As filed with the Securities and Exchange Commission on March 16, 2006
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
ý ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended December 31, 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 |
TRINITY CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
New Mexico |
| 85-0242376 |
(State or other jurisdiction of incorporation or |
| (I.R.S. Employer Identification No.) |
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1200 Trinity Drive |
| 87544 |
(Address of principal executive offices) |
| (Zip Code) |
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Registrant’s telephone number, including area code (505) 662-5171 | ||
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Securities registered pursuant to Section 12(b) of the Act: None | ||
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Securities registered pursuant to Section 12(g) of the Act: | ||
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Common Stock | ||
20,000,000 authorized shares | ||
(Title of class) |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. o Yes ý No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. o Yes ý No
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. ý Yes o No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filed, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (check one)
Large Accelerated Filer o | Accelerated Filer ý | Non-Accelerated Filer o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). o Yes ý No
The aggregate market value of the registrant’s common stock (“Common Stock”) held by non-affiliates as of June 30, 2005, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $131,298,000 (based on the last sale price of the Common Stock at June 30, 2005 of $28.50 per share).
As of March 10, 2006, there were 6,587,249 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Document of the Registrant |
| Form 10-K Reference Location |
Portions of the 2006 Proxy Statement |
| PART III |
TABLE OF CONTENTS
Please note: Unless the context clearly suggests otherwise, references in this Form 10-K to “us,” “we”, “our” or “the Company” include Trinity Capital Corporation and its wholly owned subsidiaries, including Los Alamos National Bank, TCC Appraisal Services Corporation, TCC Advisors Corporation, TCC Funds and Title Guaranty & Insurance Company.
Trinity Capital Corporation
General. Trinity Capital Corporation (“Trinity”), a financial holding company organized under the laws of the State of New Mexico, is the sole shareholder of Los Alamos National Bank (the “Bank”), the sole shareholder of TCC Appraisal Services Corporation (“TCC Appraisal”), and the sole shareholder of Title Guaranty & Insurance Company (“Title Guaranty”). Los Alamos National Bank is the sole shareholder of TCC Advisors Corporation (“TCC Advisors”). Trinity is located in Los Alamos, New Mexico, a small community in the Jemez Mountains of Northern New Mexico. Los Alamos has approximately 19,000 residents and enjoys worldwide recognition as the birthplace of the atomic bomb at Los Alamos National Laboratory (the “Laboratory”). Today, the Laboratory remains a pre-eminent research facility for scientific and technological development in numerous scientific fields. The Laboratory is currently operated by the University of California for the United States Department of Energy; in June 2006, Los Alamos National Security, LLC will take over operations for the Department of Energy. The Laboratory employs (directly and indirectly) approximately 11,300 residents of northern New Mexico, making it the largest employer in the area. The Laboratory remains the cornerstone of the community and has attracted numerous other scientific businesses headquartered in the area.
Los Alamos National Bank was founded in 1963 by local investors to provide convenient, full-service banking to the unique scientific community that developed around the Laboratory. Los Alamos National Bank is a full-service commercial banking institution with four bank locations in Los Alamos, White Rock and Santa Fe, New Mexico and a loan production office in Albuquerque, New Mexico. We provide a broad range of banking products and services, including credit, cash management, deposit, asset management and trust products to our targeted customer base of individuals and small and medium-sized businesses. As of December 31, 2005, we had total assets of $1.2 billion, net loans of $1.0 billion and deposits (net of deposits of affiliates) of $1.0 billion. LANB created TCC Advisors in February 2006, to enable us to manage certain assets and register with the SEC as a Registered Investment Advisor should we chose to do so in the future. In February 2006, TCC Funds, a Delaware Business Trust was created with Trinity as its sponsor, to allow for the creation of a mutual fund.
Trinity acquired Title Guaranty, a privately owned title insurance company in May 2000, making it the only title company in New Mexico to be owned by a bank holding company. Title Guaranty is a title insurance company organized under the laws of the State of New Mexico doing business in Los Alamos and Santa Fe Counties. Title Guaranty opened its second office in the Bank’s Downtown Santa Fe facility in February 2005. The services provided by Title Guaranty complement the services provided by Trinity’s other subsidiaries, the Bank and TCC Appraisal. Title Guaranty provides title insurance, closing services, escrow and notary service, searches and title reports for Los Alamos and Santa Fe Counties.
TCC Appraisal is a real estate appraisal company created by Trinity in January 2006. TCC Appraisal provides residential real estate appraisals for properties in Los Alamos County. TCC Appraisal’s offices are located in the Company’s headquarter building in Los Alamos.
Corporate Structure. Trinity Capital Corporation was organized in 1975 as a bank holding company, as defined in the Bank Holding Company Act of 1956, as amended, (“BHCA”) and elected to become a Financial Holding Company, as defined in that Act. Trinity acquired the stock of Los Alamos National Bank in 1975 and serves as the holding company for the Bank. In 2000, Trinity purchased Title Guaranty & Insurance Company, a title insurance company located in and doing business in Los Alamos and Santa Fe Counties. In 2006, Trinity created TCC Appraisal, a real estate appraisal company located in and doing business in Los Alamos County. Title Guaranty, TCC Appraisal, and the Bank are wholly-owned subsidiaries of Trinity. Los Alamos National Bank created TCC Advisors in February 2006. In addition, Trinity owns all the common shares of four business trusts, which were created by Trinity for the sole purpose of issuing an aggregate of $33.0 million in trust preferred securities. In February 2006, Trinity created TCC Funds, a Delaware Business Trust created for the purpose of creating and holding mutual funds. Trinity’s sole business is the ownership of the outstanding shares of the Bank, TCC Appraisal, Title Guaranty and the administration of the Trusts and Trinity does not anticipate expanding its operations in the future. The address of our headquarters is 1200 Trinity Drive, Los Alamos, New Mexico 87544, our main telephone number is (505) 662-5171 and our general email address is tcc@lanb.com.
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We maintain a website at www.lanb.com/tcc. We make available free of charge on or through our website, the annual report on Form 10-K, proxy statements, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the Securities and Exchange Commission. The Company will also provide copies of its filings free of charge upon written request to: TCC Stock Representative, Trinity Capital Corporation, 1200 Trinity Drive, Los Alamos, New Mexico 87544. In addition, you may read and copy any materials we filed with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers such as Trinity. Our filings are also available free of charge on the SEC’s website at http://www.sec.gov.
Regulation and Supervision
Financial institutions and their holding companies are extensively regulated under federal and state law. As a result, the growth and earnings performance of Trinity may be affected not only by management decisions and general economic conditions, but also by the requirements of state and federal statutes and by the regulations and policies of various bank regulatory authorities, including the Office of the Comptroller of the Currency (the “OCC”), the Board of Governors of the Federal Reserve System (the “Federal Reserve”) and the Federal Deposit Insurance Corporation (the “FDIC”). Furthermore, taxation laws administered by the Internal Revenue Service and state taxing authorities and securities laws administered by the Securities and Exchange Commission (the “SEC”) and state securities authorities have an impact on the business of Trinity. The effect of applicable statutes, regulations and regulatory policies may be significant, and cannot be predicted with a high degree of certainty.
Federal and state laws and regulations generally applicable to financial institutions regulate, among other things, the scope of business, the kinds and amounts of investments, reserve requirements, capital levels relative to operations, the nature and amount of collateral for loans, the establishment of branches, mergers and consolidations, and the payment of dividends. This system of supervision and regulation establishes a comprehensive framework for the respective operations of Trinity and its subsidiaries and is intended primarily for the protection of FDIC-insured deposit funds and depositors, rather than shareholders.
The following is a summary of the material elements of the regulatory framework that applies to Trinity. It does not describe all of the statutes, regulations and regulatory policies that apply, nor does it restate all of the requirements of the statutes, regulations and regulatory policies that are described. As such, the following is qualified in its entirety by reference to the applicable statutes, regulations and regulatory policies. Any change in applicable law, regulations or regulatory policies may have a material effect on the business of Trinity.
General. Trinity, as the sole shareholder of Los Alamos National Bank, is a financial holding company. As a financial holding company, Trinity is registered with, and is subject to regulation by, the Federal Reserve under the BHCA. In accordance with Federal Reserve policy, Trinity is expected to act as a source of financial strength to Los Alamos National Bank and to commit resources to support Los Alamos National Bank in circumstances where Trinity might not otherwise do so. Under the BHCA, Trinity is subject to periodic examination by the Federal Reserve. Trinity is also required to file with the Federal Reserve periodic reports of Trinity’s operations and such additional information regarding Trinity and its subsidiaries as the Federal Reserve may require.
Acquisitions, Activities and Change in Control. The primary purpose of a bank or financial holding company is to control banks. Under the BHCA, a holding company must obtain Federal Reserve approval before: (i) acquiring, directly or indirectly, ownership or control of any voting shares of another bank or bank holding company if, after the acquisition, it would own or control more than 5% of the voting shares of the other bank or bank holding company (unless it already owns or controls the majority of such shares); (ii) acquiring all or substantially all of the assets of another bank; or (iii) merging or consolidating with another bank holding company. Subject to certain conditions (including certain deposit concentration limits established by the BHCA), the Federal Reserve may allow a bank holding company to acquire banks located in any state of the United States. In approving interstate acquisitions, the Federal Reserve is required to give effect to applicable state law limitations on the aggregate amount of deposits that may be held by the acquiring holding company and its insured depository institution affiliates in the state in which the target bank is located and state laws that require that the target bank have been in existence for a minimum period of time (not to exceed five years) before being acquired by an out-of-state holding company.
The BHCA generally prohibits a bank holding company from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company that is not a bank and from engaging in any business other than that of banking, managing and controlling banks or furnishing services to banks and their subsidiaries. This general prohibition is subject to a number of exceptions. The principal exception allows bank holding companies to engage in, and to own shares of companies engaged in, certain businesses found by the Federal Reserve to be “so closely related to banking ... as to be a proper incident thereto.” Under current regulations of the Federal Reserve, this authority would permit Trinity to engage in a variety of banking-related businesses, including the operation of a thrift, sales and consumer finance, equipment leasing, the operation of a computer service bureau (including software development), and mortgage banking and brokerage. The BHCA generally does not place territorial restrictions on the domestic activities of non-bank subsidiaries of bank holding companies.
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Bank holding companies that meet certain eligibility requirements prescribed by the BHCA and elect to operate as financial holding companies may engage in, or own shares in companies engaged in, a wider range of non-banking activities, including, but not limited to, securities and insurance activities and any other activity that the Federal Reserve, in consultation with the Secretary of the Treasury, determines by regulation or order is financial in nature, incidental to any such financial activity or complementary to any such financial activity and does not pose a substantial risk to the safety or soundness of depository institutions or the financial system generally. Trinity elected (and the Federal Reserve accepted Trinity’s election) to operate as a financial holding company.
Federal law also prohibits any person or company from acquiring “control” of an FDIC-insured depository institution or its holding company without prior notice to the appropriate federal bank regulator. “Control” is conclusively presumed to exist upon the acquisition of 25% or more of the outstanding voting securities of a bank or bank holding company, but may arise under certain circumstances at 10% ownership.
Capital Requirements. Holding companies are required to maintain minimum levels of capital in accordance with Federal Reserve capital adequacy guidelines. If capital falls below minimum guideline levels, a holding company, among other things, may be denied approval to acquire or establish additional banks or non-bank businesses.
The Federal Reserve’s capital guidelines establish the following minimum regulatory capital requirements for holding companies: (i) a risk-based requirement expressed as a percentage of total assets weighted according to risk; and (ii) a leverage requirement expressed as a percentage of total assets. The risk-based requirement consists of a minimum ratio of total capital to total risk-weighted assets of 8% and a minimum ratio of Tier 1 capital to total risk-weighted assets of 4%. The leverage requirement consists of a minimum ratio of Tier 1 capital to total assets of 3% for the most highly rated companies, with a minimum requirement of 4% for all others. For purposes of these capital standards, Tier 1 capital consists primarily of permanent stockholders’ equity less intangible assets (other than certain loan servicing rights and purchased credit card relationships). Total capital consists primarily of Tier 1 capital plus certain other debt and equity instruments that do not qualify as Tier 1 capital and a portion of the company’s allowance for loan and lease losses.
The risk-based and leverage standards described above are minimum requirements. Higher capital levels will be required if warranted by the particular circumstances or risk profiles of individual banking organizations. For example, the Federal Reserve’s capital guidelines contemplate that additional capital may be required to take adequate account of, among other things, interest rate risk, or the risks posed by concentrations of credit, nontraditional activities or securities trading activities. Further, any banking organization experiencing or anticipating significant growth would be expected to maintain capital ratios, including tangible capital positions (i.e., Tier 1 capital less all intangible assets), well above the minimum levels. As of December 31, 2005, Trinity had regulatory capital in excess of the Federal Reserve’s minimum requirements.
Dividends. Trinity’s ability to pay dividends to its shareholders may be affected by both general corporate law considerations and policies of the Federal Reserve applicable to holding companies. New Mexico law prohibits Trinity from paying dividends if, after giving effect to the dividend: (i) Trinity would be unable to pay its debts as they become due in the usual course of its business; or (ii) Trinity’s total assets would be less than the sum of its total liabilities and (unless Trinity’s articles of incorporation otherwise permit) the maximum amount that then would be payable, in any liquidation, in respect of all outstanding shares having preferential rights in liquidation. Additionally, policies of the Federal Reserve caution that a holding company should not pay cash dividends that exceed its net income or that can only be funded in ways that weaken the holding company’s financial health, such as by borrowing. The Federal Reserve also possesses enforcement powers over holding companies and their non-bank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations. Among these powers is the ability to proscribe the payment of dividends by banks and bank holding companies.
Federal Securities Regulation. Trinity’s common stock is registered with the SEC under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Consequently, Trinity is subject to the information, proxy solicitation, insider trading and other restrictions and requirements of the SEC under the Exchange Act.
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Los Alamos National Bank
General. Los Alamos National Bank is a national banking organization created under the laws of the United States of America. The Bank is regulated primarily by the OCC, a branch of the Department of Treasury. The Bank currently has four bank offices and one loan production office. In February 2006, the Bank created TCC Advisors as a wholly owned subsidiary of the Bank.
Products and Services. The Bank provides a full range of financial services for deposit customers and we lend money to credit-worthy borrowers at competitive interest rates, and our strategy has been to position ourselves in the market as a low-fee, high-value community bank. Our products include certificates of deposits, checking and saving accounts, Individual Retirement Accounts, loans, mortgage loan servicing, trust and brokerage services, international services, and safe deposit boxes. These business activities make up our three key processes: investment of funds, generation of funds and service-for-fee income. We achieved our success in part by minimizing charges relating to the investment and generation of funds processes, i.e. loans, credit cards, checking, and savings accounts. The profitability of our operations depends primarily on our net interest income, which is the difference between total interest earned on interest earning assets and total interest paid on interest bearing liabilities, and our ability to maintain efficient operations. In addition to our net interest income, we produce additional income through our mortgage servicing operations and other income processes, such as trust and brokerage. A more complete description of our products and services makeup can be found under “Management’s Discussion and Analysis and Results of Operations” in Item 7 in this Form 10-K.
Lending Activities.
General. We provide a broad range of commercial and retail lending services to corporations, partnerships, individuals and government agencies. We actively market our services to qualified borrowers. Lending officers actively solicit the business of new borrowers entering our market areas as well as long-standing members of the local business community. We have established lending policies which include a number of underwriting factors to be considered in making a loan, including location, loan to value ratio, cash flow and the credit history of the borrower. Our current maximum lending limit to one borrower is approximately $16.9 million. Our loan portfolio is comprised primarily of loans in the areas of commercial real estate, residential real estate, construction, general commercial and consumer lending. As of December 31, 2005, residential mortgages made up approximately 31% of our loan portfolio, commercial real estate loans comprised approximately 37%, construction lending comprised 17%, general commercial loans comprised 9% and consumer lending comprised 6%.
Residential Real Estate Loans. Residential mortgage lending has been a focal point since our formation in 1963. A majority of the residential mortgage loans we originate and retain are in the form of 15- and 30-year variable rate loans, a number that increased as a result of the interest rate reductions in 2001, 2002 and 2003. We also originate 15- to 30-year fixed rate residential mortgages and we sell most of these to outside investors. We retain the servicing of almost all of the residential mortgages we originate. We believe the retention of mortgage servicing provides us with a relatively steady source of fee income as compared to fees generated solely from mortgage origination operations. Moreover, the retention of such servicing rights allows us to continue to have regular contact with mortgage customers and solidifies our involvement with the community.
Commercial Real Estate Loans. The largest portion of our loan portfolio is comprised of commercial real estate loans. The primary repayment risk for a commercial real estate loan is the failure of the business due to economic events or governmental regulations outside of the control of the borrower or lender that negatively impact the future cash flow and market values of the affected properties. We have collateralized these loans and, in most cases, take personal guarantees to help assure repayment. Our commercial real estate loans are primarily made based on the identified cash flow of the borrower and secondarily on the underlying real estate acting as collateral. Credit support provided by the borrower for most of these loans and the probability of repayment is based on the liquidation of the real estate and enforcement of a personal guarantee, if any exists.
Construction Loans. We have also been active in financing construction of residential and commercial properties in northern New Mexico. We manage the risk of construction lending through the use of underwriting and construction loan guidelines and require the work be done by reputable contractors. Construction loans are structured either to be converted to permanent loans at the end of the construction phase or to be paid off upon receiving financing from another financial institution. The amount financed on construction loans is based on the appraised value of the property, as determined by an independent appraiser, and an analysis of the potential marketability and profitability of the project. Construction loans generally have terms of up to 24 months, with extensions as needed. Loan proceeds are disbursed on a percentage of completion basis, as determined by inspections, with all construction required to be completed prior to the final disbursement of funds.
Construction loans afford us the opportunity to increase the interest rate sensitivity of our loan portfolio and to receive yields higher than those obtainable on adjustable rate mortgage loans secured by existing residential properties. These higher yields correspond to the higher risks associated with construction lending.
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Commercial Loans. The Bank is an active commercial lender. Our focus in commercial lending concentrates on loans to building contractors, developers, business services companies and retailers. The Bank provides various credit products to our commercial customers including lines of credit for working capital and operational purposes and term loans for the acquisition of equipment and other purposes. Collateral on commercial loans typically includes accounts receivable, furniture, fixtures, inventory and equipment. In addition, almost all commercial loans also have personal guarantees to assure repayment. The terms of most commercial loans range from one to seven years. A significant portion of our commercial business loans has floating interest rates or reprice within one year.
Consumer Loans. We also provide all types of consumer loans including motor vehicle, home improvement, student loans, credit cards, signature loans and small personal credit lines. Consumer loans typically have shorter terms and lower balances with higher yields as compared to our other loans, but generally carry higher risks of default. Consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be affected by adverse personal circumstances.
