
| 2004 |
| difference |
| 2005 |
| 2004 |
| difference |
| ||||||
|
| (In thousands) |
| ||||||||||||||||
Other income: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Mortgage loan servicing fees |
| $ | 681 |
| $ | 592 |
| $ | 89 |
| $ | 1,942 |
| $ | 1,751 |
| $ | 191 |
|
Loan and other fees |
| 712 |
| 590 |
| 122 |
| 2,009 |
| 1,829 |
| 180 |
| ||||||
Service charges on deposits |
| 401 |
| 377 |
| 24 |
| 1,100 |
| 1,047 |
| 53 |
| ||||||
Gain on sale of loans |
| 665 |
| 374 |
| 291 |
| 1,766 |
| 2,373 |
| (607 | ) | ||||||
Gain on sale of securities |
| — |
| — |
| — |
| — |
| 272 |
| (272 | ) | ||||||
Other operating income |
| 414 |
| 164 |
| 250 |
| 809 |
| 692 |
| 117 |
| ||||||
|
| $ | 2,873 |
| $ | 2,097 |
| $ | 776 |
| $ | 7,626 |
| $ | 7,964 |
| (338 | ) | |
In the third quarter of 2005, other income increased by $776 thousand (37.0%) to $2.9 million from $2.1 million in the third quarter of 2004. Gain on sale of loans increased $291 thousand (77.8%) due to an increase in the sale of loans between September 30, 2004 and September 30, 2005. Title insurance premiums (included in “other operating income” above) increased $241 thousand mainly due to additional business generated from Title Guaranty’s new Santa Fe office.
In the first nine months of 2005, other income decreased by $338 thousand (4.2%) to $7.6 million from $8.0 million in the first nine months of 2004. Gain on sale of loans decreased $607 thousand (25.6%) due to fewer loans being sold in the first nine months of 2005 compared to the same period in 2004 (most of the loan sales in 2004 were during the first two quarters of the year, though in the third quarter of 2005 loan sales exceeded the sales in the third quarter of 2004.) Gain on sale of securities dropped $272 thousand (100.0%) due to the lack of security sales in 2005. Mortgage loan servicing fees increased $191 thousand (10.9%) in the first nine months of 2005, partially due to an increase in fees from issuing letters of credit. Loan and other fees increased $180 thousand (9.8%) largely due to an increase in ATM switch fees collected.
Other Expenses. Changes in other expenses between the three months ended September 30, 2005 and 2004 and the nine months ended September 30, 2005 and 2004 were as follows:
|
| Three Months Ended |
|
|
| Nine Months Ended |
|
|
| ||||||||||
|
| September 30, |
| Net |
| September 30, |
| Net |
| ||||||||||
|
| 2005 |
| 2004 |
| difference |
| 2005 |
| 2004 |
| difference |
| ||||||
|
| (In thousands) |
| ||||||||||||||||
Other expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Salaries and employee benefits |
| $ | 4,038 |
| $ | 3,725 |
| $ | 313 |
| $ | 12,059 |
| $ | 11,433 |
| $ | 626 |
|
Occupancy |
| 785 |
| 660 |
| 125 |
| 2,378 |
| 1,728 |
| 650 |
| ||||||
Data processing |
| 486 |
| 508 |
| (22 | ) | 1,391 |
| 1,442 |
| (51 | ) | ||||||
Marketing |
| 403 |
| 433 |
| (30 | ) | 1,133 |
| 983 |
| 150 |
| ||||||
Amortization and valuation of mortgage servicing rights |
| (162 | ) | 1,230 |
| (1,392 | ) | 902 |
| 1,120 |
| (218 | ) | ||||||
Supplies |
| 159 |
| 202 |
| (43 | ) | 559 |
| 583 |
| (24 | ) | ||||||
Loss (gain) on sale of other real estate owned |
| 123 |
| (3 | ) | 126 |
| 950 |
| 125 |
| 825 |
| ||||||
Postage |
| 142 |
| 143 |
| (1 | ) | 452 |
| 416 |
| 36 |
| ||||||
Other |
| 931 |
| 911 |
| 20 |
| 3,032 |
| 2,958 |
| 74 |
| ||||||
|
| $ | 6,905 |
| $ | 7,809 |
| $ | (904 | ) | $ | 22,856 |
| $ | 20,788 |
| $ | 2,068 |
|
18
For the third quarter of 2005, other expenses decreased $904 thousand (11.6%) to $6.9 million from $7.8 million in the third quarter of 2004. This decrease was primarily due to a decrease in the mortgage servicing rights impairment and amortization of $1.4 million (113.2%), due to an increase in the valuation of mortgage servicing rights that resulted from a higher interest rate environment. This was partially offset by an increase in salaries and employee benefits of $313 thousand (8.4%), mainly due to an increase in compensation per employee.