Additional information on the risks associated with our banking activities and products and concentrations can be found under Risk Factors in Section 1A of this Form 10-K.
Market Area. The Bank’s customers are concentrated in northern and central New Mexico, particularly in Santa Fe and Los Alamos counties. Los Alamos, the base of our operations, lies within Los Alamos County and has approximately 19,000 residents. The primary employer in Los Alamos County is the Laboratory, one of the world’s pre-eminent scientific research and development facilities operated by the University of California for the United States Department of Energy until June 2006 at which time Los Alamos National Security, LLC will operate the Laboratory for the Department of Energy. The Laboratory employs approximately 8,300 employees and an additional 3,000 subcontractors. Most of the employees are scientists, engineers and technicians, contributing to Los Alamos County’s exceptional percentages of the population with high school diplomas or equivalents (96.3%) and those with bachelor or higher degrees (60.5%) compared with national averages of 80.4% and 24.4% respectively. The concentration of highly skilled and highly educated residents provides the Bank with a sophisticated customer base and supports an average median income over 85% greater than the national average and an unemployment rate (2.8%) almost one-half the national average (5.5%).
In 1999, the Bank opened a full-service office in Santa Fe, New Mexico and opened a second full-service office in Downtown Santa Fe in August of 2004. Santa Fe serves as the capital of New Mexico and is located approximately 35 miles south-east of Los Alamos. The primary employers in Santa Fe are the state and federal governments. Santa Fe County has approximately 139,000 residents with its local economy based primarily on government and tourism. The Bank’s continued expansion into Santa Fe has permitted the convenient provision of products and services to our existing customer base in Santa Fe as well as attracting new customers in Santa Fe. The addition of our second office in Santa Fe has resulted in a considerable growth of our customer base by providing a convenient location for the large number of businesses and customers based near the Santa Fe Plaza, which is located in the central part of the business district and government facilities.
We expanded and expect to continue expansion in the Santa Fe market in part to take advantage of the population growth, which has been higher than the state and national averages. From 1990 to 2000, Santa Fe County’s population grew 30.7%. From April 1, 2000 to July 1, 2004 it grew 7.3%, compared to a national average of 4.3%. New Mexico’s population growth continues to be high compared to national averages at 20.1% between 1990 and 2000 and 4.6% from April, 2000 to July 1, 2004. The population growth for Los Alamos County, where two of our offices are located, was 1.3% from 1990 to 2000 and 2.5% from April 1, 2000 to July 1, 2004. Both Santa Fe and Los Alamos counties have higher than median and per capita income levels, and higher than national averages of homeownership, both in comparison to New Mexico and national averages.
Competition. We face strong competition both in originating loans and in attracting deposits. Competition in originating real estate loans comes primarily from other commercial banks, savings institutions and mortgage bankers making loans secured by real estate located in our market area. Commercial banks and finance companies, including finance company affiliates of automobile manufacturers, provide vigorous competition in consumer lending. We compete for real estate and other loans principally on the basis of the interest rates and loan fees we charge, the types of loans we originate and the quality and speed of services we provide to borrowers.
There is substantial competition in attracting deposits from other commercial banks, savings institutions, money market and mutual funds, credit unions and other investment vehicles. Our ability to attract and retain deposits depends on our ability to provide investment opportunities that satisfy the requirements of investors as to rate of return, liquidity, risk and other factors. Under the Gramm-Leach-Bliley Act enacted in 2000, securities firms and insurance companies that elect to become financial holding companies may acquire banks and other financial institutions. This has significantly changed the competitive environment in which we conduct business. The financial services industry has also become more competitive as further technological advances enable more companies to provide financial services. These technological advances may diminish the importance of depository institutions and other financial intermediaries in the transfer of funds between parties.
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Employees. As of December 31, 2005, the Bank had approximately 260 full time-equivalent employees. We are not a party to any collective bargaining agreements. Employee relations are excellent as evidenced by the results of our annual employee satisfaction surveys. Over the last six years, the results of the employee satisfaction survey have consistently shown satisfaction levels exceeding our peers according to the independent consultant hired to administer and evaluate our surveys.
Regulation and Supervision
General. Los Alamos National Bank is a national bank, chartered by the OCC under the National Bank Act. The deposit accounts of Los Alamos National Bank are insured by the FDIC’s Bank Insurance Fund (“BIF”), and Los Alamos National Bank is a member of the Federal Reserve System. As a national bank, Los Alamos National Bank is subject to the examination, supervision, reporting and enforcement requirements of the OCC, the chartering authority for national banks. The FDIC, as administrator of the BIF, also has regulatory authority over Los Alamos National Bank. Los Alamos National Bank is also a member of the Federal Home Loan Bank System, which provides a central credit facility primarily for member institutions.
Deposit Insurance. As an FDIC-insured institution, Los Alamos National Bank is required to pay deposit insurance premium assessments to the FDIC. The FDIC has adopted a risk-based assessment system under which all insured depository institutions are placed into one of nine categories and assessed insurance premiums based upon their respective levels of capital and results of supervisory evaluations. Institutions classified as well-capitalized (as defined by the FDIC) and considered healthy pay the lowest premium while institutions that are less than adequately capitalized (as defined by the FDIC) and considered of substantial supervisory concern pay the highest premium. Risk classification of all insured institutions is made by the FDIC for each semi-annual assessment period.
During the year ended December 31, 2005, BIF assessments ranged from 0% of deposits to 0.27% of deposits. For the semi-annual assessment period beginning January 1, 2006, BIF assessment rates will continue to range from 0% of deposits to 0.27% of deposits.
FICO Assessments. Since 1987, a portion of the deposit insurance assessments paid by members of the FDIC’s Savings Association Insurance Fund (“SAIF”) has been used to cover interest payments due on the outstanding obligations of the Financing Corporation (“FICO”). FICO was created in 1987 to finance the recapitalization of the Federal Savings and Loan Insurance Corporation, the SAIF’s predecessor insurance fund. As a result of federal legislation enacted in 1996, beginning as of January 1, 1997, both SAIF members and BIF members became subject to assessments to cover the interest payments on outstanding FICO obligations until the final maturity of such obligations in 2019. These FICO assessments are in addition to amounts assessed by the FDIC for deposit insurance. During the year ended December 31, 2005, the FICO assessment rate for BIF and SAIF members was approximately 0.01% of deposits.
Supervisory Assessments. National banks are required to pay supervisory assessments to the OCC to fund the operations of the OCC. The amount of the assessment is calculated using a formula that takes into account the bank’s size and its supervisory condition (as determined by the composite rating assigned to the bank as a result of its most recent OCC examination). During the year ended December 31, 2005, Los Alamos National Bank paid supervisory assessments to the OCC totaling $239,000.
Capital Requirements. The OCC has established the following minimum capital standards for national banks, such as Los Alamos National Bank: (i) a leverage requirement consisting of a minimum ratio of Tier 1 capital to total assets of 3% for the most highly-rated banks with a minimum requirement of at least 4% for all others; and (ii) a risk-based capital requirement consisting of a minimum ratio of total capital to total risk-weighted assets of 8% and a minimum ratio of Tier 1 capital to total risk-weighted assets of 4%. In general, the components of Tier 1 capital and total capital are the same as those for bank holding companies discussed above.
The capital requirements described above are minimum requirements. Higher capital levels will be required if warranted by the particular circumstances or risk profiles of individual institutions. For example, the regulations of the OCC provide that additional capital may be required to take adequate account of, among other things, interest rate risk or the risks posed by concentrations of credit, nontraditional activities or securities trading activities.
Further, federal law and regulations provide various incentives to financial institutions to maintain regulatory capital at levels in excess of minimum regulatory requirements. For example, a financial institution that is “well-capitalized” may qualify for exemptions from prior notice or application requirements otherwise applicable to certain types of activities and may qualify for expedited processing of other required notices or applications. Additionally, one of the criteria that determines a bank holding company’s eligibility to operate as a financial holding company is a requirement that all of its financial institution subsidiaries be “well-capitalized.” Under the regulations of the OCC, in order to be “well-capitalized” a financial institution must maintain a ratio of total capital to total risk-weighted assets of 10% or greater, a ratio of Tier 1 capital to total risk-weighted assets of 6% or greater and a ratio of Tier 1 capital to total assets of 5% or greater.
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Federal law also provides the federal banking regulators with broad power to take prompt corrective action to resolve the problems of undercapitalized institutions. The extent of the regulators’ powers depends on whether the institution in question is “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized,” in each case as defined by regulation. Depending upon the capital category to which an institution is assigned, the regulators’ corrective powers include: (i) requiring the institution to submit a capital restoration plan; (ii) limiting the institution’s asset growth and restricting its activities; (iii) requiring the institution to issue additional capital stock (including additional voting stock) or to be acquired; (iv) restricting transactions between the institution and its affiliates; (v) restricting the interest rate the institution may pay on deposits; (vi) ordering a new election of directors of the institution; (vii) requiring that senior executive officers or directors be dismissed; (viii) prohibiting the institution from accepting deposits from correspondent banks; (ix) requiring the institution to divest certain subsidiaries; (x) prohibiting the payment of principal or interest on subordinated debt; and (xi) ultimately, appointing a receiver for the institution.
As of December 31, 2005: (i) Los Alamos National Bank was not subject to a directive from the OCC to increase its capital to an amount in excess of the minimum regulatory capital requirements; (ii) Los Alamos National Bank exceeded its minimum regulatory capital requirements under OCC capital adequacy guidelines; and (iii) Los Alamos National Bank was “well-capitalized,” as defined by OCC regulations.
Dividends. The National Bank Act imposes limitations on the amount of dividends that may be paid by a national bank, such as Los Alamos National Bank. Generally, a national bank may pay dividends out of its undivided profits in such amounts and at such times as the bank’s board of directors deems prudent. Without prior OCC approval, however, a national bank may not pay dividends in any calendar year that, in the aggregate, exceed the bank’s year-to-date net income plus the bank’s retained net income for the two preceding years.
The payment of dividends by any financial institution is affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations, and a financial institution generally is prohibited from paying any dividends if, following payment thereof, the institution would be undercapitalized. As described above, Los Alamos National Bank exceeded its minimum capital requirements under applicable guidelines as of December 31, 2005. As of December 31, 2005, approximately $12.9 million was available to be paid as dividends by Los Alamos National Bank. Notwithstanding the availability of funds for dividends, however, the OCC may prohibit the payment of any dividends by Los Alamos National Bank if the OCC determines such payment would constitute an unsafe or unsound practice.
Insider Transactions. Los Alamos National Bank is subject to certain restrictions imposed by federal law on extensions of credit to Trinity, on investments in the stock or other securities of Trinity and the acceptance of the stock or other securities of Trinity as collateral for loans. Los Alamos National Bank also is subject to certain restrictions imposed by federal law on extensions of credit by Los Alamos National Bank to its directors and officers, to directors and officers of Trinity and its subsidiaries, to principal shareholders of Trinity and to “related interests” of such directors, officers and principal shareholders. In addition, federal law and regulations may affect the terms upon which any person who is a director or officer of Trinity or Los Alamos National Bank or a principal shareholder of Trinity may obtain credit from banks with which Los Alamos National Bank maintains correspondent relationships.
Safety and Soundness Standards. The federal banking agencies have adopted guidelines that establish operational and managerial standards to promote the safety and soundness of federally insured depository institutions. The guidelines set forth standards for internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, asset quality and earnings.
In general, the safety and soundness guidelines prescribe the goals to be achieved in each area, and each institution is responsible for establishing its own procedures to achieve those goals. If an institution fails to comply with any of the standards set forth in the guidelines, the institution’s primary federal regulator may require the institution to submit a plan for achieving and maintaining compliance. If an institution fails to submit an acceptable compliance plan, or fails in any material respect to implement a compliance plan that has been accepted by its primary federal regulator, the regulator is required to issue an order directing the institution to cure the deficiency. Until the deficiency cited in the regulator’s order is cured, the regulator may restrict the institution’s rate of growth, require the institution to increase its capital, restrict the rates the institution pays on deposits or require the institution to take any action the regulator deems appropriate under the circumstances. Noncompliance with the standards established by the safety and soundness guidelines may also constitute grounds for other enforcement action by the federal banking regulators, including cease and desist orders and civil money penalty assessments.
Branching Authority. National banks headquartered in New Mexico, such as Los Alamos National Bank, have the same branching rights in New Mexico as banks chartered under New Mexico law, subject to OCC approval. New Mexico law grants New Mexico-chartered banks the authority to establish branches anywhere in the State of New Mexico, subject to receipt of all required regulatory approvals.
7
Federal law permits state and national banks to merge with banks in other states subject to: (i) regulatory approval; (ii) federal and state deposit concentration limits; and (iii) state law limitations requiring the merging bank to have been in existence for a minimum period of time (not to exceed five years) prior to the merger. The establishment of new interstate branches or the acquisition of individual branches of a bank in another state (rather than the acquisition of an out-of-state bank in its entirety) is permitted only in those states the laws of which expressly authorize such expansion.
Financial Subsidiaries. Under Federal law and OCC regulations, national banks are authorized to engage, through “financial subsidiaries,” in any activity that is permissible for a financial holding company and any activity that the Secretary of the Treasury, in consultation with the Federal Reserve, determines is financial in nature or incidental to any such financial activity, except (i) insurance underwriting, (ii) real estate development or real estate investment activities (unless otherwise permitted by law), (iii) insurance company portfolio investments and (iv) merchant banking. The authority of a national bank to invest in a financial subsidiary is subject to a number of conditions, including, among other things, requirements that the bank must be well-managed and well-capitalized (after deducting from capital the bank’s outstanding investments in financial subsidiaries). Los Alamos National Bank has not applied for approval to establish any financial subsidiaries.
Federal Reserve System. Federal Reserve regulations, as presently in effect, require depository institutions to maintain non-interest earning reserves against their transaction accounts (primarily NOW and regular checking accounts), as follows: for transaction accounts aggregating $48.3 million or less, the reserve requirement is 3% of total transaction accounts; and for transaction accounts aggregating in excess of $48.3 million, the reserve requirement is $1.215 million plus 10% of the aggregate amount of total transaction accounts in excess of $48.3 million. The first $7.8 million of otherwise reservable balances are exempted from the reserve requirements. These reserve requirements are subject to annual adjustment by the Federal Reserve. Los Alamos National Bank is in compliance with the foregoing requirements.
Recent Regulatory Developments. On February 8, 2006, President Bush signed the Federal Deposit Insurance Reform Act of 2005 (“FDIRA”) into law as part of the Deficit Reduction Act of 2005 and on February 15, 2006, President Bush signed into law the technical and conforming amendments designed to implement FDIRA. FDIRA provides for legislative reforms to modernize the federal deposit insurance system.
Among other things, FDIRA: (i) merges the BIF and the SAIF of the FDIC into a new Deposit Insurance Fund (the “DIF”); (ii) allows the FDIC, after March 31, 2010, to increase deposit insurance coverage by an adjustment for inflation and requires the FDIC’s Board of Directors, not later than April 1, 2010 and every five years thereafter, to consider whether such an increase is warranted; (iii) increases the deposit insurance limit for certain employee benefit plan deposits from $100,000 to $250,000, subject to adjustments for inflation after March 31, 2010, and provides for pass-through insurance coverage for such deposits; (iv) increases the deposit insurance limit for certain retirement account deposits from $100,000 to $250,000, subject to adjustments for inflation after March 31, 2010; (v) allows the FDIC’s Board of Directors to set deposit insurance premium assessments in any amount the Board of Directors deems necessary or appropriate, after taking into account various factors specified in FDIRA; (vi) replaces the fixed designated reserve ratio of 1.25% with a reserve ratio range of 1.15%-1.50%, with the specific reserve ratio to be determined annually by the FDIC by regulation; (vii) permits the FDIC to revise the risk-based assessment system by regulation; (viii) requires the FDIC, at the end of any year in which the reserve ratio of the DIF exceeds 1.5% of estimated insured deposits, to declare a dividend payable to insured depository institutions in an amount equal to 100% of the amount held by the DIF in excess of the amount necessary to maintain the DIF’s reserve ratio at 1.5% of estimated insured deposits or to declare a dividend equal to 50% of the amount in excess of the amount necessary to maintain the reserve ratio at 1.35% if the reserve ratio is between 1.35%-1.5% of estimated insured deposits; and (ix) provides a one-time credit based upon the assessment base of the institution on December 31, 1996 to each insured depository institution that was in existence as of December 31, 1996 and paid a deposit insurance assessment prior to that date (or a successor to any such institution).
The merger of the BIF and SAIF will take effect by July 1, 2006, while the remaining provisions are not effective until the FDIC issues final regulations. FDIRA requires the FDIC to issue final regulations no later than 270 days after enactment: (i) designating a reserve ratio; (ii) implementing increases in deposit insurance coverage; (iii) implementing the dividend requirement; (iv) implementing the one-time assessment credit; and (v) providing for assessments in accordance with FDIRA.
8
Title Guaranty & Insurance Company
General. Title Guaranty is a title insurance company organized under the laws of New Mexico and doing business in Los Alamos and Santa Fe Counties. We acquired Title Guaranty in May of 2000 to provide services related to the lending activities of Los Alamos National Bank. Title Guaranty has provided services to the Los Alamos community since its founding in 1963 and handled approximately 65% of the mortgages recorded in Los Alamos County in 2005. Title Guaranty continues to face strong competition in Los Alamos County from the two other title companies in Los Alamos which collectively handled approximately 35% of the mortgages recorded in Los Alamos County in 2005. Title Guaranty opened a second office in the Bank’s Downtown Santa Fe facility in February 2005 under a lease and purchase agreement with LandAmerica Capitol City Title Services, Inc. to provide title services and products in Santa Fe County. Title Guaranty faces strong competition in Santa Fe County from numerous other title companies. In 2005, Title Guaranty handled approximately 3% of the mortgages recorded in Santa Fe County. The New Mexico Public Regulation Commission oversees the title industry. Title Guaranty is regulated by the New Mexico Department of Insurance and is required to file annual experience reports and is audited annually by the Department of Insurance. The annual experience report requires that Title Guaranty be audited by a certified public accountant.
Employees. As of December 31, 2005, Title Guaranty had approximately 13 full time-equivalent employees. We are not a party to any collective bargaining agreements.
Products and Services. The products and services offered by Title Guaranty include: title insurance; closings: purchase/sale, commercial, construction, refinance, tax deferred exchange, relocation, and courtesy; escrow and notary services; searches; and title reports. Title insurance covers lenders, investors, and property owners from potential losses that can arise in real estate ownership and is typically required for loans collateralized by real property. To streamline its processes, Title Guaranty has employed the latest technology in the title insurance industry allowing customers to view the status of their file online through an internet based software, Ramquest Software. Title Guaranty’s national underwriters are Chicago Title Insurance Company, Commonwealth Land Title Insurance Company, Fidelity National Title Insurance Company and Lawyers Title Insurance Corporation.
Trinity Capital Trust I, II, III and IV
Trinity Capital Trust I, Trinity Capital Trust II, Trinity Capital Trust III, and Trinity Capital Trust IV (the “Trusts”) are Delaware statutory business trusts formed in 2000, 2001, 2004, and 2005, for the purpose of issuing $10 million, $6 million, $6 million, and $10 million, in trust preferred securities and lent the proceeds to Trinity. Trinity guarantees, on a limited basis, payments of distributions on the trust preferred securities and payments on redemption of the trust preferred securities.
The trust preferred securities are currently included in the Tier 1 capital of Trinity for regulatory capital purposes. However, the Federal Reserve Board recently enacted a rule that may limit the inclusion of some of our trust preferred securities in Tier 1 capital for regulatory capital purposes after 2009, although we believe that we will be able to continue treating it all as Tier 1 capital under the rule. See Note 9, “Junior Subordinated Debt Owed to Unconsolidated Trusts” and Note 16, “Regulatory Matters” in the notes to consolidated financial statements included in Item 8, “Financial Statements and Supplementary Data,” of this report.
In addition to the other information in this Annual Report on Form 10-K, shareholders or prospective investors should carefully consider the following risk factors:
Our profitability is dependent upon the health of the markets in which we operate.
We operate primarily in northern and central New Mexico, and as a result, our financial condition, results of operations and cash flows are subject to changes in the economic conditions in those areas. We have developed a particularly strong presence in Los Alamos and Santa Fe Counties and their surrounding communities. Our success depends upon the business activity, population, income levels, deposits and real estate activity in these markets. Although our customers’ business and financial interests may extend well beyond these market areas, adverse economic conditions that affect these market areas could reduce our growth rate, affect the ability of our customers to repay their loans to us and generally affect our financial condition and results of operations. Because of our geographic concentration, we are less able than other regional or national financial institutions to diversify our credit risks across multiple markets.
9
Central to the health of the economies of Los Alamos and Santa Fe Counties is the Laboratory. The Laboratory is currently transitioning from operation and management under the University of California to Los Alamos National Security, LLC. Los Alamos National Security, LLC, a limited liability company composed of the University of California, Bechtel, BWX Technologies, and the Washington Group International, will take over management and operation of the Laboratory in June 2006 after over 40 years of operation by the University of California. The Laboratory employs, directly or indirectly, over 11,000 residents of northern New Mexico. The Laboratory’s budget, the most important indicator of Laboratory health, remained stable at $2.2 billion for 2005-2006.
Our growth must be effectively managed and our growth strategy involves risks that may impact our net income.
As part of our general growth strategy, we may expand into additional communities or attempt to strengthen our position in our current markets to take advantage of expanding market share by opening new offices. To the extent that we undertake additional office openings, we are likely to experience the effects of higher operating expenses relative to operating income from the new operations for a period of time, which may have an adverse effect on our levels of reported net income, return on average equity and return on average assets. Our current growth strategies involve internal growth from our current offices and additional smaller office openings whose additional overhead expenses can be more quickly absorbed.
We must compete with other banks and financial institutions in all lines of business.
The banking and financial services business in our market is highly competitive. Our competitors include large regional banks, local community banks, savings institutions, securities and brokerage companies, mortgage companies, insurance companies, finance companies, money market mutual funds, credit unions and other non-bank financial service providers. Many of these competitors are not subject to the same regulatory restrictions as we are and are able to provide customers with an alternative to traditional banking services.
Increased competition in our market and market changes, such as interest rate changes, force management to better control costs in order to absorb any resultant narrowing of our net interest margin, i.e., the spread between the interest rates earned on investments and loans and the interest rates paid on deposits and other interest-bearing liabilities. Without effective management and cost controls, net income may be adversely impacted by changing conditions and competition. Our efficiency leads to a decreased cost of operation that allows us to effectively anticipate and respond to market and competitive changes without adversely affecting net income.
Interest rates and other conditions impact our results of operations.
Our profitability is in part a function of net interest margin. Like most banking institutions, our net interest margin will be affected by general economic conditions and other factors, including fiscal and monetary policies of the federal government, that influence market interest rates and our ability to respond to changes in such rates. At any given time, our assets and liabilities will be such that they are affected differently by a given change in interest rates. As a result, an increase or decrease in rates, the length of loan terms or the mix of adjustable and fixed rate loans in our portfolio could have a positive or negative effect on our net income, capital and liquidity. We measure interest rate risk under various rate scenarios and using specific criteria and assumptions. A summary of this process, along with the results of our net interest income simulations is presented at “Quantitative and Qualitative Disclosures About Market Risk” included under Item 7A of Part II of this Form 10-K. Although we believe our current level of interest rate sensitivity is reasonable and effectively managed, significant fluctuations in interest rates may have an adverse effect on our business, financial condition and results of operations.
We must effectively manage our credit risk.
There are risks inherent in making any loan, including risks inherent in dealing with individual borrowers, risks of nonpayment, risks resulting from uncertainties as to the future value of collateral and risks resulting from changes in economic and industry conditions. We attempt to minimize our credit risk through prudent loan application approval procedures, careful monitoring of the concentration of our loans within specific industries and periodic independent reviews of outstanding loans by our loan review and audit departments as well as external auditors. However, we cannot assure such approval and monitoring procedures will eliminate these credit risks.
The majority of the bank’s loan portfolio is invested in commercial real estate, residential real estate, construction, general commercial and consumer lending. The maximum amount of the commercial loans we can offer is smaller than loans that our national and regional competitors with larger lending limits. While there is little demand for loans over our legal lending limit, we can and have engaged in participation loans with other financial institutions to respond to customer requirements. However, there are some loans and relationships that we cannot effectively compete for due to our size.
10
Our allowance for loan losses must be managed to provide sufficient reserves to absorb potential losses in our loan portfolio.
We established our allowance for loan losses in consultation with management and external auditor recommendations, and maintain it at a level considered adequate by management to absorb probable loan losses based on a continual analysis of our portfolio and market environment. The amount of loan losses is susceptible to changes in economic, operating and other conditions within our market, which may be beyond our control, and such losses may exceed current estimates. At December 31, 2005, our allowance for loan losses as a percentage of total loans was 0.87% and as a percentage of total non-performing loans was approximately 110.02%. Although management believes that the allowance for loan losses is adequate to absorb losses on any existing loans that may become uncollectible, we cannot predict loan losses with certainty, and we cannot assure that our allowance for loan losses will prove sufficient to cover actual loan losses. In addition, our regulators may require us to change the amount of our reserves for loan loss. Additional reserve allocations or loan losses in excess of our reserves may adversely affect our business, financial condition and results of operations. Additional information regarding our allowance for loan losses and the methodology we use to determine an appropriate level of reserves is located in the “Management’s Discussion and Analysis” section included under Item 7 of Part II of this Form 10-K.
Our continued pace of growth may require us to raise additional capital in the future, which may not be available when it is needed.
We are required by federal and state regulatory authorities to maintain adequate levels of capital to support our operations. We anticipate that our existing capital resources will satisfy our capital requirements for the foreseeable future. However, our growth rate may create a need for additional capital from the capital markets. Our ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside our control, and on our financial performance. There may not always be capital available or available on favorable terms. These conditions may alter our strategic direction and require us to manage our growth to remain within capital limits relying solely on our earnings for capital formation, thereby materially reducing our growth rate.
Our ability to attract and retain management and key personnel may affect future growth and earnings.
Much of our success to date has been influenced strongly by our ability to attract and to retain management experienced in banking and financial services and familiar with the communities in our market areas. Our ability to retain executive officers, the current management teams, office managers and loan officers of our bank subsidiary will continue to be important to the successful implementation of our strategy. It is also critical, as we grow, to be able to attract and retain qualified additional management and loan officers with the appropriate level of experience and knowledge about our market areas to implement our community-based operating strategy. The unexpected loss of services of any key personnel, or the inability to recruit and retain qualified personnel in the future, could have an adverse effect on our business, financial condition and results of operations.
Government regulation can result in limitations on our operations.
We operate in a highly regulated environment and are subject to supervision and regulation by a number of governmental regulatory agencies, including the Federal Reserve, the OCC and the FDIC. Regulations adopted by these agencies, which are generally intended to provide protection for depositors and customers rather than for the benefit of shareholders, govern a comprehensive range of matters relating to ownership and control of our shares, our acquisition of other companies and businesses, permissible activities for us to engage in, maintenance of adequate capital levels and other aspects of our operations. These bank regulators possess broad authority to prevent or remedy unsafe or unsound practices or violations of law. The laws and regulations applicable to the banking industry could change at any time and we cannot predict the effects of these changes on our business and profitability. Changes in regulation could also increase our cost of compliance and adversely affect profitability.
Technology is continually changing and we must effectively implement new technologies.
The financial services industry is undergoing rapid technological changes with frequent introductions of new technology-driven products and services. In addition to better serving customers, the effective use of technology increases efficiency and enables us to reduce costs. Our future success will depend in part upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience as well as to create additional efficiencies in our operations as we continue to grow and expand our market areas. In order to anticipate and develop new technology, we employ a full staff of internal information system developers and consider this area a core part of our business. In the past, we have been able to respond to technological changes faster and with greater flexibility than our competitors. However, we must continue to make substantial investments in technology which may affect our net income.
There is a limited trading market for our common shares, and shareholders may not be able to resell shares at or above the price shareholders paid for them.
The trading in our common shares has less liquidity than many other companies quoted on the national securities exchanges or markets. A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the market of willing buyers and sellers of our common shares at any given time. This presence depends on the individual decisions of investors and general economic and market conditions over which we have no control. We cannot insure volume of trading in our common shares will increase in the future.
11
System failure or breaches of our network security could subject us to increased operating costs as well as litigation and other liabilities.
The computer systems and network infrastructure we use could be vulnerable to unforeseen problems. Our operations are dependent upon our ability to protect our computer equipment against damage from physical theft, fire, power loss, telecommunications failure or a similar catastrophic event, as well as from security breaches, denial of service attacks, viruses, worms and other disruptive problems caused by hackers. Any damage or failure that causes an interruption in our operations could have a material adverse effect on our financial condition and results of operations. Computer break-ins, phishing and other disruptions could also jeopardize the security of information stored in and transmitted through our computer systems and network infrastructure, which may result in significant liability to us and may cause existing and potential customers to refrain from doing business with us. We employ external auditors to conduct extensive auditing and testing for any weaknesses in our systems, controls, firewalls and encryption to reduce the likelihood of any security failures or breaches. Although we, with the help of third-party service providers and auditors, intend to continue to implement security technology and establish operational procedures to prevent such damage, there can be no assurance that these security measures will be successful. In addition, advances in computer capabilities, new discoveries in the field of cryptography or other developments could result in a compromise or breach of the algorithms we and our third-party service providers use to encrypt and protect customer transaction data. A failure of such security measures could have a material adverse affect on our financial condition and results of operations.
We are subject to certain operational risks, including, but not limited to, customer or employee fraud and data processing system failures and errors.
Employee errors and employee and customer misconduct could subject us to financial losses or regulatory sanctions and seriously harm our reputation. Misconduct by our employees could include hiding unauthorized activities from us, improper or unauthorized activities on behalf of our customers or improper use of confidential information. It is not always possible to prevent employee errors and misconduct, and the precautions we take to prevent and detect this activity may not be effective in all cases. Employee errors could also subject us to financial claims for negligence.
We maintain a system of internal controls and insurance coverage to mitigate operational risks, including data processing system failures and errors and customer or employee fraud. Should our internal controls fail to prevent or detect an occurrence, or if any resulting loss is not insured or exceeds applicable insurance limits, it could have a material adverse affect on our business, financial condition and results of operations.
Failure to pay interest on our debt may adversely impact our ability to pay dividends.
As of December 31, 2005, we had $33.0 million of junior subordinated debentures that are held by four business trusts that we control. Interest payments on the debentures must be paid before we pay dividends on our capital stock, including our Common Stock. In 2005, the interest payments totaled $2.493 million per year; however, the amount is subject to change due to a variable rate applicable to $10 million of the debentures. We have the right to defer interest payments on the debentures for up to 20 consecutive quarters. However, if we elect to defer interest payments, all deferred interest must be paid before we may pay dividends on our capital stock. Deferral of interest payments could also cause a decline in the market price of our Common Stock.
Our loan portfolio has a large concentration of real estate loans, which involve risks specific to real estate value.
Real estate lending (including commercial, construction, and residential) is a large portion of our loan portfolio. These categories constitute $871.6 million, or approximately 85.3% of our total loan portfolio as of December 31, 2005. The market value of real estate can fluctuate significantly in a short period of time as a result of market conditions in the geographic area in which the real estate is located. Although a significant portion of such loans are secured by real estate as a secondary form of collateral, adverse developments affecting real estate values in one or more of our markets could increase the credit risk associated with our loan portfolio. Additionally, commercial real estate lending typically involves larger loan principal amounts and the repayment of the loans generally is dependent, in large part, on sufficient income from the properties securing the loans to cover operating expenses and debt service. Economic events or governmental regulations outside of the control of the borrower or lender could negatively impact the future cash flow and market values of the affected properties.
If the loans that are collateralized by real estate become troubled during a time when market conditions are declining or have declined, we may not be able to realize the amount of security that we anticipated at the time of originating the loan, which could cause us to increase our provision for loan losses and adversely affect our operating results and financial condition.
12
Our construction and development loans are based upon estimates of costs and value associated with the complete project. These estimates may be inaccurate and we may be exposed to more losses on these projects than on other loans.
At December 31, 2005, construction loans, including land acquisition and development, totaled $178.1 million, or 17.43%, of our total loan portfolio. Construction, land acquisition and development lending involve additional risks because funds are advanced upon the security of the project, which is of uncertain value prior to its completion. Because of the uncertainties inherent in estimating construction costs, as well as the market value of the completed project and the effects of governmental regulation of real property, it is relatively difficult to evaluate accurately the total funds required to complete a project and the related loan-to-value ratio. As a result, construction loans often involve the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project and the ability of the borrower to sell or lease the property, rather than the ability of the borrower or guarantor to repay principal and interest. If our appraisal of the value of the completed project proves to be overstated, we may have inadequate security for the repayment of the loan upon completion of construction of the project. If we are forced to foreclose on a project prior to or at completion due to a default, there can be no assurance that we will be able to recover all of the unpaid balance of, and accrued interest on, the loan as well as related foreclosure and holding costs. In addition, we may be required to fund additional amounts to complete the project and may have to hold the property for an unspecified period of time. We have attempted to address these risks through our underwriting procedures, compliance with applicable regulations, and by limiting the amount of construction development lending.
Item 1B. Unresolved Staff Comments.
None
As of March 10, 2006, the Company conducts operations through five locations as shown below. Trinity is headquartered in the main Bank office in Los Alamos, New Mexico. All four banking offices are owned by the Bank and are not subject to any mortgages or material encumbrances. Our loan production office is leased office space. In addition to our offices, the Bank operates 29 automatic teller machines (“ATMs”) throughout northern New Mexico. The ATMs are housed either in bank offices or on leased property. We believe our facilities are adequate for our existing business as well as our present and immediately foreseeable needs.
Locations |
| Address |
| Entity |
Company Headquarters |
| 1200 Trinity Drive |
| Trinity |
Los Alamos Office |
| 1200 Trinity Drive |
| Bank, Title Guaranty, TCC Appraisals, TCC Funds |
White Rock Office |
| 77 Rover |
| Bank |
Santa Fe Office I (Galisteo) |
| 2009 Galisteo Street |
| Bank |
Santa Fe Office II (Downtown) |
| 301 Griffin Street |
| Bank, Title Guaranty, TCC Funds |
Albuquerque Loan Production Office |
| 6301 Indian School Road, N.E. |
| Bank |
Neither Trinity, the Bank, Title Guaranty, TCC Appraisals, TCC Advisors or TCC Funds are involved in any pending legal proceedings, other than routine legal proceedings occurring in the normal course of business, which, in the opinion of management, in the aggregate, are material to our consolidated financial condition.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the quarter ended December 31, 2005.
13
Item 5. Market for Registrant’s Common Equity Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Trinity’s common stock is not listed on any automated quotation system or securities exchange. No firm makes a market in our stock. As of March 10, 2006, there were 6,587,249 shares of common stock outstanding and approximately 1,300 shareholders of record. The most recent reported sale price of Trinity’s stock as of December 31, 2005 was $28.00 per share.
The tables below show the reported high and low sales prices of the common stock during the periods indicated. The prices below are only the trades where the price was disclosed to us. Private sales, where the value of the shares traded were not given to us, are not included. The following figures have been adjusted for all stock splits:
Quarter ending |
| High sales price |
| Low sales price |
| ||
December 31, 2005 |
| $ 28.00 |
|
| $ 25.80 |
|
|
September 30, 2005 |
| 29.00 |
|
| 27.00 |
|
|
June 30, 2005 |
| 34.00 |
|
| 27.50 |
|
|
March 31, 2005 |
| 30.75 |
|
| 26.00 |
|
|
|
|
|
|
|
|
|
|
December 31, 2004 |
| 31.00 |
|
| 28.25 |
|
|
September 30, 2004 |
| 30.50 |
|
| 30.00 |
|
|
June 30, 2004 |
| 31.00 |
|
| 30.00 |
|
|
March 31, 2004 |
| 31.00 |
|
| 29.00 |
|
|
Dividend Policy
Since January 2004, we paid dividends on our common stock as follows (as adjusted for stock splits):
Date paid |
| Amount |
| |
January 13, 2006 |
| $ 0.34 |
|
|
July 11, 2005 |
| 0.30 |
|
|
January 14, 2005 |
| 0.30 |
|
|
July 9, 2004 |
| 0.30 |
|
|
January 9, 2004 |
| 0.30 |
|
|
Trinity’s ability to pay dividends to shareholders is largely dependent upon the dividends it receives from the Bank and the Bank is subject to regulatory limitations on the amount of cash dividends it may pay. Please see “Business—Trinity Capital Corporation—Supervision and Regulation—Dividends” and “Business—Los Alamos National Bank—Supervision and Regulation—Dividends” under Item 1 for a more detailed description of these limitations.
We have the right to, and may from time to time, enter into borrowing arrangements or issue other debt instruments, the provisions of which may contain restrictions on payment of dividends and other distributions on Trinity common stock and Trinity preferred stock. We have issued in the aggregate approximately $33.0 million in junior subordination debentures to Trinity Capital Trust I, Trinity Capital Trust II, Trinity Capital Trust III and Trinity Capital Trust IV. All of the common stock of the trusts is owned by Trinity and the debentures are the only assets of the trusts. Under the terms of the debentures, we may be prohibited, under certain circumstances, from paying dividends on shares of its common stock. None of these circumstances currently exist. As of the date hereof, we have not entered into any other arrangements that contain restrictions on the payment of dividends. We believe that Trinity can continue to pay comparable cash dividends to shareholders in the future, assuming that (a) we continue to be profitable, (b) we do not experience any unusual growth that would necessitate higher capital retention and (c) the regulatory environment on minimum capital requirements or maximum dividends paid does not change.