For the nine months ended September 30, 2005, other expenses increased $2.1 million (9.9%) to $22.9 million from $20.8 million in the first nine months of 2004. This increase was largely due to an increase on the sale of other real estate owned by $825 thousand (660.0%) due to the disposal of several residential real estate properties acquired in foreclosure during the third quarter of 2005. Occupancy expense increased by $650 thousand (37.6%) mainly due to expenses associated with the new Santa Fe office, which was opened for nine months in 2005 compared to just one month in 2004. Salaries and employee benefits also increased $626 thousand (5.5%), mainly due to an increase in compensation per employee.
Income Taxes. In the third quarter of 2005, income tax expense increased $1.1 million (92.2%) over the third quarter of 2004 to a total of $2.2 million compared to $1.1 million. The effective tax rate increased to 39.5% in the third quarter of 2005, compared to 35% in the third quarter of 2004.
In the nine months ended September 30, 2005, income tax expense was relatively flat from the same period in 2004, increasing $64 thousand (1.3%), remaining at a total of $4.9 million. The effective tax rate decreased slightly to 37.7% in the first nine months of 2005, compared to 38.1% in the first nine months of 2004. This decrease was mainly attributable to the tax benefit from the exercise of stock options.
Balance Sheet—General. Total assets at September 30, 2005 were at $1.2 billion, an increase of $142.5 million (13.2%) from December 31, 2004. Net loans increased $109.7 million (12.4%) during 2005 and cash and cash equivalents increased by $62.7 million (263.5%). This was partially offset by a decline in investments of $31.6 million (27.9%). During the same period, total liabilities increased $139.2 million (13.8%) to a total of $1.1 billion on September 30, 2005, from $1.0 billion on December 31, 2004. The increase in total liabilities was primarily due to an increase in total deposits of $141.0 million (16.0%). Stockholders’ equity (including stock owned by the Employee Stock Ownership Plan) increased $3.3 million (4.5%) to $76.2 million on September 30, 2005 compared to $73.0 million on December 31, 2004.
Investment Securities. The primary purposes of the investment portfolio are to provide a source of earnings for liquidity management purposes, to provide collateral to pledge against public deposits and to control interest rate risk. In managing the portfolio, we seek to obtain the objectives of safety of principal, liquidity, diversification and maximized return on funds. For an additional discussion with respect to these matters, see “Liquidity” and “Capital Resources” under Item 2 and “Asset Liability Management” under Item 3 below.
19
The following tables set forth the amortized cost and fair value of our securities by accounting classification category and by type of security as indicated:
|
| At September 30, 2005 |
| At December 31, 2004 |
| At September 30, 2004 |
| ||||||||||||
|
| Amortized Cost |
| Fair Value |
| Amortized Cost |
| Fair Value |
| Amortized Cost |
| Fair Value |
| ||||||
|
| (In thousands) |
| ||||||||||||||||
Securities Available for Sale: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
U.S. Government agencies |
| $ | 35,146 |
| $ | 34,789 |
| $ | 42,218 |
| $ | 41,907 |
| $ | 47,341 |
| $ | 47,290 |
|
States and political subdivisions |
| 5,995 |
| 5,967 |
| 2,210 |
| 2,191 |
| 2,221 |
| 2,216 |
| ||||||
Equity securities |
| 1 |
| 4 |
| 1 |
| 7 |
| 1 |
| 6 |
| ||||||
Total securities available for sale |
| $ | 41,142 |
| $ | 40,760 |
| $ | 44,429 |
| $ | 44,105 |
| $ | 49,563 |
| $ | 49,512 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Securities Held to Maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
U.S. Government agencies |
| $ | 19,760 |
| $ | 19,719 |
| $ | 46,547 |
| $ | 46,705 |
| $ | 52,723 |
| $ | 53,223 |
|
States and political subdivisions |
| 13,120 |
| 13,127 |
| 15,111 |
| 15,178 |
| 15,297 |
| 15,407 |
| ||||||
Total securities held to maturity |