14
Issuer Purchases of Equity Securities
During the fourth quarter of 2005, we repurchased the following securities:
Period |
| (a) |
| (b) |
| (c) |
| (d) |
| ||
October 1-October 31, 2005 |
| — |
| — |
| — |
| — |
| ||
November 1-November 30, 2005 |
| — |
| — |
| — |
| — |
| ||
December 1-December 31, 2005 (1) |
| 76,923 |
| $ | 26.00 |
| 76,923 |
| $ | 0 |
|
Total |
| 76,923 |
| $ | 26.00 |
| 76,923 |
| $ | 0 |
|
(1) On December 5, 2005, the Company announced that it would repurchase up to $2.0 million in outstanding shares of the Company’s common stock. The Company’s Board of Directors determined that the repurchase of stock was a sensible use of the Company’s current capital. The stock was converted into treasury shares. The Company completed repurchasing the $2.0 million on December 14, 2005.
15
Item 6. Selected Financial Data.
The following table sets forth certain consolidated financial and other data of Trinity at the dates and for the periods indicated. Amounts in the table for prior years have been reclassified for the deconsolidation of the Trusts upon the adoption of a new accounting standard. See Note 1, “Significant Accounting Policies—Recent accounting pronouncements” in the Notes to Consolidated Financial statements included in Item 8, “Financial Statements and Supplementary Data.”
|
| Year Ended December 31, |
| |||||||||||||
|
| 2005 |
| 2004 |
| 2003 |
| 2002 |
| 2001 |
| |||||
|
| (Dollars in thousands, except per share data) |
| |||||||||||||
Statement of Income Data: |
|
|
|
|
|
|
|
|
|
|
| |||||
Interest income |
| $ | 67,909 |
| $ | 54,291 |
| $ | 53,420 |
| $ | 54,277 |
| $ | 57,094 |
|
Interest expense |
| 26,328 |
| 17,093 |
| 19,080 |
| 23,497 |
| 30,341 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net interest income |
| 41,581 |
| 37,198 |
| 34,340 |
| 30,780 |
| 26,753 |
| |||||
Provision for loan losses |
| 2,850 |
| 2,100 |
| 3,350 |
| 2,800 |
| 2,900 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net interest income after provision for loan losses |
| 38,731 |
| 35,098 |
| 30,990 |
| 27,980 |
| 23,853 |
| |||||
Other income |
| 10,249 |
| 10,466 |
| 17,870 |
| 13,725 |
| 7,259 |
| |||||
Other expense |
| 29,851 |
| 28,746 |
| 28,208 |
| 25,183 |
| 18,566 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Income before income taxes |
| 19,129 |
| 16,818 |
| 20,652 |
| 16,522 |
| 12,546 |
| |||||
Income taxes |
| 7,169 |
| 6,429 |
| 7,794 |
| 6,281 |
| 4,604 |
| |||||
Net income |
| $ | 11,960 |
| $ | 10,389 |
| $ | 12,858 |
| $ | 10,241 |
| $ | 7,942 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Common Share Data:(1) |
|
|
|
|
|
|
|
|
|
|
| |||||
Earnings per common share |
| $ | 1.80 |
| $ | 1.54 |
| $ | 1.93 |
| $ | 1.55 |
| $ | 1.20 |
|
Diluted earnings per common share |
| 1.79 |
| 1.52 |
| 1.90 |
| 1.54 |
| 1.19 |
| |||||
Book value per common share(2) |
| 11.54 |
| 10.84 |
| 9.86 |
| 8.48 |
| 7.45 |
| |||||
Shares outstanding at end of period |
| 6,554,559 |
| 6,732,748 |
| 6,701,478 |
| 6,650,131 |
| 6,618,808 |
| |||||
Weighted average common shares outstanding |
| 6,632,587 |
| 6,728,289 |
| 6,660,858 |
| 6,627,900 |
| 6,643,776 |
| |||||
Diluted weighted average common shares outstanding |
| 6,692,849 |
| 6,840,020 |
| 6,756,326 |
| 6,659,034 |
| 6,665,087 |
| |||||
Dividend payout ratio(3) |
| 35.56 | % | 39.61 | % | 29.02 | % | 31.61 | % | 36.67 | % | |||||
Cash dividends declared per common share(4) |
| $ | 0.64 |
| $ | 0.61 |
| $ | 0.56 |
| $ | 0.49 |
| $ | 0.44 |
|
(1) |
| On December 19, 2002, Trinity’s Board of Directors approved a two-for-one split of our common stock, effective December 19, 2002. Earnings per share, book value per share, weighted average shares outstanding and total shares outstanding of prior years have been calculated giving consideration to the retroactive effect of the stock split. |
|
|
|
(2) |
| Computed by dividing total stockholders’ equity, including net stock owned by Employee Stock Ownership Plan (“ESOP”), divided by shares outstanding at end of period. |
|
|
|
(3) |
| Computed by dividing declared per common share by earnings per common share. |
|
|
|
(4) |
| Computed by dividing dividends on consolidated statements of changes in stockholders’ equity by weighted average common shares outstanding. |
16
The following table reconciles net interest income on a fully tax-equivalent basis for the periods presented:
|
| Year Ended December 31, |
| |||||||||||||
|
| 2005 |
| 2004 |
| 2003 |
| 2002 |
| 2001 |
| |||||
|
| (Dollars in thousands, except per share data) |
| |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net interest income |
| $ | 41,581 |
| $ | 37,198 |
| $ | 34,340 |
| $ | 30,780 |
| $ | 26,753 |
|
Tax-equivalent adjustment to net interest income |
| 416 |
| 350 |
| 276 |
| 116 |
| 144 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net interest income, fully tax-equivalent basis |
| $ | 41,997 |
| $ | 37,548 |
| $ | 34,616 |
| $ | 30,896 |
| $ | 26,897 |
|
17
|
| As of or for the Year Ended December 31, |
| |||||||||||||
|
| 2005 |
| 2004 |
| 2003 |
| 2002 |
| 2001 |
| |||||
|
| (Dollars in thousands) |
| |||||||||||||
Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
| |||||
Investment securities |
| $ | 125,808 |
| $ | 113,243 |
| $ | 174,966 |
| $ | 106,313 |
| $ | 79,753 |
|
Loans, gross |
| 1,019,380 |
| 894,321 |
| 740,523 |
| 660,448 |
| 650,359 |
| |||||
Allowance for loan losses |
| 8,842 |
| 8,367 |
| 7,368 |
| 6,581 |
| 5,637 |
| |||||
Total assets |
| 1,244,016 |
| 1,080,393 |
| 1,006,750 |
| 912,927 |
| 810,958 |
| |||||
Deposits |
| 1,041,848 |
| 880,581 |
| 836,195 |
| 790,086 |
| 670,254 |
| |||||
Short-term and long-term borrowings, including ESOP borrowings |
| 83,520 |
| 96,092 |
| 78,957 |
| 42,380 |
| 64,047 |
| |||||
Junior subordinated debt owed to unconsolidated trusts |
| 32,992 |
| 22,682 |
| 16,496 |
| 16,496 |
| 16,496 |
| |||||
Stock owned by ESOP participants, net of unearned ESOP shares |
| 16,100 |
| 18,078 |
| 18,256 |
| 9,462 |
| 7,780 |
| |||||
Stockholders’ equity |
| 59,518 |
| 54,878 |
| 47,802 |
| 46,905 |
| 41,438 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Performance Ratios: |
|
|
|
|
|
|
|
|
|
|
| |||||
Return on average assets(1) |
| 1.02 | % | 1.01 | % | 1.32 | % | 1.21 | % | 1.07 | % | |||||
Return on average equity(2) |
| 16.05 | % | 14.61 | % | 20.15 | % | 19.17 | % | 16.63 | % | |||||
Net interest margin on a fully tax equivalent basis(3) |
| 3.80 | % | 3.94 | % | 3.84 | % | 4.04 | % | 3.96 | % | |||||
Loans to deposits |
| 97.84 | % | 100.61 | % | 88.56 | % | 83.59 | % | 97.03 | % | |||||
Efficiency ratio(4) |
| 57.59 | % | 60.31 | % | 54.03 | % | 56.58 | % | 54.59 | % | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Asset Quality Ratios: |
|
|
|
|
|
|
|
|
|
|
| |||||
Non-performing loans to total loans |
| 0.79 | % | 0.64 | % | 0.43 | % | 0.59 | % | 1.13 | % | |||||
Non-performing assets to total assets |
| 0.68 | % | 1.13 | % | 1.09 | % | 0.84 | % | 1.20 | % | |||||
Allowance for loan losses to total loans |
| 0.87 | % | 0.93 | % | 0.99 | % | 1.00 | % | 0.87 | % | |||||
Allowance for loan losses to non-performing loans |
| 110.02 | % | 146.23 | % | 230.83 | % | 168.14 | % | 76.70 | % | |||||
Net loan charge-offs to average loans |
| 0.24 | % | 0.14 | % | 0.35 | % | 0.29 | % | 0.32 | % | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Capital Ratios:(5) |
|
|
|
|
|
|
|
|
|
|
| |||||
Tier 1 capital (to risk-weighted assets) |
| 10.10 | % | 10.65 | % | 10.64 | % | 10.21 | % | 10.18 | % | |||||
Total capital (to risk-weighted assets) |
| 11.67 | % | 11.59 | % | 11.61 | % | 11.15 | % | 11.08 | % | |||||
Tier 1 capital (to average assets) |
| 8.19 | % | 8.87 | % | 8.05 | % | 7.89 | % | 8.18 | % | |||||
Average equity, including junior subordinated debt owed to unconsolidated trusts, to average assets |
| 8.76 | % | 8.93 | % | 8.19 | % | 8.20 | % | 7.95 | % | |||||
Average equity, excluding junior subordinated debt owed to unconsolidated trusts, to average assets |
| 6.37 | % | 6.92 | % | 6.55 | % | 6.31 | % | 6.46 | % | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Other: |
|
|
|
|
|
|
|
|
|
|
| |||||
Banking facilities |
| 4 |
| 4 |
| 3 |
| 3 |
| 3 |
| |||||
Full-time equivalent employees |
| 273 |
| 282 |
| 296 |
| 258 |
| 220 |
| |||||
(1) |
| Calculated by dividing net income by the average assets during the year. |
|
|
|
(2) |
| Calculated by dividing net income by the average stockholders’ equity, including stock owned by ESOP participants, net of unearned ESOP shares, during the year. |
|
|
|
(3) |
| Calculated by dividing net interest income adjusted to a fully tax-equivalent basis, adjusting for federal and state exemption of interest income and certain other permanent income tax differences. |
|
|
|
(4) |
| Calculated by dividing the operating expense by the sum of net interest income and other income. |
|
|
|
(5) |
| Ratios presented are for Trinity on a consolidated basis. See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Capital Resources.” |
18
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation.
This discussion is intended to focus on certain financial information regarding Trinity 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 Trinity’s financial position and results of operations should be read in conjunction with the information set forth in Item 7A, “Quantitative and Qualitative Disclosures about Market Risk” and the consolidated financial statements and notes thereto appearing under Item 8 of this Form 10-K.
Special Note Concerning Forward-Looking Statements
This document (including information incorporated by reference) contains, and future oral and written statements of the Company and its management may contain, forward-looking statements, within the meaning of such term in the Private Securities Litigation Reform Act of 1995, with respect to the financial condition, results of operations, plans, objectives, future performance and business of the Company. Forward-looking statements, which may be based upon beliefs, expectations and assumptions of the Company’s management and on information currently available to management, are generally identifiable by the use of words such as “believe,” “expect,” “anticipate,” “plan,” “intend,” “estimate,” “may,” “will,” “would,” “could,” “should” or other similar expressions. Additionally, all statements in this document, including forward-looking statements, speak only as of the date they are made, and the Company undertakes no obligation to update any statement in light of new information or future events.
The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. The factors, which could have a material adverse effect on the operations and future prospects of the Company and its subsidiaries are detailed in the “Risk Factors” section included under Item 1A of Part I of this Form 10-K. In addition to the risk factors described in that section, there are other factors that may impact any public company, including ours, which could have a material adverse effect on the operations and future prospects of the Company and its subsidiaries. These additional factors include, but are not limited to, the following:
• The economic impact of past and any future terrorist attacks, acts of war or threats thereof and the response of the United States to any such threats and attacks.
• The costs, effects and outcomes of existing or future litigation.
• Consumer spending and savings habits which may change in a manner that affects our business adversely.
• Changes in accounting policies and practices, as may be adopted by state and federal regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission and the Public Company Accounting Oversight Board.
• The ability of the Company to manage the risks associated with the foregoing as well as anticipated.
These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.
Critical Accounting Policies
Allowance for Loan Losses: 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.
19
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 in our portfolio 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 in our portfolio 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. This evaluation also takes into consideration such factors as changes in the nature and volume of the loan portfolio, growth 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 our allowance for loan losses and may require us to make additions to the allowance based on their evaluation of information available at the time of their examinations.
Mortgage Servicing Right (MSR) Assets: Servicing residential mortgage loans for third-party investors represents a significant business activity of the Bank. As of December 31, 2005, mortgage loans serviced for others totaled $944.0 million. The MSRs on these loans total $9.8 million as of December 31, 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 fair value of the MSRs, mortgage interest rates, which are used to determine prepayment rates and discount rates are held constant over the estimated life of the portfolio. Fair values of the MS Rs 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 of repayment, extending the life of the MSRs and increas ing 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. In 2005, we recognized income of $2.3 million due to a decrease in the valuation allowance associated with MSRs; in 2004, we recognized income of $1.1 million due to a decrease in the valuation allowance associated with MSRs. We can have no certainty on the direction and amount of interest rate changes looking forward, and therefore, the amount or direction of the change in valuation.
Overview
The year 2005 was characterized by strong asset growth and strong growth in income due to an increase in net interest income. Net income was $12.0 million, a 15.1% increase from the prior year earnings of $10.4 million. Total assets also grew 15.1%. Net interest income increased $4.4 million, which was partially offset by an increase in non-interest expense of $1.1 million and an increase in provision for loan losses of $750 thousand. We also increased our risk-based capital by issuing $10.0 million in trust preferred securities during the year, enabling us to continue to grow and remain well-capitalized.
Net interest income (not tax-equivalent), our major source of income, increased 11.8% over the prior year. This increase was mainly due to our growth in interest-earning assets, while our net interest margin (not tax-equivalent) decreased from 3.90% in 2004 to 3.76% in 2005. This decrease in margin was primarily due to a flattening yield curve, which increased our cost of funds at a more rapid rate than the yield on our loans.
Looking forward to the year 2006, we expect continued growth in deposits and loans in both our Los Alamos and Santa Fe markets. We believe that we have sufficient capital to support this growth and remain well-capitalized.
20
Income Statement Analysis
Net Income-General. Net income for 2005 was $12.0 million, compared to $10.4 million in 2004 and $12.9 million in 2003. Diluted earnings per share increased by $0.27 to $1.79 for 2005 from $1.52 in 2004. This represented an increase in diluted earnings per share of 17.8%. Diluted earnings per share in 2004 decreased by $0.38 or 20.0% from $1.90 in 2003. The increase in 2005 from the previous year was primarily the result of an increase in net interest income of 11.8%, which was partially offset by an increase in other expenses of 3.8% and an increase in provision for loan losses of 35.7%. The decrease in 2004 from the previous year was primarily the result of a decrease in non-interest income of 41.4%, which was partially offset by an increase in net interest income of 8.3% and decrease of provision for loan losses of 37.3%.
The profitability of our operations depends primarily on our net interest income, which is the difference between total interest earned on interest earning assets and total interest paid on interest bearing liabilities. 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. Our net income is affected by our 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. 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. 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. Other income and other expenses are impacted by growth of operations and growth in the number of accounts through both acquisitions and core banking business growth. Growth in operations affects other expenses as a result of additional employees, branch facilities and promotional marketing expense. Growth in the number of accounts affects other income including service fees as well as other expenses such as computer services, supplies, postage, telecommunications and other miscellaneous expenses.
21
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:
|
| Year Ended December 31, |
| ||||||||||||||||||||||
|
| 2005 |
| 2004 |
| 2003 |
| ||||||||||||||||||
|
| Average |
| Interest |
| Yield/Rate |
| Average |
| Interest |
| Yield/Rate |
| Average |
| Interest |
| Yield/Rate |
| ||||||
|
| (Dollars in thousands) |
| ||||||||||||||||||||||
Interest Earning Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Loans(1)(2) |
| $ | 980,498 |
| $ | 63,730 |
| 6.50 | % | $ | 809,772 |
| $ | 50,305 |
| 6.21 | % | $ | 738,886 |
| $ | 48,963 |
| 6.63 | % |
Taxable investment securities |
| 77,549 |
| 2,364 |
| 3.05 |
| 111,131 |
| 3,173 |
| 2.86 |
| 113,280 |
| 3,551 |
| 3.13 |
| ||||||
Investment securities exempt from federal income taxes(3) |
| 18,528 |
| 1,175 |
| 6.34 |
| 19,808 |
| 972 |
| 4.91 |
| 15,053 |
| 789 |
| 5.24 |
| ||||||
Federal funds sold |
| 1,083 |
| 12 |
| 1.11 |
| 40 |
| — |
| 0.91 |
| 412 |
| 3 |
| 0.73 |
| ||||||
Other interest bearing deposits |
| 26,564 |
| 969 |
| 3.65 |
| 11,778 |
| 132 |
| 1.12 |
| 34,182 |
| 338 |
| 0.99 |
| ||||||
Investment in unconsolidated trust subsidiaries |
| 840 |
| 75 |
| 8.93 |
| 615 |
| 59 |
| 9.59 |
| 496 |
| 52 |
| 10.48 |
| ||||||
Total interest earning assets |
| 1,105,062 |
| 68,325 |
| 6.18 |
| 953,144 |
| 54,641 |
| 5.73 |
| 902,309 |
| 53,696 |
| 5.95 |
| ||||||
Non-interest earning assets |
| 63,760 |
|
|
|
|
| 73,774 |
|
|
|
|
| 72,716 |
|
|
|
|
| ||||||
Total assets |
| $ | 1,168,822 |
|
|
|
|
| $ | 1,026,918 |
|
|
|
|
| $ | 975,025 |
|
|
|
|
| |||
Interest Bearing Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
NOW and money market deposit |
| $ | 93,127 |
| $ | 1,226 |
| 1.32 | % | $ | 136,104 |
| $ | 1,310 |
| 0.96 | % | $ | 199,161 |
| $ | 2,269 |
| 1.14 | % |
Savings deposit |
| 390,525 |
| 5,670 |
| 1.45 |
| 318,918 |
| 3,224 |
| 1.01 |
| 219,264 |
| 2,918 |
| 1.33 |
| ||||||
Time deposits |
| 417,173 |
| 13,740 |
| 3.29 |
| 330,066 |
| 7,944 |
| 2.41 |
| 351,356 |
| 10,109 |
| 2.88 |
| ||||||
Short-term borrowings |
| 6,096 |
| 188 |
| 3.08 |
| 15,110 |
| 287 |
| 1.90 |
| 1,467 |
| 30 |
| 2.04 |
| ||||||
Long-term borrowings, including ESOP borrowings |
| 78,003 |
| 3,011 |
| 3.86 |
| 65,296 |
| 2,397 |
| 3.67 |
| 52,862 |
| 2,000 |
| 3.78 |
| ||||||
Junior subordinated debt owed to unconsolidated trusts |
| 27,936 |
| 2,493 |
| 8.92 |
| 20,468 |
| 1,931 |
| 9.43 |
| 16,496 |
| 1,754 |
| 10.63 |
| ||||||
Total interest bearing liabilities |
| 1,012,860 |
| 26,328 |
| 2.60 |
| 885,962 |
| 17,093 |
| 1.93 |
| 840,606 |
| 19,080 |
| 2.27 |
| ||||||
Demand deposits—non-interest bearing |
| 35,202 |
|
|
|
|
| 50,171 |
|
|
|
|
| 63,775 |
|
|
|
|
| ||||||
Other non-interest bearing liabilities |
| 46,252 |
|
|
|
|
| 19,689 |
|
|
|
|
| 6,837 |
|
|
|
|
| ||||||
Stockholders’ equity, including stock owned by ESOP |
| 74,508 |
|
|
|
|
| 71,096 |
|
|
|
|
| 63,807 |
|
|
|
|
| ||||||
Total liabilities and stockholders equity |
| $ | 1,168,822 |
|
|
|
|
| $ | 1,026,918 |
|
|
|
|
| $ | 975,025 |
|
|
|
|
| |||
Net interest income/interest rate Spread(4) |
|
|
| $ | 41,997 |
| 3.58 | % |
|
| $ | 37,548 |
| 3.80 | % |
|
| $ | 34,616 |
| 3.68 | % | |||
Net interest margin on a fully tax equivalent basis(5) |
|
|
|
|
| 3.80 | % |
|
|
|
| 3.94 | % |
|
|
|
| 3.84 | % | ||||||
Net interest margin(5) |
|
|
|
|
| 3.76 | % |
|
|
|
| 3.90 | % |
|
|
|
| 3.81 | % |
(1) Includes non-accrual loans of $8.2 million, $3.3 million and $2.6 million for 2005, 2004 and 2003.
(2) Interest income includes loan origination fees of $3.2 million, $3.0 million and $3.4 million for the years ended December 31, 2005, 2004 and 2003.
(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.
22
For 2005, net interest income on a fully tax equivalent basis increased $4.5 million to $42.0 million from $37.5 million for 2004. The increase in net interest income on a fully tax equivalent basis resulted from an increase in interest income on a fully tax equivalent basis of $13.7 million (25.0%), which was partially offset by an increase in interest expense of $9.2 million (54.0%). Interest income on a fully tax equivalent basis increased primarily due to an increase in average interest-earning assets of $151.9 million (15.9%), which accounted for $10.3 million of the increase. The yield on earning assets on a fully tax equivalent basis increased 45 basis points, which accounted for $3.4 million of the increase. Interest expense increased primarily due to an increase on the cost of interest-bearing liabilities of 67 basis points, which accounted for $5.5 million of the increase. Average interest-bearing liabilities increased $126.9 million (14.3%), accounting for $3.7 million of the increase in interest expense. The net interest margin expressed in a fully tax equivalent basis decreased 14 basis points to 3.80% for 2005 from 3.94% in 2004.
For 2004, net interest income on a fully tax equivalent basis increased $2.9 million to $37.5 million from $34.6 million for 2003. The increase in net interest income on a fully tax equivalent basis resulted from a decrease in interest expense of $2.0 million (10.4%), and an increase in interest income on a fully tax equivalent basis of $945 thousand (1.8%). Interest expense decreased due to a decrease in interest rates on interest bearing liabilities of 34 basis points, which accounted for $3.0 million. This decrease in rate on liabilities was partially offset by an increase in average interest bearing liabilities of $45.4 million (5.4%), which increased interest expense by $1.0 million. Interest income on a fully tax equivalent basis increased due to an increase in average interest-earning assets of $50.8 million (5.6%), which increased interest income on a fully tax equivalent basis by $4.5 million. This was partially offset by a decrease in the rate on earning assets of 22 basis points, which decreased interest income on a fully tax equivalent basis $3.5 million. The net interest margin expressed in a fully tax equivalent basis increased 10 basis points to 3.94% for 2004 from 3.84% in 2003.
23
Volume, Mix and Rate Analysis of Net Interest Income. The following table presents 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) and (ii) changes attributable to changes in interest rate (changes in rate times the prior period volume).. Changes attributable to the combined impact of volume and rate have been allocated proportionally to the changes due to volume and the changes due to rate.
|
| Year Ended December 31, |
| ||||||||||||||||
|
| 2005 Compared to 2004 |
| 2004 Compared to 2003 |
| ||||||||||||||
|
| Change Due |
| Change Due |
| Total |
| Change Due |
| Change Due |
| Total |
| ||||||
|
| (In thousands) |
| ||||||||||||||||
Interest Earning Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Loans |
| $ | 11,009 |
| $ | 2,416 |
| $ | 13,425 |
| $ | 4,520 |
| $ | (3,178 | ) | $ | 1,342 |
|
Taxable investment securities |
| (1,012 | ) | 203 |
| (809 | ) | (66 | ) | (312 | ) | (378 | ) | ||||||
Investment securities exempt from federal income taxes(1) |
| (66 | ) | 269 |
| 203 |
| 236 |
| (53 | ) | 183 |
| ||||||
Federal funds sold |
| 12 |
| — |
| 12 |
| (3 | ) | — |
| (3 | ) | ||||||
Other interest bearing deposits |
| 300 |
| 537 |
| 837 |
| (246 | ) | 40 |
| (206 | ) | ||||||
Investment in unconsolidated trust subsidiaries |
| 20 |
| (4 | ) | 16 |
| 11 |
| (4 | ) | 7 |
| ||||||
Total increase (decrease) in interest income |
| 10,263 |
| 3,421 |
| 13,684 |
| 4,452 |
| (3,507 | ) | 945 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Interest Bearing Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
NOW and money market deposit accounts |
| (484 | ) | 400 |
| (84 | ) | (644 | ) | (315 | ) | (959 | ) | ||||||
Savings deposits |
| 831 |
| 1,615 |
| 2,446 |
| 1,117 |
| (811 | ) | 306 |
| ||||||
Time deposits |
| 2,419 |
| 3,377 |
| 5,796 |
| (586 | ) | (1,579 | ) | (2,165 | ) | ||||||
Short-term borrowings |
| (223 | ) | 124 |
| (99 | ) | 259 |
| (2 | ) | 257 |
| ||||||
Long-term borrowings |
| 486 |
| 128 |
| 614 |
| 458 |
| (61 | ) | 397 |
| ||||||
Junior subordinated debt owed to unconsolidated trusts |
| 671 |
| (109 | ) | 562 |
| 390 |
| (213 | ) | 177 |
| ||||||
Total increase (decrease) in interest expense |
| 3,700 |
| 5,535 |
| 9,235 |
| 994 |
| (2,981 | ) | (1,987 | ) | ||||||
Increase (decrease) in net interest income |
| $ | 6,563 |
| $ | (2,114 | ) | $ | 4,449 |
| $ | 3,458 |
| $ | (526 | ) | $ | 2,932 |
|
(1) Non-taxable investment income is presented on a fully tax equivalent basis, adjusting for federal and state exemption of interest income and certain other permanent income tax differences.
Other Income. Changes in other income between 2005, 2004 and 2003 were as follows:
|
| Year ended |
| Net |
| Year ended |
| Net |
| ||||||||||
|
| 2005 |
| 2004 |
| difference |
| 2004 |
| 2003 |
| difference |
| ||||||
|
| (In thousands) |
| ||||||||||||||||
Other income: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Mortgage loan servicing fees |
| $ | 2,594 |
| $ | 2,367 |
| $ | 227 |
| $ | 2,367 |
| $ | 2,208 |
| $ | 159 |
|
Loan and other fees |
| 2,753 |
| 2,432 |
| 321 |
| 2,432 |
| 1,925 |
| 507 |
| ||||||
Service charges on deposits |
| 1,489 |
| 1,416 |
| 73 |
| 1,416 |
| 1,275 |
| 141 |
| ||||||
Gain on sale of loans |
| 2,377 |
| 3,129 |
| (752 | ) | 3,129 |
| 10,859 |
| (7,730 | ) | ||||||
Gain on sale of securities |
| — |
| 272 |
| (272 | ) | 272 |
| — |
| 272 |
| ||||||
Other operating income |
| 1,036 |
| 850 |
| 186 |
| 850 |
| 1,603 |
| (753 | ) | ||||||
|
| $ | 10,249 |
| $ | 10,466 |
| $ | (217 | ) | $ | 10,466 |
| $ | 17,870 |
| $ | (7,404 | ) |
24
In 2005, other income decreased $217 thousand (2.1%) to $10.2 million from $10.5 million in 2004. Gain on sale of loans decreased $752 thousand (24.0%) due to the continued drop in mortgage loan refinancing activity and smaller premiums recognized on loans sold. This drop was expected in light of the Federal Reserve’s actions in raising the federal funds rates 200 basis points during 2005, and was experienced across the financial services industry. Loans and other fees increased $321 thousand (13.2%), largely due to an increase in ATM switch fees ($121 thousand), bankcard fees ($95 thousand) and trust income ($91 thousand). Gain on the sale of securities decreased $272 thousand (100%) as there were no sales of securities in 2005. Mortgage loan service fees increased $227 thousand (9.6%) largely due to an increase in fees received from the issuance of Letters of Credit.
For 2004, other income decreased $7.4 million (41.4%) to $10.5 million from $17.9 million in 2003. Gain on sale of loans decreased $7.7 million (71.2%) due to a drop in mortgage loan refinancing activity from historically high activity in 2003. This drop in refinancing was expected as a result of the five increases in interest rates made by the Federal Reserve in 2004 and was experienced across the financial services industry. Other operating income decreased $753 thousand (46.9%) mainly due to a decrease in title insurance premiums of $743 thousand (54.2%), as well as the reduced mortgage loan refinancing volume.
Other Expenses. Changes in other expenses between 2005 and 2004 and between 2004 and 2003 are as follows:
|
| Year ended |
| Net |
| Year ended |
| Net |
| ||||||||||
|
| 2005 |
| 2004 |
| difference |
| 2004 |
| 2003 |
| difference |
| ||||||
|
| (In thousands) |
| ||||||||||||||||
Other expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Salaries and employee benefits |
| $ | 16,073 |
| $ | 15,342 |
| $ | 731 |
| $ | 15,342 |
| $ | 15,555 |
| $ | (213 | ) |
Occupancy |
| 3,166 |
| 2,601 |
| 565 |
| 2,601 |
| 1,798 |
| 803 |
| ||||||
Data processing |
| 1,841 |
| 1,924 |
| (83 | ) | 1,924 |
| 1,500 |
| 424 |
| ||||||
Marketing |
| 1,509 |
| 1,365 |
| 144 |
| 1,365 |
| 1,451 |
| (86 | ) | ||||||
Amortization and valuation of mortgage servicing rights |
| 501 |
| 1,650 |
| (1,149 | ) | 1,650 |
| 2,003 |
| (353 | ) | ||||||
Supplies |
| 686 |
| 1,005 |
| (319 | ) | 1,005 |
| 914 |
| 91 |
| ||||||
Loss on sale of other real estate owned |
| 950 |
| 414 |
| 536 |
| 414 |
| 438 |
| (24 | ) | ||||||
Postage |
| 582 |
| 556 |
| 26 |
| 556 |
| 536 |
| 20 |
| ||||||
Other |
| 4,543 |
| 3,889 |
| 654 |
| 3,889 |
| 4,013 |
| (124 | ) | ||||||
|
| $ | 29,851 |
| $ | 28,746 |
| $ | 1,105 |
| $ | 28,746 |
| $ | 28,208 |
| $ | 538 |
|
Other expenses increased $1.1 million (3.8%) to $29.9 million in 2005 from $28.7 million in 2004. Amortization and valuation of mortgage servicing rights decreased $1.1 million (69.6%) largely due to the reduction of mortgage servicing rights impairment of $1.2 million in 2005 compared to 2004. This was the result of a higher interest rate environment in 2005 and the lower number of mortgage refinancings. Salaries and employee benefits increased $731 thousand (4.8%) largely due to an increase in salaries expense due to a shift from lower-compensated employees to higher-compensated employees. Other expenses increased $654 thousand mainly due to an increase in professional fees ($300 thousand), an increase in collection expenses ($209 thousand) and an increase in audit and examination fees ($161 thousand). The increase in professional fees was mainly due to services related to managing our facilities maintenance and vendor management. The increase in collection expenses was mainly associated to collecting on non-performing loans. The increase in audit and examination fees was due to additional fees due to an increase in the asset size of the Company. The increase in debit and credit card interchange fees was largely due to an increase in the volume of these transactions.
Other expenses increased $538 thousand (1.9%) to $28.7 million in 2004 from $28.2 million in 2003. Occupancy expenses increased by $803 thousand (44.7%) due to several factors, including decreased rental income of $265 thousand (72.4%) caused by the tenants in the Bank’s Los Alamos office relocating early in the year. Occupancy expenses also increased because of increased repair and maintenance costs of $263 thousand (69.8%) due to extensive maintenance on the Los Alamos office. Depreciation expense also increased $133 thousand (11.1%) mainly due to the depreciation associated with the new Santa Fe office opened in 2004. Data processing expense increased $424 thousand (28.3%), primarily due to software depreciation and maintenance expenses increasing $310 thousand (24.6%) caused by additional software purchases made during 2004.
Income Taxes. In 2005, income tax expense increased by $740 thousand (11.5%) from the previous year to a total of $7.2 million from $6.4 million, although the effective tax rate decreased from 38.2% in 2004 to 37.5% in 2005. This decrease in effective tax rate was attributable to the exercise of stock options by employees in 2005 that decreased our taxable income, but not our book income.
25
For 2004, income tax expense decreased by $1.4 million (17.5%) from the previous year to a total of $6.4 million compared to $7.8 million. The effective tax rate increased from 37.7% in 2003 to 38.2% in 2004. This increase in effective tax rate was attributable to the adjustment of deferred taxes made in 2004 to more accurately reflect the effective rate.
Balance Sheet Analysis
Balance Sheet-General. Total assets at December 31, 2005 were $1.2 billion, an increase of $163.6 million (15.1%) from December 31, 2004. Net loans increased $124.6 million (14.1%) during 2005, and cash and cash equivalents increased $30.9 million (129.6%). During the same period, total liabilities increased $161.0 million (16.0%) to a total of $1.2 billion on December 31, 2005, from $1.0 billion on December 31, 2004. The increase in total liabilities was primarily due to an increase in total deposits of $161.3 million (18.3%). Stockholders’ equity (including stock owned by the Employee Stock Ownership Plan) increased $2.6 million (3.6%) to $75.6 million on December 31, 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 7 and “Asset Liability Management” under Item 7A below.
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 December 31, 2005 |
| At December 31, 2004 |
| At December 31, 2003 |
| ||||||||||||
|
| Amortized Cost |
| Fair Value |
| Amortized Cost |
| Fair Value |
| Amortized Cost |
| Fair Value |
| ||||||
|
| (In thousands) |
| ||||||||||||||||
Securities Available for Sale: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
U.S. Government agencies |
| $ | 85,687 |
| $ | 85,289 |
| $ | 42,218 |
| $ | 41,907 |
| $ | 94,868 |
| $ | 95,081 |
|
States and political subdivisions |
| 5,984 |
| 5,937 |
| 2,210 |
| 2,191 |
| — |
| — |
| ||||||
Equity securities |
| 1 |
| 5 |
| 1 |
| 7 |
| 1 |
| 7 |
| ||||||
Total securities available for sale |
| $ | 91,672 |
| $ | 91,231 |
| $ | 44,429 |
| $ | 44,105 |
| $ | 94,869 |
| $ | 95,088 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Securities Held to Maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
U.S. Government agencies |
| $ | 13,687 |
| $ | 13,647 |
| $ | 46,547 |
| $ | 46,705 |
| $ | 53,246 |
| $ | 54,541 |
|
States and political subdivisions |
| 12,925 |
| 12,918 |
| 15,111 |
| 15,178 |
| 20,471 |
| 20,638 |
| ||||||
Total securities held to maturity |
| $ | 26,612 |
| $ | 26,565 |
| $ | 61,658 |
| $ | 61,883 |
| $ | 73,717 |
| $ | 75,179 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Other securities: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Non-marketable equity securities (including FRB and FHLB stock) |
| $ | 6,973 |
| $ | 6,973 |
| $ | 6,798 |
| $ | 6,798 |
| $ | 5,665 |
| $ | 5,665 |
|
Investment in unconsolidated trusts |
| 992 |
| 992 |
| 682 |
| 682 |
| 496 |
| 496 |
| ||||||
Total other securities |
| $ | 7,965 |
| $ | 7,965 |
| $ | 7,480 |
| $ | 7,480 |
| $ | 6,161 |
| $ | 6,161 |
|
U.S. Government agencies securities generally consist of fixed rate securities with maturities of one month to five years. States and political subdivisions investment securities consist of investment grade and local non-rated issues with maturities six months to thirty years.
Securities held from one issuer, Los Alamos Retirement Center, Inc., had a book value in excess of 10% of Trinity’s stockholders’ equity at December 31, 2005, with securities held by us totaling $9.6 million. Los Alamos Retirement Center, Inc. manages a nursing home and an assisted living facility in Los Alamos.