| $ | 32,880 |
| $ | 32,846 |
| $ | 61,658 |
| $ | 61,883 |
| $ | 68,020 |
| $ | 68,630 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Other securities: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Non-marketable equity securities (including FRB and FHLB stock) |
| $ | 7,016 |
| $ | 7,016 |
| $ | 6,798 |
| $ | 6,798 |
| $ | 6,573 |
| $ | 6,573 |
|
Investment in unconsolidated trusts |
| 992 |
| 992 |
| 682 |
| 682 |
| 682 |
| 682 |
| ||||||
Total other securities |
| $ | 8,008 |
| $ | 8,008 |
| $ | 7,480 |
| $ | 7,480 |
| $ | 7,255 |
| $ | 7,255 |
|
Loan Portfolio. The following tables set forth the composition of the loan portfolio:
|
| At September 30, 2005 |
| At December 31, 2004 |
| At September 30, 2004 |
| |||||||||
|
| Amount |
| Percent |
| Amount |
| Percent |
| Amount |
| Percent |
| |||
|
| (Dollars in thousands) |
| |||||||||||||
Commercial |
| $ | 90,837 |
| 9.01 | % | $ | 92,736 |
| 10.35 | % | $ | 85,439 |
| 10.05 | % |
Commercial real estate |
| 383,149 |
| 38.02 |
| 346,454 |
| 38.65 |
| 335,236 |
| 39.45 |
| |||
Residential real estate |
| 314,061 |
| 31.17 |
| 282,380 |
| 31.50 |
| 261,535 |
| 30.77 |
| |||
Construction real estate |
| 165,195 |
| 16.39 |
| 121,769 |
| 13.59 |
| 116,417 |
| 13.70 |
| |||
Installment and other |
| 54,471 |
| 5.41 |
| 52,984 |
| 5.91 |
| 51,260 |
| 6.03 |
| |||
Total loans |
| 1,007,713 |
| 100.00 |
| 896,323 |
| 100.00 |
| 849,887 |
| 100.00 |
| |||
Unearned income |
| (2,216 | ) |
|
| (2,002 | ) |
|
| (1,958 | ) |
|
| |||
Gross loans |
| 1,005,497 |
|
|
| 894,321 |
|
|
| 847,929 |
|
|
| |||
Allowance for loan losses |
| (9,850 | ) |
|
| (8,367 | ) |
|
| (8,554 | ) |
|
| |||
Net loans |
| $ | 995,647 |
|
|
| $ | 885,954 |
|
|
| $ | 839,375 |
|
|
|
Total loans increased $157.8 million (18.6%) to $1.0 billion at September 30, 2005 from $849.9 million at September 30, 2004. The increase was due primarily to growth in the Company’s residential, construction, and commercial real estate loan portfolios as the percentage levels of the categories of loans within the portfolio remained relatively constant. The strong loan growth was due to market conditions combined with the additional activity generated from the company’s second Santa Fe office, opened in August 2004.
20
Asset Quality. The following table sets forth the amounts of non-performing loans and non-performing assets at the dates indicated:
|
| At September 30, |
| At December 31, |
| At September 30, |
| |||||
|
| (Dollars in Thousands) |
| |||||||||
Non-accruing loans |
| $ | 11,587 |
| $ | 5,714 |
| $ | 3,391 |
| ||
Loans 90 days or more past due, still accruing interest |
| 69 |
| 8 |
| 12 |
| |||||
Total non-performing loans |
| 11,656 |
| 5,722 |
| 3,403 |
| |||||
Other real estate owned |
| 330 |
| 6,438 |
| 6,728 |
| |||||
Other repossessed assets |
| 24 |
| 64 |
| 68 |
| |||||
Total non-performing assets |
| $ | 12,010 |
| $ | 12,224 |
| $ | 10,199 |
| ||
|
|
|
|
|
|
|
| |||||
Total non-performing loans to total loans |
| 1.16 | % | 0.64 | % | 0.40 | % | |||||
Allowance for loan losses to non-performing loans |
| 84.5 | % | 146.23 | % | 251.40 | % | |||||
Total non-performing assets to total assets |
| 0.98 | % | 1.13 | % | 0.95 | % | |||||
At September 30, 2005, total non-performing assets increased $1.8 million (17.8%) to $12.0 million from $10.2 million at September 30, 2004 due to increases in non-accruing loans of $8.2 million (241.7%), which was largely offset by a decrease in other real estate owned of $6.4 million (95.1%). The increase in non-accrual loans was due mainly to $5.8 million in commercial loans to one borrower being placed on non-accrual status in June of 2005. This loan is collateralized by commercial property, construction equipment and accounts receivable. Management has allocated $2.0 million of the allowance for loan losses for these loans in the event that the customer will not be able to fully repay. The decrease in other real estate owned was primarily due to the sale of $5.8 million in residential real estate and residential construction property in 2005.