26
The following table sets forth certain information regarding contractual maturities and the weighted average yields of our securities portfolio as of December 31, 2005:
|
| Due in One Year or Less |
| Due after One Year through |
| Due after Five Years through |
| Due after Ten Years or no |
| ||||||||||||
|
| Balance |
| Weighted |
| Balance |
| Weighted |
| Balance |
| Weighted |
| Balance |
| Weighted |
| ||||
|
| (Dollars in thousands) |
| ||||||||||||||||||
Securities Available for Sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
U.S. Government agencies |
| $ | 31,537 |
| 2.96 | % | $ | 54,150 |
| 4.53 | % | — |
| �� |
| — |
| — |
| ||
States and political subdivision(1) |
| 2,637 |
| 4.02 | % | 2,584 |
| 4.18 | % | 763 |
| 2.94 | % | — |
| — |
| ||||
Equity securities |
| — |
| — |
| — |
| — |
| — |
| — |
| $ | 1 |
| 17.66 | % | |||
Total |
| $ | 34,174 |
|
|
| $ | 56,734 |
|
|
| $ | 763 |
|
|
| $ | 1 |
|
|
|
Securities Held to Maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
U.S. Government agencies |
| $ | 13,687 |
| 3.20 | % | — |
| — |
| — |
| — |
| — |
| — |
| |||
States and political subdivision(1) |
| 1,766 |
| 4.69 | % | $ | 1,605 |
| 5.19 | % | — |
| — |
| $ | 9,554 |
| 9.82 | % | ||
Total |
| $ | 15,453 |
|
|
| $ | 1,605 |
|
|
| — |
|
|
| $ | 9,554 |
|
|
| |
Other securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Non-marketable Equity Securities (including FRB and FHLB stock) |
| $ | 100 |
| 1.50 | % | — |
| — |
| — |
| — |
| $ | 6,873 |
| 3.82 | % | ||
Investment in Unconsolidated trusts |
| — |
| — |
| — |
| — |
| — |
| — |
| 992 |
| 8.75 | % | ||||
Total |
| $ | 100 |
|
|
| — |
|
|
| — |
|
|
| $ | 7,865 |
|
|
| ||
(1) Yield is reflected on a fully tax equivalent basis, adjusting for federal and state exemption of interest income and certain other permanent income tax differences.
Loan Portfolio. The following tables set forth the composition of the loan portfolio:
|
| At December 31, |
| |||||||||||||||||||||||
|
| 2005 |
| 2004 |
| 2003 |
| 2002 |
| 2001 |
| |||||||||||||||
|
| Amount |
| Percent |
| Amount |
| Percent |
| Amount |
| Percent |
| Amount |
| Percent |
| Amount |
| Percent |
| |||||
|
| (Dollars in thousands) |
| |||||||||||||||||||||||
Commercial |
| $ | 93,579 |
| 9.16 | % | $ | 92,736 |
| 10.35 | % | $ | 71,299 |
| 9.61 | % | $ | 65,778 |
| 9.94 | % | $ | 55,838 |
| 8.58 | % |
Commercial real estate |
| 379,884 |
| 37.19 |
| 346,454 |
| 38.65 |
| 286,551 |
| 38.61 |
| 245,001 |
| 37.02 |
| 217,776 |
| 33.45 |
| |||||
Residential real estate |
| 313,693 |
| 30.71 |
| 282,380 |
| 31.50 |
| 222,282 |
| 29.95 |
| 200,408 |
| 30.28 |
| 236,139 |
| 36.26 |
| |||||
Construction real estate |
| 178,068 |
| 17.43 |
| 121,769 |
| 13.59 |
| 112,616 |
| 15.18 |
| 105,921 |
| 16.01 |
| 101,500 |
| 15.59 |
| |||||
Installment and other |
| 56,309 |
| 5.51 |
| 52,984 |
| 5.91 |
| 49,349 |
| 6.65 |
| 44,656 |
| 6.75 |
| 39,833 |
| 6.12 |
| |||||
Total loans |
| 1,021,533 |
| 100.00 |
| 896,323 |
| 100.00 |
| 742,097 |
| 100.00 |
| 661,764 |
| 100.00 |
| 651,086 |
| 100.00 |
| |||||
Unearned income |
| (2,153 | ) |
|
| (2,002 | ) |
|
| (1,574 | ) |
|
| (1,316 | ) |
|
| (727 | ) |
|
| |||||
Gross loans |
| 1,019,380 |
|
|
| 894,321 |
|
|
| 740,523 |
|
|
| 660,448 |
|
|
| 650,359 |
|
|
| |||||
Allowance for loan losses |
| (8,842 | ) |
|
| (8,367 | ) |
|
| (7,368 | ) |
|
| (6,581 | ) |
|
| (5,637 | ) |
|
| |||||
Net loans |
| $ | 1,010,538 |
|
|
| $ | 885,954 |
|
|
| $ | 733,155 |
|
|
| $ | 653,867 |
|
|
| $ | 644,722 |
|
|
|
Net loans increased $124.6 million (14.1%) to $1.0 billion at December 31, 2005 from $886.0 million at December 31, 2004. The increase was due primarily to growth in our construction, commercial real estate and residential real estate portfolios.
27
Loan Maturities. The following table sets forth the maturity or repricing information for commercial and construction real estate loans outstanding at December 31, 2005:
|
| Due in One Year Or Less |
| Due after One Year |
| Due after Five Years |
|
|
| |||||||||||
|
| Fixed Rate |
| Floating Rate |
| Fixed Rate |
| Floating Rate |
| Fixed Rate |
| Floating Rate |
| Total |
| |||||
|
| (In thousands) |
| |||||||||||||||||
Commercial loans and construction real estate loans |
| $ | 135,337 |
| $ | 128,234 |
| $ | 7,797 |
| — |
| $ | 279 |
| — |
| $ | 271,647 |
|
Asset Quality. The following table sets forth the amounts of non-performing loans and non-performing assets at the dates indicated:
|
| At December 31, |
| |||||||||||||
|
| 2005 |
| 2004 |
| 2003 |
| 2002 |
| 2001 |
| |||||
|
| (Dollars in thousands) |
| |||||||||||||
Non-accruing loans |
| $ | 8,037 |
| $ | 5,714 |
| $ | 3,112 |
| $ | 3,914 |
| $ | 6,472 |
|
Loans 90 days or more past due, still accruing interest |
| — |
| 8 |
| 80 |
| — |
| 877 |
| |||||
Total non-performing loans |
| $ | 8,037 |
| $ | 5,722 |
| 3,192 |
| 3,914 |
| 7,349 |
| |||
Other real estate owned |
| 375 |
| 6,438 |
| 7,383 |
| 3,707 |
| 2,338 |
| |||||
Other repossessed assets |
| 27 |
| 64 |
| 353 |
| 39 |
| 18 |
| |||||
Total non-performing assets |
| $ | 8,439 |
| $ | 12,224 |
| $ | 10,928 |
| $ | 7,660 |
| $ | 9,705 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total non-performing loans to total loans |
| 0.79 | % | 0.64 | % | 0.43 | % | 0.59 | % | 1.13 | % | |||||
Allowance for loan losses to non-performing loans |
| 110.02 | % | 146.23 | % | 230.83 | % | 168.14 | % | 76.70 | % | |||||
Total non-performing assets to total assets |
| 0.68 | % | 1.13 | % | 1.09 | % | 0.84 | % | 1.20 | % |
Non-performing Loans. Non-performing loans include (i) loans accounted for on a non-accrual basis, (ii) accruing loans contractually past due 90 days or more as to interest and principal and (iii) troubled debt restructurings. Management reviews the loan portfolio for problem loans on an ongoing basis. During the ordinary course of business, management may become aware of borrowers that may not be able to meet the contractual requirements of loan agreements. Such loans are placed under close supervision with consideration given to placing the loan on a non-accrual status, increasing the allowance for loan losses, and (if appropriate) partial or full charge-off. After a loan is placed on non-accrual status, any current year interest previously accrued but not yet collected is reversed against current income. When payments are received on non-accrual loans, such payments will be applied to principal and not taken into income. Loans will not be placed back on accrual status unless all back interest and principal payments are made. If interest on non-accrual loans had been accrued, such income would have amounted to $198 thousand and $216 thousand for the years ended December 31, 2005 and 2004, respectively. None of these amounts were included in interest income during these periods. Our policy is to place loans 90 days past due on non-accrual status. An exception is made when management believes the loan will become current and there is documented evidence of the borrower’s ability to repay. Non-accrual loans are further classified as impaired when underlying collateral is not sufficient to cover the loan balance and it is probable that we will not fully collect all principal and interest. In December 2005, we restructured $5.8 million in commercial loans to a single customer. To facilitate repayment of this debt, all creditors with priority to the collateral have been satisfied and all receivables of the borrower have been assigned to us and are to be sent to a lockbox account with us. Although we believe that it is likely we will collect on the full amount of the restructured loan, $916 thousand of the loan loss reserve is specifically allocated to this relationship.
Non-performing assets also consist of other repossessed assets and other real estate owned (“OREO”). OREO represents properties acquired through foreclosure or other proceedings and are recorded at the fair value less the estimated cost of disposal. OREO is evaluated regularly to ensure that the recorded amount is supported by its current fair value. Valuation allowances to reduce the carrying amount to fair value less estimated costs of disposal are recorded as necessary. Revenues and expenses from the operations of OREO and changes in the valuation are included in other income and other expenses on the income statement.
At December 31, 2005, total non-performing assets decreased $3.8 million to $8.4 million from $12.2 million at December 31, 2004 due to decreases in OREO of $6.1 million, which was partially offset by an increase in non-performing loans of $2.3 million. The decrease in OREO was largely due to the sales of residential real estate property in 2005. The increase in non-performing loans was largely due to the placing of the $5.8 million commercial loan discussed above on non-accrual status in 2005, which was partially offset by the total payoff of a $2.4 million commercial real estate loan that had been on non-accrual status in 2004. We believe that collateral on this loan is adequate to minimize any losses on the $5.8 million restructured loan.
28
At December 31, 2004, total non-performing assets increased $1.3 million to $12.2 million from $10.9 million at December 31, 2003 due to increases in non-performing loans of $2.5 million, which was partially offset by a decrease in other real estate owned of $945 thousand and a decrease in other repossessed assets of $289 thousand. The increase in non-performing loans was largely due to the placing of a $2.4 million commercial real estate loan on non-accrual status in 2004. We believe that our collateral on this loan is adequate to minimize any loss. The decrease in OREO was largely due to the sale of a $1.3 million commercial real estate property in 2004, which was partially offset by the acquisition of an $844 thousand residential real estate property in 2004.
The following table presents an analysis of the allowance for loan losses for the periods presented:
|
| Year Ended December 31, |
| |||||||||||||
|
| 2005 |
| 2004 |
| 2003 |
| 2002 |
| 2001 |
| |||||
|
| (Dollars in thousands) |
| |||||||||||||
Balance at beginning of year |
| $ | 8,367 |
| $ | 7,368 |
| $ | 6,581 |
| $ | 5,637 |
| $ | 4,621 |
|
Provision for loan losses |
| 2,850 |
| 2,100 |
| 3,350 |
| 2,800 |
| 2,900 |
| |||||
Charge-offs: |
|
|
|
|
|
|
|
|
|
|
| |||||
Commercial |
| 1,912 |
| 640 |
| 506 |
| 1,240 |
| 1,060 |
| |||||
Commercial real estate |
| — |
| — |
| 527 |
| — |
| 356 |
| |||||
Residential real estate |
| 125 |
| 188 |
| 305 |
| 168 |
| 374 |
| |||||
Construction real estate |
| — |
| — |
| 1,220 |
| — |
| — |
| |||||
Installment and other |
| 500 |
| 459 |
| 255 |
| 516 |
| 435 |
| |||||
Total charge-offs |
| 2,537 |
| 1,287 |
| 2,813 |
| 1,924 |
| 2,225 |
| |||||
Recoveries: |
|
|
|
|
|
|
|
|
|
|
| |||||
Commercial |
| 48 |
| 108 |
| 166 |
| 11 |
| 14 |
| |||||
Commercial real estate |
| — |
| — |
| — |
| — |
| — |
| |||||
Residential real estate |
| — |
| 1 |
| 11 |
| — |
| 274 |
| |||||
Construction real estate |
| 55 |
| 23 |
| — |
| — |
| — |
| |||||
Installment and other |
| 59 |
| 54 |
| 73 |
| 57 |
| 53 |
| |||||
Total recoveries |
| 162 |
| 186 |
| 250 |
| 68 |
| 341 |
| |||||
Net charge-offs |
| 2,375 |
| 1,101 |
| 2,563 |
| 1,856 |
| 1,884 |
| |||||
Balance at end of year |
| $ | 8,842 |
| $ | 8,367 |
| $ | 7,368 |
| $ | 6,581 |
| $ | 5,637 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Gross loans at end of year |
| $ | 1,019,380 |
| $ | 894,321 |
| $ | 740,523 |
| $ | 660,448 |
| $ | 650,359 |
|
Ratio of allowance to total loans |
| 0.87 | % | 0.93 | % | 0.99 | % | 1.00 | % | 0.87 | % | |||||
Ratio of net charge-offs to average loans |
| 0.24 | % | 0.14 | % | 0.35 | % | 0.29 | % | 0.32 | % |
Net charge-offs for 2005 totaled $2.4 million, an increase of $1.3 million (115.7%) over 2004. The increase in the charge-offs was mainly due to an increase in commercial loan charge-offs of $1.3 million. This increase was due to a single commercial loan charge-off of $1.5 million, which was partially offset by a general decline in other commercial charge-offs. The increase of the provision by $750 thousand was due to management’s identification of the charge off necessary on that commercial loan.
Net charge-offs for 2004 totaled $1.1 million, a decrease of $1.5 million (57.0%) over 2003. The decrease in the charge-offs was mainly due to a decline in construction loan charge-offs of $1.2 million (there were no construction loan charge-offs in 2004). The decrease of the provision by $1.3 million was because in 2003 the provision included an extra $1.2 million for two large residential properties for which losses associated with foreclosure were identified.
29
The following table sets forth the allocation of the allowance for loan losses for the years presented and the percentage of loans in each category to total loans. An allocation for a loan classification is only for internal analysis of the adequacy of the allowance and is not an indication of expected or anticipated losses:
|
| At December 31, |
| |||||||||||||||||||||||
|
| 2005 |
| 2004 |
| 2003 |
| 2002 |
| 2001 |
| |||||||||||||||
|
| Amount |
| Percent |
| Amount |
| Percent |
| Amount |
| Percent |
| Amount |
| Percent |
| Amount |
| Percent |
| |||||
|
| (Dollars in thousands) |
| |||||||||||||||||||||||
Commercial |
| $ | 2,934 |
| 9.16 | % | $ | 3,502 |
| 10.35 | % | $ | 2,509 |
| 9.61 | % | $ | 2,062 |
| 9.94 | % | $ | 1,559 |
| 8.58 | % |
Commercial and residential real estate |
| 3,086 |
| 67.90 |
| 2,511 |
| 70.15 |
| 3,192 |
| 68.56 |
| 1,376 |
| 67.30 |
| 866 |
| 69.71 |
| |||||
Construction real estate |
| 1,993 |
| 17.43 |
| 981 |
| 13.59 |
| 844 |
| 15.18 |
| 2,399 |
| 16.01 |
| 2,129 |
| 15.59 |
| |||||
Installment and other |
| 813 |
| 5.51 |
| 1,369 |
| 5.91 |
| 799 |
| 6.65 |
| 386 |
| 6.75 |
| 385 |
| 6.12 |
| |||||
Unallocated |
| 16 |
| N/A |
| 4 |
| N/A |
| 24 |
| N/A |
| 358 |
| N/A |
| 698 |
| N/A |
| |||||
Total |
| $ | 8,842 |
| 100.00 | % | $ | 8,367 |
| 100.00 | % | $ | 7,368 |
| 100.00 | % | $ | 6,581 |
| 100.00 | % | $ | 5,637 |
| 100.00 | % |
N/A—not applicable
The portion of the allocation that was based upon historical loss experience decreased by $1.2 million in 2005, from $3.7 million in 2004 to $2.5 million in 2005. This was largely due to a decrease in the allocation for commercial loans which decreased by $1.6 million and a decrease in the allocation for installment and other loans of $849 thousand, which were partially offset by an increase in the allocation for commercial real estate loans which increased by $744 thousand and an increase in the allocation for residential real estate loans which increased by $512 thousand. The allocation for specifically identified loans increased by $950 thousand, from $446 thousand in 2004 to $1.4 million in 2005. This was largely due to the addition of a single commercial loan for $916 thousand to the specifically identified loans. The concentration allocation increased $705 thousand, from $4.2 million in 2004 to $4.9 million in 2005. This was primarily due to an increase in the allocation of $867 thousand for concentrations in construction/land development loans.
We expect continued growth in our loan portfolio due to a stable local economy, a stabilized Laboratory budget of over $2.2 billion and anticipated increases in interest rates. We anticipate the volume of commercial real estate and construction loans to increase as the construction industry strengthens and the New Mexico economy continues to improve by attracting new business to the state. Commercial real estate has strengthened over the past several years due to vacancy rates returning to their historical averages and demand picking up due to new business looking to expand within the state. The housing market for homes below $500 thousand remains strong and we believe that market will remain constant in the near future. We expect residential real estate for property worth greater than $1.5 million to continue to be soft. Total net charge-offs were substantially more in 2005 than in 2004. This was primarily due to an increase in commercial charge-offs in 2005 due to the relationship discussed above.
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 we believe the allowance for loan losses is sufficient to cover probable losses inherent in the loan portfolio, there can be no assurance that the allowance will prove sufficient to cover actual loan losses.
Potential Problem Loans. The Company utilizes an internal asset classification system as a means of reporting problem and potential problem assets. At scheduled Board of Directors meetings every quarter, a list of total adversely classified assets is presented, showing OREO, other repossessed assets, and all loans listed as “Substandard,” “Doubtful” and “Loss.” All non-accrual loans are classed either as “Substandard” or “Doubtful” and are thus included in total adversely classified assets. A separate watch list of loans classified as “Special Mention” is also presented. An asset is classified Substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or 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.
30
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. Although management believes that adequate specific and general loan loss allowances have been established, actual losses are dependent upon future events and, as such, further additions to the level of specific and general loan loss allowances may become necessary.
The following table shows the amounts of adversely classified assets and special mention loans as of the periods indicated:
|
| At December 31, |
| |||||||||||||
|
| 2005 |
| 2004 |
| 2003 |
| 2002 |
| 2001 |
| |||||
|
| (In thousands) |
| |||||||||||||
Loans classified as: |
|
|
|
|
|
|
|
|
|
|
| |||||
Substandard |
| $ | 14,484 |
| $ | 15,810 |
| $ | 9,815 |
| $ | 7,769 |
| $ | 11,209 |
|
Doubtful |
| 1,414 |
| 201 |
| 180 |
| 8 |
| 552 |
| |||||
Total adversely classified loans |
| 15,898 |
| 16,011 |
| 9,995 |
| 7,777 |
| 11,761 |
| |||||
Other real estate owned |
| 375 |
| 6,438 |
| 7,383 |
| 3,707 |
| 2,338 |
| |||||
Other repossessed assets |
| 27 |
| 64 |
| 353 |
| 39 |
| 18 |
| |||||
Total adversely classified assets |
| $ | 16,300 |
| $ | 22,513 |
| $ | 17,731 |
| $ | 11,523 |
| $ | 14,117 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Special mention loans |
| $ | 14,836 |
| $ | 22,834 |
| $ | 17,507 |
| $ | 10,035 |
| $ | 8,367 |
|
Total adversely classified assets decreased $6.2 million (27.6%) from December 31, 2004 to December 31, 2005. This was mainly due to a decrease of $6.1 million in other real estate owned, which was due to the sale of residential real estate in this portfolio. Special mention loans decreased $8.0 million (35.0%) from December 31, 2004 to December 31, 2005.