At September 30, 2005, total non-performing assets decreased $214 thousand (1.8%) to $12.0 million from $12.2 million at December 31, 2004 primarily due to increases in non-accruing loans of $5.9 million, as discussed above, which was largely offset by a decrease in other real estate owned of $6.1 million. The decrease in other real estate owned was primarily due to the sale of $5.8 million in residential real estate and residential construction property in 2005.
Allowance for Loan Losses. Management believes the allowance for loan losses accounting policy is critical to the portrayal and understanding of the Company’s financial condition and results of operations. As such, selection and application of this “critical accounting policy” involves judgments, estimates, and uncertainties that are susceptible to change. In the event that different assumptions or conditions were to prevail, and depending upon the severity of such changes, the possibility of materially different financial condition or results of operations is a reasonable likelihood.
The allowance for loan losses is maintained at an amount that management believes will be adequate to absorb probable losses on existing loans, based on an evaluation of the collectibility of loans and prior loss experience. This evaluation also takes into consideration such factors as changes in the nature and volume of the loan portfolio, the value of underlying collateral, overall portfolio quality, review of specific problem loans and current economic conditions that may affect the borrower’s ability to pay. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions. In addition, as an integral part of their examination process regulatory agencies periodically review the Company’s allowance for loan losses and may require the Company to make additions to the allowance based on their evaluation of information available at the time of their examinations.
21
The following table presents an analysis of the allowance for loan losses for the periods presented:
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||
|
| 2005 |
| 2004 |
| 2005 |
| 2004 |
| ||||
|
| (Dollars in thousands) |
| ||||||||||
Balance at beginning of period |
| $ | 9,364 |
| $ | 8,289 |
| $ | 8,367 |
| $ | 7,368 |
|
Provision for loan losses |
| 750 |
| 450 |
| 2,100 |
| 1,650 |
| ||||
Total charge-offs |
| (311 | ) | (308 | ) | (740 | ) | (603 | ) | ||||
Total recoveries |
| 47 |
| 123 |
| 123 |
| 139 |
| ||||
Net charge-offs |
| (264 | ) | (185 | ) | (617 | ) | (464 | ) | ||||
Balance at end of period |
| $ | 9,850 |
| $ | 8,554 |
| $ | 9,850 |
| $ | 8,554 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross loans at end of period |
| $ | 1,005,497 |
| $ | 847,929 |
| $ | 1,005,497 |
| $ | 847,929 |
|
Ratio of allowance to total loans |
| 0.98 | % | 1.01 | % | 0.98 | % | 1.01 | % | ||||
Ratio of net charge-offs to average loans (1) |
| 0.10 | % | 0.09 | % | 0.09 | % | 0.08 | % |
(1) Net charge-offs are annualized for the purposes of this calculation.
Net charge-offs for the three months ended September 30, 2005 totaled $264 thousand, an increase of $79 thousand (42.7%) from $185 thousand for the three months ended September 30, 2004. The majority of the charge-offs were installment and commercial loans. The provision for loan losses increased by $300 thousand (66.7%) for the three months ended September 30, 2005, due to management’s analysis of current non-performing loans.
Net charge-offs for the nine months ended September 30, 2005 totaled $617 thousand, an increase of $153 thousand (33.0%) from $464 thousand from the nine months ended September 30, 2004. The majority of the charge-offs were installment and commercial loans. The provision for loan losses increased by $450 thousand (27.3%) for the nine months ended September 30, 2005, due to management’s analysis of current non-performing loans.
The following table sets forth the allocation of the allowance for loan losses for the periods presented and the percentage of loans in each category to total loans. An allocation for a loan classification is only for internal analysis of the adequacy of the allowance and is not an indication of expected or anticipated losses:
|
| At September 30, 2005 |
| At December 31, 2004 |
| At September 30, 2004 |
| |||||||||
|
| Amount |
| Percent |
| Amount |
| Percent |
| Amount |
| Percent |
| |||
|
| (Dollars in thousands) |
| |||||||||||||
Commercial |
| $ | 3,681 |
| 9.01 | % | $ | 3,502 |
| 10.35 | % | $ | 1,998 |
| 10.05 | % |
Commercial and residential real estate |
| 3,513 |
| 69.19 |
| 2,511 |
| 70.15 |
| 3,363 |
| 70.22 |
| |||
Construction real estate |
| 1,842 |
| 16.39 |
| 981 |
| 13.59 |
| 1,193 |
| 13.70 |
| |||
Installment and other |
| 802 |
| 5.41 |
| 1,369 |
| 5.91 |
| 1,978 |
| 6.03 |
| |||
Unallocated |
| 12 |
| N/A |
| 4 |
| N/A |
| 22 |
| N/A |
| |||
Total |
| $ | 9,850 |
| 100.00 | % | $ | 8,367 |
| 100.00 | % | $ | 8,554 |
| 100.00 | % |
N/A—not applicable
22
The portion of the allocation that was based upon historical loss experience decreased by $1.4 million (37.8%) in 2005, from $3.7 million on December 31, 2004 to $2.3 million on September 30, 2005. This was largely due to a decrease in the allocation for commercial loans which decreased by $1.7 million and the allocation for installment and other loans which decreased by $862 thousand. This was partially offset by an increase in the allocation for commercial and residential real estate of $1.1 million. These changes were due to a change in the losses we actually experienced during the nine months ended September 30, 2005. Historical loss allocation declined $553 thousand (19.5%) from September 30, 2004 to September 30, 2005 This was mainly due to a decrease in the allocation for installment and other loans of $1.3 million and the allocation for commercial loans of $421 thousand, which was largely offset by an increase in the allocation for commercial and residential real estate of $1.1 million. Concentration allocation was relatively unchanged from December 31, 2005 to September 30, 2005, remaining at $5.1 million. From September 30, 2004 to September 30, 2005, the concentration allocation decreased slightly, by $243 thousand (4.5%). Concentration allocation was relatively unchanged due to little change in the actual loan concentrations of the Bank. From December 31, 2004 to September 30, 2005, the allocation for specifically identified loans increased, from $446 thousand to $2.4 million, an increase of $2.0 million (438.1%). From September 30, 2004 to September 30, 2005, the allocation for specifically identified loans increased $2.1 million (607.7%). These increases were largely due to an allocation for $2.0 million being made in June of 2005 for a single borrower, as discussed above.
Management anticipates continued growth in the loan portfolio due to a strong local economy, an expected Los Alamos National Laboratory budget of over $2 billion and continued new home construction and expansion in Santa Fe. The volume of commercial real estate and construction loans is also anticipated to increase as the industry continues to strengthen and the recovery in capital spending boosts production and profits in 2005. Although record mortgage financing peaked in 2003, the housing market for new construction and resale homes is expected to remain strong, especially in the under $500 thousand market, which should remain constant. Residential real estate for property worth greater than $1.5 million is expected to be as “soft” as during the last several years.
Additions to the allowance for loan losses, which are charged to earnings through the provision for loan losses, are determined based on a variety of factors, as indicated above. Although management believes the allowance for loan losses is sufficient to cover probable losses inherent in the loan portfolio, there can be no assurance that the allowance will prove sufficient to cover actual future loan losses.
Potential Problem Loans. The Company utilizes an internal asset classification system as a means of reporting problem and potential problem assets. At scheduled Board of Directors meetings every quarter, a list of total adversely classified assets is presented, showing other real estate owned, other repossessed assets, and all loans listed as “Substandard,” “Doubtful” and “Loss.” All non-accrual loans are classed either as “Substandard” or “Doubtful” and are thus included in total adversely classified assets. A separate watch list of loans classified as “Special Mention” is also presented. An asset is classified Substandard if it is inadequately protected by the current net worth and paying capacity of the obligor and/or of the collateral pledged, if any. Substandard assets include those characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Assets classified as Doubtful have all the weaknesses inherent in those classified Substandard 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. Assets classified as Loss are those considered uncollectible and viewed as non-bankable assets, worthy of charge-off. Assets that do not currently expose the Company to sufficient risk to warrant classification in one of the aforementioned categories, but possess weaknesses that may or may not be within the control of the customer are deemed to be Special Mention.
The Company’s determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the Bank’s primary regulators, which can order the establishment of additional general or specific loss allowances. The Comptroller of the Currency, in conjunction with the other federal banking agencies, has adopted an interagency policy statement on the allowance for loan losses. The policy statement provides guidance for financial institutions on both the responsibilities of management for the assessment and establishment of adequate allowances and guidance for banking agency examiners to use in determining the adequacy of general valuation guidelines. Generally, the policy statement recommends that (i) institutions have effective systems and controls to identify, monitor and address asset quality problems; (ii) management has analyzed all significant factors that affect the collectibility of the portfolio in a reasonable manner; and (iii) management has 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. The Company analyzes its process regularly, with modifications made if needed, and reports those results quarterly at Board of Directors meetings. However, there can be no assurance that regulators, in reviewing the Company’s loan portfolio, will not request the Company to materially increase its allowance for loan losses at a future time. Although management believes that adequate specific and general loan loss allowances have been established, actual losses are dependent upon future events and, as such, further additions to the level of specific and general loan loss allowances may become necessary.