Sources of Funds
General. Deposits, short-term and long-term borrowings, loan and investment security repayments and prepayments, proceeds from the sale of securities, and cash flows generated from operations are the primary sources of our funds for lending, investing and other general purposes. Loan repayments are a relatively predictable source of funds except during periods of significant interest rate declines, while deposit flows tend to fluctuate with prevailing interests rates, money markets conditions, general economic conditions and competition.
Deposits. We offer a variety of deposit accounts with a range of interest rates and terms. Our core deposits consist of checking accounts, NOW accounts, savings accounts and non-public certificates of deposit. These deposits, along with public fund deposits and short-term and long-term borrowings are used to support our asset base. Our deposits are obtained predominantly from the geographic trade areas surrounding each of our office locations. We rely primarily on customer service and long-standing relationships with customers to attract and retain deposits; however, market interest rates and rates offered by competing financial institutions significantly affect our ability to attract and retain deposits.
31
The following table sets forth the maturities of time deposits $100 thousand and over at December 31, 2005:
|
| At December 31, 2005 |
| |
|
| (In thousands) |
| |
Time deposits $100,000 and over: |
|
|
| |
Maturing within three months |
| $ | 100,405 |
|
After three but within six months |
| 61,419 |
| |
After six but within twelve months |
| 57,742 |
| |
After twelve months |
| 75,017 |
| |
|
|
|
| |
Total time deposits $100,000 and over: |
| $ | 294,583 |
|
Borrowings. We have access to a variety of borrowing sources and use short-term and long-term borrowings to support our asset base. Short-term borrowings include federal funds purchased, securities sold under agreements to repurchase and advances from Federal Home Loan Bank (“FHLB”) with remaining maturities under one year. Long-term borrowings are advances from the FHLB with remaining maturities over one year. Total short-term and long-term borrowings decreased $12.1 million at December 31, 2005 compared to December 31, 2004, due to increased liquidity from strong deposit growth.
In addition to short- and long-term borrowings made by us, the ESOP uses long-term borrowings to facilitate its ability to acquire stock for the benefit of all employees who participate in the plan.
The following table sets forth certain information regarding our borrowings for the periods indicated:
|
| At December 31, |
| |||||||
|
| 2005 |
| 2004 |
| 2003 |
| |||
|
| (Dollars in thousands) |
| |||||||
Short-term borrowings: |
|
|
|
|
|
|
| |||
Average balance outstanding |
| $ | 6,096 |
| $ | 15,110 |
| $ | 1,467 |
|
Maximum outstanding at any month-end during the period |
| 23,000 |
| 40,600 |
| 9,402 |
| |||
Balance outstanding at end of period |
| 10,000 |
| 34,400 |
| 9,402 |
| |||
Weighted average interest rate during the period |
| 3.08 | % | 1.90 | % | 2.04 | % | |||
Weighted average interest rate at end of the period |
| 3.92 | % | 2.37 | % | 1.80 | % | |||
Long-term borrowings: |
|
|
|
|
|
|
| |||
Average balance outstanding |
| $ | 76,764 |
| $ | 63,538 |
| $ | 52,862 |
|
Maximum outstanding at any month-end during the period |
| 86,836 |
| 66,793 |
| 75,391 |
| |||
Balance outstanding at end of period |
| 72,306 |
| 60,006 |
| 67,398 |
| |||
Weighted average interest rate during the period |
| 3.82 | % | 3.66 | % | 3.78 | % | |||
Weighted average interest rate at end of the period |
| 3.88 | % | 3.64 | % | 3.69 | % | |||
Borrowings made by Employee Stock Ownership Plan (ESOP) to outside parties: |
|
|
|
|
|
|
| |||
Average balance outstanding |
| $ | 1,239 |
| $ | 1,758 |
| $ | 2,386 |
|
Maximum outstanding at any month-end during the period |
| 1,214 |
| 2,157 |
| 2,415 |
| |||
Balance outstanding at end of period |
| 1,214 |
| 1,686 |
| 2,157 |
| |||
Weighted average interest rate during the period |
| 6.17 | % | 4.23 | % | 4.12 | % | |||
Weighted average interest rate at end of the period |
| 7.25 | % | 5.25 | % | 4.00 | % | |||
Junior subordinated debt owed to unconsolidated trusts: |
|
|
|
|
|
|
| |||
Average balance outstanding |
| $ | 27,936 |
| $ | 20,468 |
| $ | 16,496 |
|
Maximum outstanding at any month-end during the period |
| 32,992 |
| 22,682 |
| 16,496 |
| |||
Balance outstanding at end of period |
| 32,992 |
| 22,682 |
| 16,496 |
| |||
Weighted average interest rate during the period |
| 8.92 | % | 9.43 | % | 10.63 | % | |||
Weighted average interest rate at end of the period |
| 8.75 | % | 9.05 | % | 10.53 | % |
Liquidity
Bank Liquidity. Liquidity management is monitored by the Asset/Liability Management Committee and Board of Directors of Los Alamos National Bank, who review historical funding requirements, current liquidity position, sources and stability of funding, marketability of assets, options for attracting additional funds, and anticipated future funding needs, including the level of unfunded commitments.
32
Our primary sources of funds are retail and commercial deposits, borrowings, public funds and funds generated from operations. Funds from operations include principal and interest payments received on loans and securities. While maturities and scheduled amortization of loans and securities provide an indication of the timing of the receipt of funds, changes in interest rates, economic conditions and competition strongly influence mortgage prepayment rates and deposit flows, reducing the predictability of the timing on sources of funds.
We adhere to a liquidity policy, approved by the Board of Directors, who set certain guidelines for liquidity purposes. This policy requires that we maintain the following liquidity ratios:
• Net on-hand liquidity to total assets (defined as interest-bearing short-term investments plus securities not needed for collateral less short-term borrowings divided by total assets) should be greater than 0%.
• Wholesale funding to total assets (defined as state deposits plus short and long-term borrowings divided by total assets) should be less than 20%.
• Unused funding lines to total assets (defined as unused borrowings lines available from FHLB and other banks divided by total assets) should be greater than 10%.
• Loans to deposits less than 110%.
• Unused commitments to fund loans to total assets (defined as unused lines of credit likely to be funded divided by total assets) should be less than 5%.
At December 31, 2005 and 2004, we were in compliance with the foregoing policy, with the exception that on December 31, 2004, net on-hand liquidity to total assets was at -0.46%. This was a temporary situation which was rectified in the following month from an influx of additional deposits, reducing our short-term borrowings to be within policy guidelines.
At December 31, 2005, we had outstanding loan origination commitments and unused commercial and retail lines of credit of $182.6 million and standby letters of credit of $37.4 million. We anticipate we will have sufficient funds available to meet current origination and other lending commitments. Certificates of deposit scheduled to mature within one year totaled $357.4 million at December 31, 2005. Based upon our historical experience, we expect to retain a substantial majority of these certificates of deposit when they mature.
In the event that additional short-term liquidity is needed, we have established relationships with several large regional banks to provide short-term borrowings in the form of federal funds purchases. We have borrowed, and management believes that we could again borrow, $94.0 million for a short time from these banks on a collective basis. Additionally, we are a member of the FHLB and have the ability to borrow from the FHLB. As a contingency plan for significant funding needs, the Asset/Liability Management committee may also consider the sale of investment securities, selling securities under agreement to repurchase, sale of certain loans and/or the temporary curtailment of lending activities.
Company Liquidity. Trinity’s main sources of liquidity at the holding company level are dividends from Los Alamos National Bank.
Los Alamos National Bank is subject to various regulatory capital requirements administered by federal and state banking agencies, which affect their ability to pay dividends to Trinity. See Item 1, “Business—Trinity Capital Corporation—Supervision and Regulation—Dividends” and in Item 1, “Business—Los Alamos National Bank—Supervision and Regulation—Dividends.” Failure to meet minimum capital requirements can initiate certain mandatory and discretionary actions by regulators that, if undertaken, could have a direct material effect on our financial statements. The minimum ratios required for Los Alamos National Bank to be considered “well capitalized” for regulatory purposes are 10%, 6% and 5%,. At December 31, 2005, Los Alamos National Bank could pay a total of $12.9 million in dividends and still comply with our internal policy regarding minimum regulatory capital ratios.
Contractual Obligations, Commitments, Contingent Liabilities and Off-balance Sheet Arrangements
We have various financial obligations, including contractual obligations and commitments, which may require future cash payments.
33
Contractual Obligations. The following table presents, as of December 31, 2005, significant fixed and determinable contractual obligations to third parties by payment date. Further discussion of the nature of each obligation is included in the notes to the consolidated financial statements.
|
| Payments Due by Period |
| |||||||||||||
|
| Total |
| One year |
| 1-3 years |
| 4-5 years |
| After 5 |
| |||||
|
| (in thousands) |
| |||||||||||||
Deposits without a stated maturity(1) |
| $ | 580,740 |
| $ | 580,740 |
| — |
| — |
| — |
| |||
Time deposits(1) |
| 461,108 |
| 357,358 |
| $ | 68,542 |
| $ | 35,174 |
| $ | 34 |
| ||
Short-term borrowings(1) |
| 10,000 |
| 10,000 |
| — |
| — |
| — |
| |||||
Long-term borrowings(1) |
| 72,306 |
| 8,022 |
| 743 |
| 18,864 |
| 44,677 |
| |||||
Borrowings made by ESOP to outside parties(1) |
| 1,214 |
| 471 |
| 743 |
| — |
| — |
| |||||
Operating leases |
| 571 |
| 133 |
| 238 |
| 200 |
| — |
| |||||
Junior subordinated debt owed to unconsolidated trusts(1) |
| 32,992 |
| — |
| — |
| — |
| 32,992 |
| |||||
Total contractual long-term cash obligations |
| $ | 1,158,931 |
| $ | 956,724 |
| $ | 70,266 |
| $ | 54,238 |
| $ | 77,703 |
|
(1) Excludes interest.
Deposits without a stated maturity and time deposits do not necessarily represent future cash requirements. While these deposits contractually can be withdrawn by the customer on the dates indicated in the above table, historical experience has shown these deposits to have low volatility. Operating leases represent rental payments for office and storage property, as well as space for ATM installation in various locations.
Commitments. The following table details the amounts and expected maturities of significant commitments as of December 31, 2005. Further discussion of these commitments is included in Notes 14 and 15 in Item 8, “Financial Statements and Supplementary Data”, in this report.
|
| Total |
| One year |
| 1-3 years |
| 4-5 years |
| After 5 |
| |||||
|
| (in thousands) |
| |||||||||||||
Commitments to extend credit: |
|
|
|
|
|
|
|
|
|
|
| |||||
Commercial |
| $ | 35,891 |
| $ | 35,490 |
| $ | 393 |
| $ | 8 |
| — |
| |
Commercial real estate |
| 10,867 |
| 10,407 |
| 460 |
| — |
| — |
| |||||
Residential real estate |
| 1,082 |
| 1,082 |
| — |
| — |
| — |
| |||||
Mortgage loans sold with recourse |
| — |
| — |
| — |
| — |
| — |
| |||||
Construction real estate |
| 52,848 |
| 50,040 |
| 2,808 |
| — |
| — |
| |||||
Revolving home equity and credit card lines |
| 44,682 |
| 9,225 |
| — |
| 16 |
| $ | 35,441 |
| ||||
Other |
| 37,271 |
| 37,209 |
| 22 |
| 39 |
| 1 |
| |||||
Standby letters of credit |
| 37,436 |
| 36,624 |
| 772 |
| — |
| 40 |
| |||||
Total commitments to extend credit |
| 220,077 |
| 180,077 |
| 4,455 |
| 63 |
| 35,482 |
| |||||
Commitments to sell mortgage loans |
| 11,567 |
| 11,567 |
| — |
| — |
| — |
| |||||
ESOP liquidity put |
| 15,185 |
| 15,185 |
| — |
| — |
| — |
| |||||
Total commitments |
| $ | 246,829 |
| $ | 206,829 |
| $ | 4,455 |
| $ | 63 |
| $ | 35,482 |
|
34
Commitments to extend credit, including loan commitments and standby letters of credit, do not necessarily represent future cash requirements, as these commitments often expire without being drawn upon. Commitments to sell mortgage loans are offset by commitments from customers to enter into a mortgage loan. The contract with the customer specifically requires the customer to pay any fees that we incur in the event that we cannot deliver a mortgage to the buyer according to the contract with the buyer of the mortgage. The Employee Stock Ownership Plan (“ESOP”) liquidity put is described in Note 11 in Item 8, “Financial Statements and Supplementary Data”, which is located elsewhere in this report.
Capital Resources
Los Alamos National Bank is subject to the risk based capital regulations administered by the banking regulatory agencies. The risk based capital guidelines are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks, to account for off-balance sheet exposure and to minimize disincentives for holding liquid assets. Under the regulations, assets and off-balance sheet items are assigned to broad risk categories, each with appropriate weights. The resulting capital ratios represent capital as a percentage of total risk weighted assets and off-balance sheet items. Under the prompt corrective action regulations, to be adequately capitalized a bank must maintain minimum ratios of total capital to risk-weighted assets of 8%, Tier 1 capital to risk-weighted assets of 4%, and Tier 1 capital to total assets of 4%. Failure to meet these capital requirements can initiate certain mandatory and possibly additional discretionary, actions by regulators, that, if undertaken, could have a direct material effect on Los Alamos National Bank’s financial statements. As of December 31, 2005, the most recent notification from the federal banking regulators categorized Los Alamos National Bank as well capitalized. A well capitalized institution must maintain a minimum ratio of total capital to risk-weighted assets of at least 10%, a minimum ratio of Tier 1 capital to risk weighted assets of at least 6%, a minimum ratio of Tier 1 capital to total assets of at least 5% and must not be subject to any written order, agreement or directive requiring it to meet or maintain a specific capital level. There are no conditions or events since that notification that management believes have changed Los Alamos National Bank’s capital classification.
In order for Trinity to be considered “adequately capitalized” on a consolidated basis, it must maintain a minimum ratio of Tier 1 capital to total assets of 4%, and a minimum ratio of total capital to risk-weighted assets of 8%. See Item 1. “Business—Supervision and Regulation,—Capital Adequacy” and “Prompt Corrective Action”.
A certain amount of both Trinity and the Bank’s Tier 1 capital was in the form of Trust Preferred Securities. Please see Note 9, “Junior Subordinated Debt Owed to Unconsolidated Trusts” in Item 8, “Financial Statements and Supplementary Data”, in this report, for details on the effect these have on risk based capital.
Trinity and the Bank were in full compliance with all capital adequacy requirements to which they are subject as of December 31, 2005. The required and actual amounts and ratios for Trinity and the Bank as of December 31, 2005 are presented below:
|
| Actual |
| For Capital Adequacy |
| To Be Well |
| |||||||||
|
| Amount |
| Ratio |
| Amount |
| Ratio |
| Amount |
| Ratio |
| |||
|
| (Dollars in thousands) |
| |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
As of December 31, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Total capital (to risk-weighted assets): |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Consolidated |
| $ | 116,734 |
| 11.67 | % | $ | 80,041 |
| 8.00 | % | N/A |
| N/A |
| |
Bank only |
| 112,691 |
| 11.30 |
| 79,816 |
| 8.00 |
| $ | 99,770 |
| 10.00 | % | ||
Tier 1 capital (to risk-weighted assets): |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Consolidated |
| 101,096 |
| 10.10 |
| 40,020 |
| 4.00 |
| N/A |
| N/A |
| |||
Bank only |
| 103,848 |
| 10.41 |
| 39,908 |
| 4.00 |
| 59,862 |
| 6.00 |
| |||
Tier 1 capital (to average assets): |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Consolidated |
| 101,096 |
| 8.19 |
| 49,348 |
| 4.00 |
| N/A |
| N/A |
| |||
Bank only |
| 103,848 |
| 8.43 |
| 49,255 |
| 4.00 |
| 61,569 |
| 5.00 |
| |||
N/A—not applicable
35
Statement of Cash Flows
Our 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 $19.3 million, $20.2 million and $84.0 million for 2005, 2004 and 2003. Net cash provided by operating activities decreased by $861 thousand from 2004 in 2005 largely due to an increase in cash used by other assets of $5.8 million, which was partially offset by an increase in cash provided by other liabilities of $2.5 million and cash provided by net income of $1.6 million. Net cash provided by operating activities decreased by $63.8 million from 2003 in 2004 largely due to the gross sale of loans held for sale decreasing $286.6 million, which was offset by a decrease in cash used by origination of loans held for sale of $356.2 million. This was reflective of the expected decline in mortgage loan refinance activity from the high in 2003.
Net cash (used in) investing activities was ($137.4) million, ($103.0) million and ($160.8) million for 2005, 2004 and 2003. The $34.4 million increase in cash used in investment activities from 2004 to 2005 was mainly due to a decrease in the proceeds from maturities and sales of investment securities of $41.1 million and an increase in cash used for the purchase of investment securities of $33.0 million. These were partially offset by a decrease in the cash used in the funding of loans, net of repayments of $29.1 million and a decrease in cash used in the purchase of premises and equipment of $6.9 million. The $57.8 million decrease in cash used in investment activities from 2003 to 2004 was mainly due to a decrease in the cash used for purchasing investment securities of $66.3 million from 2003 to 2004. In addition, the increase in cash used for the funding of loans in 2004 over 2003 of $66.3 million was largely offset by increases in cash provided by the maturities and sales of investment securities of $64.1 million. Total loans increased in 2004 by 20.8% over 2003, compared to 12.1% in 2003 over 2002. The increase in loan activity was reflective of a strengthening local economy.
Net cash provided by financing activities was $148.9 million, $63.6 million and $79.0 million for 2005, 2004 and 2003. Cash provided by financing activities increased $85.3 million from 2004 to 2005 mainly due to an increase in cash provided from time deposits of $119.8 million, which was partially offset by a decrease in cash provided from the issuance of borrowings net of repayments of $29.7 million, and an increase in cash used in the purchase of treasury stock of $6.3 million. Cash provided by financing activities decreased in 2004 compared to 2003 by $15.4 million mainly due to an increase in cash used for the repayment of short- and long-term debt of $405.1 million, which was largely offset by an increase in cash provided by the issuance of short- and long-term debt of $386.1 million. This decrease in short- and long-term borrowings was made possible by the reduction of cash and cash equivalents that we held.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Asset Liability Management
Our net interest income is subject to “interest rate risk” to the extent that it can vary based on changes in the general level of interest rates. It is our policy to maintain an acceptable level of interest rate risk over a range of possible changes in interest rates while remaining responsive to market demand for loan and deposit products. The strategy we employ to manage our interest rate risk is to measure our risk using an asset/liability simulation model and adjust the maturity of securities in its investment portfolio to manage that risk.