23
The following table shows the amounts of adversely classified assets and special mention loans as of the periods indicated:
|
| At September 30, 2005 |
| At December 31, |
| At September 30, |
| |||
|
| (Dollars in thousands) |
| |||||||
Loans classified as: |
|
|
|
|
|
|
| |||
Substandard |
| $ | 19,794 |
| $ | 15,810 |
| $ | 12,734 |
|
Doubtful |
| 1,319 |
| 201 |
| 218 |
| |||
Total adversely classified loans |
| 21,113 |
| 16,011 |
| 12,952 |
| |||
Other real estate owned |
| 330 |
| 6,438 |
| 6,728 |
| |||
Other repossessed assets |
| 24 |
| 64 |
| 68 |
| |||
Total adversely classified assets |
| $ | 21,467 |
| $ | 22,513 |
| $ | 19,748 |
|
|
|
|
|
|
|
|
| |||
Special mention loans |
| $ | 15,854 |
| $ | 22,834 |
| $ | 17,673 |
|
Total adversely classified assets increased $1.7 million (8.7%) from September 30, 2004 to September 30, 2005. The main reason for the increase was an increase of $7.1 million in loans classified as substandard and an increase of $1.1 million in loans classified as doubtful, which was partially offset by a decrease in other real estate owned of $6.4 million. The increase in loans classified as substandard was due mainly to one large borrowing relationship being downgraded. The increase in loans classified as doubtful was mainly due to the same relationship downgrade. The decrease in other real estate owned was primarily due to the sale of $5.8 million in residential real estate and residential construction property in 2005. Special mention loans decreased $1.8 million (10.3%) from September 30, 2004 to September 30, 2005, primarily due to several loans having been upgraded to pass and some loans having been downgraded further to substandard.
Sources of Funds
Liquidity and Sources of Capital
The Company’s cash flows are comprised of three classifications: cash flows from operating activities, cash flows from investing activities and cash flows from financing activities. Net cash provided by operating activities was $6.9 million and $12.7 million for the nine months ended September 30, 2005 and 2004, respectively. Net cash provided by operating activities decreased $5.8 million in the first nine months of 2005 compared to the first nine months of 2004 largely due to a decline in the gross sales of loans held for sale by $39.4 million over the first nine months of 2004, which was partially offset by the origination of loans held for sale that decreased $33.2 million in the same period. Net cash used in investing activities was $(77.0) million and $(66.5) million for the nine months ended September 30, 2005 and 2004, respectively. The $10.5 million increase in cash used in investing activities was largely due to the decrease of $28.4 million in the proceeds from the sale of investment securities and the decrease of $14.5 million in the proceeds from the maturities and paydowns of investment securities. This was partially offset by a decrease of $24.6 million in cash used for the purchases of investment securities and a decrease of $6.8 million in cash used for the purchase of premises and equipment. Net cash provided by financing activities was $132.9 million and $59.7 million for the nine months ended September 30, 2005 and 2004, respectively. The $73.2 million increase in cash provided by financing activities was mainly due to an increase in new deposit growth of $108.5 million in the first nine months of 2005 compared to the first nine months of 2004. This was partially offset by a decrease in cash provided by net borrowings activity of $35.8 million.
The Company expects to have available cash to meet its liquidity needs. Liquidity management is monitored by the Asset/Liability Committee of the Bank, which takes into account the marketability of assets, the sources and stability of funding and the level of unfunded commitments. In the event that additional short-term liquidity is needed, the Company has established relationships with several large regional banks to provide short-term borrowings in the form of federal funds purchases. The Company has borrowed, and management believes that the Company could again borrow, up to $94.0 million for a short time from these banks on a collective basis. Additionally, the Bank is a member of the Federal Home Loan Bank (“FHLB”) and has the ability to borrow from the FHLB. As a contingency plan for significant funding needs, the Asset/Liability committee may also consider the sale of investment securities, selling securities under agreement to repurchase, sale of certain loans and/or the temporary curtailment of lending activities.
At September 30, 2005, the Company’s total risk-based capital ratio was 11.93%, the Tier 1 capital to risk-weighted assets ratio was 10.27%, and the Tier 1 capital to average assets ratio was 8.51%. At December 31, 2004, the Company’s total risk-based capital ratio was 11.59%, the Tier 1 capital to risk-weighted assets ratio was 10.65%, and the Tier 1 capital to average assets ratio was 8.87%.
24
At September 30, 2005, the Bank’s total risk-based capital ratio was 11.46%, the Tier 1 capital to risk-weighted assets ratio was 10.46%, and the Tier 1 capital to average assets ratio was 8.66%. At December 31, 2004, the Bank’s total risk-based capital ratio was 10.78%, the Tier 1 capital to risk-weighted assets ratio was 9.83%, and the Tier 1 capital to average assets ratio was 8.19%. The Bank was categorized as “well-capitalized” under Federal Deposit Insurance Corporation regulations at September 30, 2005 and December 31, 2004.
At September 30, 2005 and December 31, 2004, the Company’s book value per common share was $11.50 and $10.84, respectively.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Asset Liability Management
The Company’s net interest income is subject to “interest rate risk” to the extent that it can vary based on changes in the general level of interest rates. It is the Company’s policy to maintain an acceptable level of interest rate risk over a range of possible changes in interest rates while remaining responsive to market demand for loan and deposit products. The strategy employed by the Company to manage its interest rate risk is to measure its risk using an asset/liability simulation model and adjust the maturity of securities in its investment portfolio to manage that risk.
Interest rate risk can also be measured by analyzing the extent to which the repricing of assets and liabilities are mismatched to create an interest sensitivity “gap”. An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time period. The interest rate sensitivity gap is defined as the difference between the amount of interest earning assets maturing or repricing within a specific time period and the amount of interest bearing liabilities maturing or repricing within that same time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. During a period of rising interest rates, therefore, a negative gap would tend to adversely affect net interest income. Conversely, during a period of falling interest rates, a negative gap position would tend to result in an increase in net interest income.
The following table sets forth the amounts of interest earning assets and interest bearing liabilities outstanding at September 30, 2005, which are anticipated by the Company, based upon certain assumptions, to reprice or mature in each of the future time periods shown. Except as stated below, the amount of assets and liabilities shown which reprice or mature during a particular period were determined based on the earlier of the term to repricing or the term to repayment of the asset or liability. The table is intended to provide an approximation of the projected repricing of assets and liabilities at September 30, 2005 on the basis of contractual maturities and scheduled rate adjustments within a three-month period and subsequent selected time intervals. The loan amounts in the table reflect principal balances expected to be reinvested and/or repriced as a result of contractual amortization and rate adjustments on adjustable-rate loans. Loan and investment securities contractual maturities and amortization reflect modest prepayment assumptions. While NOW, money market and savings deposit accounts have adjustable rates, it is assumed that the interest rates on these accounts will not adjust immediately to changes in other interest rates. Therefore, the table is calculated assuming that these accounts will reprice based upon an historical analysis of rate changes of these particular accounts, with repricing assigned to these accounts from one to thirteen months.
25
|
| Time to Maturity or Repricing |
| |||||||||||||
As of September 30, 2005: |
| 0-90 Days |
| 91-365 Days |
| 1-5 Years |
| Over 5 Years |
| Total |
| |||||
|
| (In thousands) |
| |||||||||||||
Interest Earning Assets: |
|
|
|
|
|
|
|
|
|
|
| |||||
Loans |
| $ | 492,851 |
| $ | 422,014 |
| $ | 61,980 |
| $ | 28,652 |
| $ | 1,005,497 |
|
Loans held for sale |
| 15,666 |
| — |
| — |
| — |
| 15,666 |
| |||||
Investment securities |
| 19,385 |
| 38,409 |
| 15,385 |
| 7,477 |
| 80,656 |
| |||||
Securities purchased under agreements to resell |
| 655 |
| — |
| — |
| — |
| 655 |
| |||||
Interest bearing deposits with banks |
| 62,211 |
| — |
| — |
| — |
| 62,211 |
| |||||
Investment in unconsolidated trusts |
| 186 |
| — |
| — |
| 806 |
| 992 |
| |||||
Total interest earning assets |
| $ | 590,954 |
| $ | 460,423 |
| $ | 77,365 |
| $ | 36,935 |
| $ | 1,165,677 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Interest Bearing Liabilities: |
|
|
|
|
|
|
|
|
|
|
| |||||
NOW and money market deposit accounts |
| $ | 122,581 |
| $ | 110,086 |
| — |
| — |
| $ | 232,667 |
| ||
Savings deposits |
| 92,200 |
| 153,067 |
| 7,386 |
| — |
| 252,653 |
| |||||
Time deposits |
| 108,470 |
| 234,932 |
| 76,393 |
| 24,046 |
| 443,841 |
| |||||
Short- and long-term borrowings |
| 1,956 |
| 5,986 |
| 21,026 |
| 55,293 |
| 84,261 |
| |||||
Borrowings made by ESOP to outside parties |
| 1,214 |
| — |
| — |
| — |
| 1,214 |
| |||||
Junior subordinated debt owed to unconsolidated trusts |
| 6,186 |
| — |
| — |
| 28,806 |
| 34,992 |
| |||||
Total interest bearing liabilities |
| $ | 332,607 |
| $ | 504,071 |
| $ | 104,805 |
| $ | 108,145 |
| $ | 1,049,628 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Rate sensitive assets (RSA) |
| $ | 590,954 |
| $ | 1,051,377 |
| $ | 1,128,742 |
| $ | 1,165,677 |
| $ | 1,165,677 |
|
Rate sensitive liabilities (RSL) |
| 332,607 |
| 836,678 |
| 941,483 |
| 1,049,628 |
| 1,049,628 |
| |||||
Cumulative GAP (GAP=RSA-RSL) |
| 258,347 |
| 214,699 |
| 187,259 |
| 116,049 |
| 116,049 |
| |||||
RSA/Total assets |
| 48.33 | % | 85.98 | % | 92.30 | % | 95.32 | % | 95.32 | % | |||||
RSL/Total assets |
| 27.20 | % | 68.42 | % | 76.99 | % | 85.83 | % | 85.83 | % | |||||
GAP/Total assets |
| 21.13 | % | 17.56 | % | 15.31 | % | 9.49 | % | 9.49 | % | |||||
GAP/RSA |
| 43.72 | % | 20.42 | % | 16.59 | % | 9.96 | % | 9.96 | % |
Certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types of assets may lag behind changes in market rates. Additionally, in the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating the table. Therefore, the Company does not rely solely on a gap analysis to manage its interest rate risk, but rather it uses what it believes to be the more reliable simulation model relating to changes in net interest income as set forth below.
Changes in net interest income between the periods below reflect changes in the composition of interest earning assets and interest bearing liabilities, related interest rates, repricing frequencies, and the fixed or variable characteristics of the interest earning assets and interest bearing liabilities. Projections of income given by the model are not actual predictions, but rather show our relative interest rate risk. Actual interest income may vary from model projections. Based on simulation modeling at September 30, 2005 and December 31, 2004, the Company’s net interest income would change over a one-year time period due to changes in interest rates as follows:
Change in Net Interest Income Over One Year Horizon
Changes in Levels of |
| At September 30, 2005 |
| At December 31, 2004 |
| ||||||
Interest Rates |
| Dollar Change |
| Percentage Change |
| Dollar Change |
| Percentage Change |
| ||
|
| (Dollars in thousands) |
| ||||||||
+ 2.00 | % | $ | (4,436 | ) | (10.41 | )% | $ | (5,183 | ) | (13.25 | )% |
+ 1.00 |
| (3,677 | ) | (8.63 | ) | (2,030 | ) | (5.19 | ) | ||
(1.00 | ) | (852 | ) | (2.00 | ) | 595 |
| 1.52 |
| ||
(2.00 | ) | (2,991 | ) | (7.02 | ) | 78 |
| 0.20 |
| ||
Simulations used by the Company assume the following:
26
1. Changes in interest rates are immediate.
2. It is the Company’s policy that interest rate exposure due to a 2.00% interest rate rise or fall be limited to 15.0% of the Company’s annual net interest income, as forecasted by the simulation model. As demonstrated by the table above, the Company’s interest rate risk exposure was within this policy at September 30, 2005.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures: An evaluation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Act”)) was carried out as of September 30, 2005 under the supervision and with the participation of our Chief Executive Officer, Chief Financial Officer and several other members of our senior management. Our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2005, our disclosure controls and procedures were effective in ensuring that the information we are required to disclose in the reports we file or submit under the Act is (i) accumulated and communicated to our management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
Changes in Internal Control Over Financial Reporting: During the quarter ended September 30, 2005, no change occurred in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
We do not expect that our disclosure controls and procedures and internal control over financial reporting will prevent all error and all 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. 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 also 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 may 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.
27
Neither Trinity, the Bank nor Title Guaranty are involved in any pending legal proceedings which, in the opinion of management, in the aggregate, are material to our consolidated financial condition.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. �� Submission of Matters to a Vote of Security Holders
None
None
31.1 Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a)
31.2 Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a)
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
28
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned thereunto duly authorized.
| TRINITY CAPITAL CORPORATION | |
|
| |
|
| |
Date: November 9, 2005 | By: | /s/ WILLIAM C. ENLOE |
|
| William C. Enloe |
|
| President and Chief Executive Officer |
|
|
|
Date: November 9, 2005 | By: | /s/ DANIEL R. BARTHOLOMEW |
|
| Daniel R. Bartholomew |
|
| Chief Financial Officer |
29