Interest rate risk can also be measured by analyzing the extent to which the repricing of assets and liabilities are mismatched to create an interest sensitivity “gap.” An asset or liability is considered to be interest rate sensitive within a specific time period if it will mature or reprice within that time period. The interest rate sensitivity gap is defined as the difference between the amount of interest earning assets maturing or repricing within a specific time period and the amount of interest bearing liabilities maturing or repricing within that same time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. During a period of rising interest rates, therefore, a negative gap would tend to adversely affect net interest income. Conversely, during a period of falling interest rates, a negative gap position would tend to result in an increase in net interest income.
36
The following tables set forth the amounts of interest earning assets and interest bearing liabilities outstanding at December 31, 2005, which we anticipate, based upon certain assumptions, to reprice or mature in each of the future time periods shown. Except as stated below, the amount of assets and liabilities shown which reprice or mature during a particular period were determined based on the earlier of the term to repricing or the term to repayment of the asset or liability. These tables are intended to provide an approximation of the projected repricing of assets and liabilities at December 31, 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. The contractual maturities and amortization of loans and investment securities reflect modest prepayment assumptions. While NOW, money market and savings deposit accounts have adjustable rates, it is assumed that the interest rates on these accounts will not adjust immediately to changes in other interest rates. Therefore, the table is calculated assuming that these accounts will reprice based upon an historical analysis of decay rates of these particular accounts, with repricing assigned to these accounts from 1 to 11 months.
|
| Time to Maturity or Repricing |
| |||||||||||||
As of December 31, 2005: |
| 0-90 Days |
| 91-365 Days |
| 1-5 Years |
| Over 5 Years |
| Total |
| |||||
|
| (In thousands) |
| |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Interest Earning Assets: |
|
|
|
|
|
|
|
|
|
|
| |||||
Loans |
| $ | 457,750 |
| $ | 451,576 |
| $ | 60,375 |
| $ | 49,679 |
| $ | 1,019,380 |
|
Loans held for sale |
| 7,588 |
| — |
| — |
| — |
| 7,588 |
| |||||
Investment securities |
| 19,687 |
| 38,107 |
| 58,901 |
| 8,121 |
| 124,816 |
| |||||
Securities purchased under agreements to resell |
| 1,013 |
| — |
| — |
| — |
| 1,013 |
| |||||
Interest bearing deposits with banks |
| 29,122 |
| — |
| — |
| — |
| 29,122 |
| |||||
Investment in unconsolidated trusts |
| 186 |
| — |
| — |
| 806 |
| 992 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total interest earning assets |
| $ | 515,346 |
| $ | 489,683 |
| $ | 119,276 |
| $ | 58,606 |
| $ | 1,182,911 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Interest Bearing Liabilities: |
|
|
|
|
|
|
|
|
|
|
| |||||
NOW and money market deposit accounts |
| $ | 141,067 |
| $ | 101,384 |
| — |
| — |
| $ | 242,451 |
| ||
Savings deposits |
| 172,387 |
| 86,872 |
| — |
| — |
| 259,259 |
| |||||
Time deposits |
| 152,818 |
| 204,540 |
| $ | 103,716 |
| $ | 34 |
| 461,108 |
| |||
Short- and long-term borrowings |
| 1,975 |
| 16,047 |
| 19,607 |
| 44,677 |
| 82,306 |
| |||||
Borrowings made by ESOP to outside parties |
| 1,214 |
| — |
| — |
| — |
| 1,214 |
| |||||
Junior subordinated debt owed to unconsolidated trusts |
| 6,186 |
| — |
| — |
| 26,806 |
| 32,992 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total interest bearing liabilities |
| $ | 475,647 |
| $ | 408,843 |
| $ | 123,323 |
| $ | 71,517 |
| $ | 1,079,330 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Rate sensitive assets (RSA) |
| $ | 515,346 |
| $ | 1,005,029 |
| $ | 1,124,305 |
| $ | 1,182,911 |
| $ | 1,182,911 |
|
Rate sensitive liabilities (RSL) |
| 475,647 |
| 884,490 |
| 1,007,813 |
| 1,079,330 |
| 1,079,330 |
| |||||
Cumulative GAP (GAP=RSA-RSL) |
| 39,699 |
| 120,539 |
| 116,492 |
| 103,581 |
| 103,581 |
| |||||
RSA/Total assets |
| 41.43 | % | 80.79 | % | 90.38 | % | 95.09 | % | 95.09 | % | |||||
RSL/Total assets |
| 38.23 | % | 71.10 | % | 81.01 | % | 86.76 | % | 86.76 | % | |||||
GAP/Total assets |
| 3.2 | % | 9.69 | % | 9.37 | % | 8.33 | % | 8.33 | % | |||||
GAP/RSA |
| 7.70 | % | 11.99 | % | 10.36 | % | 8.76 | % | 8.76 | % |
Certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types of assets may lag behind changes in market rates. Additionally, in the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating the table. Therefore, we do not rely solely on a gap analysis to manage our interest rate risk, but rather we use what we believe to be the more reliable simulation model relating to changes in net interest income.
37
Based on simulation modeling at December 31, 2005 and 2004, our net interest income would change over a one-year time period due to changes in interest rates as follows:
Change in Net Interest Income Over One Year Horizon
Changes in Levels of |
| At December 31, 2005 |
| At December 31, 2004 |
| ||||||
Interest Rates |
| Dollar Change |
| Percentage Change |
| Dollar Change |
| Percentage Change |
| ||
|
| (Dollars in thousands) |
| ||||||||
+ 2.00 | % | $ | (3,093 | ) | (7.21 | )% | $ | (5,183 | ) | (13.25 | )% |
+ 1.00 |
| (948 | ) | (2.21 | ) | (2,030 | ) | (5.19 | ) | ||
(1.00 | ) | 1,047 |
| 2.44 |
| 595 |
| 1.52 |
| ||
(2.00 | ) | 721 |
| 1.68 |
| 78 |
| 0.20 |
| ||
Our simulations used assume the following:
1. Changes in interest rates are immediate.
2. It is our policy that interest rate exposure due to a 2% interest rate rise or fall be limited to 15% of our annual net interest income, as forecasted by the simulation model. As demonstrated by the table above, our interest rate risk exposure was within this policy at December 31, 2005.
Changes in net interest income between the periods above reflect changes in the composition of interest earning assets and interest bearing liabilities, related interest rates, repricing frequencies, and the fixed or variable characteristics of the interest earning assets and interest bearing liabilities. Projections of income given by the model are not actual predictions, but rather show our relative interest rate risk. Actual interest income may vary from model projections.
38
Item 8. Financial Statements and Supplemental Data.
TRINITY CAPITAL CORPORATION AND SUBSIDIARIES
FINANCIAL STATEMENTS
Audited Financial Statements December 31, 2005, 2004, and 2003
INDEX
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING |
|
|
|
| |
|
|
AUDITED FINANCIAL STATEMENTS |
|
|
|
| |
|
|
| |
|
|
| |
|
|
| |
|
|
|
39
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, and for performing an assessment of the effectiveness of internal control over financial reporting as of December 31, 2005. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s system of internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Management performed an assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2005 based upon criteria in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on our assessment, management determined that the Company’s internal control over financial reporting was effective as of December 31, 2005.
Our management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2005 has been audited by Moss Adams, LLP, an independent registered public accounting firm, as stated in their report which appears herein.
40
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Trinity Capital Corporation
We have audited the accompanying consolidated balance sheet of Trinity Capital Corporation and subsidiaries as of December 31, 2005 and the related statement of income, changes in stockholders’ equity and cash flows for the year then ended. The 2004 consolidated statements of Trinity Capital Corporation and subsidiaries were audited by Neff + Ricci LLP who combined with Moss Adams LLP as of January 1, 2006, and whose report dated February 18, 2005, expressed an unqualified opinion on those statements. The 2003 consolidated statements of income, changes in stockholders’ equity and cash flows were also audited by Neff + Ricci LLP, and whose report dated February 26, 2004, expressed an unqualified opinion on those statements. We have also audited management’s assessment, included in the accompanying Management Report on Internal Control over Financial Reporting, that Trinity Capital Corporation maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Trinity Capital Corporation and subsidiaries’ management is responsible for these financial statements, maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on these financial statements, an opinion on management’s assessment, and an opinion on the effectiveness of the Bank’s internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of the effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Trinity Capital Corporation and subsidiaries as of December 31, 2005 and the results of its operations and cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion management’s assessment that Trinity Capital Corporation and subsidiaries maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on criteria established in Internal Control - Integrated Framework issued by the COSO. Furthermore, in our opinion, Trinity Capital Corporation and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control - Integrated Framework issued by the COSO.
Moss Adams LLP
Albuquerque, New Mexico
March 16, 2006
41
TRINITY CAPITAL CORPORATION & SUBSIDIARIES
December 31, 2005 and 2004
(Amounts in thousands, except share data)
|
| 2005 |
| 2004 |
| ||
ASSETS |
|
|
|
|
| ||
Cash and due from banks |
| $ | 24,547 |
| $ | 23,678 |
|
Interest bearing deposits with banks |
| 29,122 |
| 96 |
| ||
Federal funds sold and securities purchased under resell agreements |
| 1,013 |
| 40 |
| ||
|
|
|
|
|
| ||
Cash and cash equivalents |
| 54,682 |
| 23,814 |
| ||
Investment securities available for sale |
| 91,231 |
| 44,105 |
| ||
Investment securities held to maturity, at amortized cost (fair value of $26,565 at December 31, 2005 and $61,883 at December 31, 2004) |
| 26,612 |
| 61,658 |
| ||
Other investments |
| 7,965 |
| 7,480 |
| ||
Loans (net of allowance for loan losses of $8,842 at December 31, 2005 and $8,367 at December 31, 2004) |
| 1,010,538 |
| 885,954 |
| ||
Loans held for sale |
| 7,588 |
| 8,634 |
| ||
Premises and equipment, net |
| 24,401 |
| 25,450 |
| ||
Accrued interest receivable |
| 7,321 |
| 5,941 |
| ||
Mortgage servicing rights, net |
| 9,779 |
| 8,371 |
| ||
Other real estate owned |
| 375 |
| 6,438 |
| ||
Other assets |
| 3,524 |
| 2,548 |
| ||
|
|
|
|
|
| ||
Total assets |
| $ | 1,244,016 |
| $ | 1,080,393 |
|
|
|
|
|
|
| ||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
| ||
Liabilities |
|
|
|
|
| ||
Deposits: |
|
|
|
|
| ||
Noninterest bearing |
| $ | 79,030 |
| $ | 63,070 |
|
Interest bearing |
| 962,818 |
| 817,511 |
| ||
|
|
|
|
|
| ||
Total deposits |
| 1,041,848 |
| 880,581 |
| ||
Short-term borrowings |
| 10,000 |
| 34,400 |
| ||
Long-term borrowings |
| 72,306 |
| 60,006 |
| ||
Junior subordinated debt owed to unconsolidated trusts |
| 32,992 |
| 22,682 |
| ||
Borrowings made by Employee Stock Ownership Plan (ESOP) to outside parties |
| 1,214 |
| 1,686 |
| ||
Accrued interest payable |
| 4,047 |
| 2,768 |
| ||
Other liabilities |
| 5,991 |
| 5,314 |
| ||
|
|
|
|
|
| ||
Total liabilities |
| 1,168,398 |
| 1,007,437 |
| ||
|
|
|
|
|
| ||
Stock owned by Employee Stock Ownership Plan (ESOP) participants; 614,558 shares and 636,915 shares at 2005 and 2004, at fair value; net of unearned ESOP shares of 72,243 shares and 98,318 shares at 2005 and 2004, at historical cost |
| 16,100 |
| 18,078 |
| ||
Commitments and contingencies (Note 14) |
|
|
|
|
| ||
Stockholders’ equity |
|
|
|
|
| ||
Common stock, no par, authorized 20,000,000 shares; issued 6,856,800 shares, shares outstanding 6,554,559 and 6,732,748 at 2005 and 2004 |
| 6,836 |
| 6,836 |
| ||
Additional paid-in capital |
| 922 |
| 997 |
| ||
Retained earnings |
| 58,013 |
| 47,849 |
| ||
Accumulated other comprehensive loss |
| (273 | ) | (200 | ) | ||
|
|
|
|
|
| ||
Total stockholders’ equity before treasury stock |
| 65,498 |
| 55,482 |
| ||
|
|
|
|
|
| ||
Treasury stock, at cost, 229,998 shares and 25,734 shares at 2005 and 2004 |
| (5,980 | ) | (604 | ) | ||
|
|
|
|
|
| ||
Total stockholders’ equity |
| 59,518 |
| 54,878 |
| ||
|
|
|
|
|
| ||
Total liabilities and stockholders’ equity |
| $ | 1,244,016 |
| $ | 1,080,393 |
|
The accompanying notes are an integral part of these consolidated financial statements.
42
TRINITY CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2005, 2004 and 2003
(Amounts in thousands except per share data)
|
| 2005 |
| 2004 |
| 2003 |
| |||
|
|
|
|
|
|
|
| |||
Interest income: |
|
|
|
|
|
|
| |||
Loans, including fees |
| $ | 63,730 |
| $ | 50,305 |
| $ | 48,963 |
|
Investment securities: |
|
|
|
|
|
|
| |||
Taxable |
| 2,364 |
| 3,173 |
| 3,551 |
| |||
Nontaxable |
| 759 |
| 622 |
| 513 |
| |||
Federal funds sold and securities purchased with agreements to resell |
| 12 |
| — |
| 3 |
| |||
Other interest bearing deposits |
| 969 |
| 132 |
| 338 |
| |||
Investment in unconsolidated trusts |
| 75 |
| 59 |
| 52 |
| |||
Total interest income |
| 67,909 |
| 54,291 |
| 53,420 |
| |||
Interest expense: |
|
|
|
|
|
|
| |||
Deposits |
| 20,636 |
| 12,478 |
| 15,296 |
| |||
Short-term borrowings |
| 188 |
| 287 |
| 30 |
| |||
Long-term borrowings |
| 3,011 |
| 2,397 |
| 2,000 |
| |||
Junior subordinated debt owed to unconsolidated trusts |
| 2,493 |
| 1,931 |
| 1,754 |
| |||
Total interest expense |
| 26,328 |
| 17,093 |
| 19,080 |
| |||
Net interest income |
| 41,581 |
| 37,198 |
| 34,340 |
| |||
Provision for loan losses |
| 2,850 |
| 2,100 |
| 3,350 |
| |||
Net interest income after provision for loan losses |
| 38,731 |
| 35,098 |
| 30,990 |
| |||
Other income: |
|
|
|
|
|
|
| |||
Mortgage loan servicing fees |
| 2,594 |
| 2,367 |
| 2,208 |
| |||
Loan and other fees |
| 2,753 |
| 2,432 |
| 1,925 |
| |||
Service charges on deposits |
| 1,489 |
| 1,416 |
| 1,275 |
| |||
Gain on sale of loans |
| 2,377 |
| 3,129 |
| 10,859 |
| |||
Gain on sale of securities |
| — |
| 272 |
| — |
| |||
Other operating income |
| 1,036 |
| 850 |
| 1,603 |
| |||
|
| 10,249 |
| 10,466 |
| 17,870 |
| |||
Other expenses: |
|
|
|
|
|
|
| |||
Salaries and employee benefits |
| 16,073 |
| 15,342 |
| 15,555 |
| |||
Occupancy |
| 3,166 |
| 2,601 |
| 1,798 |
| |||
Data processing |
| 1,841 |
| 1,924 |
| 1,500 |
| |||
Marketing |
| 1,509 |
| 1,365 |
| 1,451 |
| |||
Amortization and valuation of mortgage servicing rights |
| 501 |
| 1,650 |
| 2,003 |
| |||
Supplies |
| 686 |
| 1,005 |
| 914 |
| |||
Loss on sale of other real estate owned |
| 950 |
| 414 |
| 438 |
| |||
Postage |
| 582 |
| 556 |
| 536 |
| |||
Other |
| 4,543 |
| 3,889 |
| 4,013 |
| |||
|
| 29,851 |
| 28,746 |
| 28,208 |
| |||
Income before income taxes |
| 19,129 |
| 16,818 |
| 20,652 |
| |||
Income taxes |
| 7,169 |
| 6,429 |
| 7,794 |
| |||
Net income |
| $ | 11,960 |
| $ | 10,389 |
| $ | 12,858 |
|
Basic earnings per common share |
| $ | 1.80 |
| $ | 1.54 |
| $ | 1.93 |
|
Diluted earnings per common share |
| $ | 1.79 |
| $ | 1.52 |
| $ | 1.90 |
|
The accompanying notes are an integral part of these consolidated financial statements.
43
TRINITY CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Years Ended December 31, 2005, 2004 and 2003
(Amounts in thousands except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
| ||||||
|
| Common Stock, No Par |
| Additional |
|
|
| Other |
|
|
| ||||||||||||
|
| Issued |
| Held in Treasury, at cost |
| Paid-In |
| Retained |
| Comprehensive |
|
|
| ||||||||||
|
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Earnings |
| Income |
| Total |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Balance, December 31, 2002 |
| 6,856,800 |
| $ | 6,836 |
| (29,128 | ) | $ | (559 | ) | $ | 199 |
| $ | 39,990 |
| $ | 439 |
| $ | 46,905 |
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net income |
|
|
|
|
|
|
|
|
|
|
| 12,858 |
|
|
|
|
| ||||||
Net change in unrealized gain on investment securities, available for sale, net of taxes of $185 |
|
|
|
|
|
|
|
|
|
|
|
|
| (304 | ) |
|
| ||||||
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 12,554 |
| ||||||
Dividends |
|
|
|
|
|
|
|
|
|
|
| (3,866 | ) |
|
| (3,866 | ) | ||||||
Decrease in stock owned by ESOP participants, 19,813 shares |
|
|
|
|
|
|
|
|
|
|
| 357 |
|
|
| 357 |
| ||||||
Net change in the fair value of stock owned by ESOP participants |
|
|
|
|
|
|
|
|
|
|
| (8,494 | ) |
|
| (8,494 | ) | ||||||
Allocation of ESOP shares |
|
|
|
|
|
|
|
|
| 346 |
|
|
|
|
| 346 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Balance, December 31, 2003 |
| 6,856,800 |
| 6,836 |
| (29,128 | ) | (559 | ) | 545 |
| 40,845 |
| 135 |
| 47,802 |
| ||||||
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net income |
|
|
|
|
|
|
|
|
|
|
| 10,389 |
|
|
|
|
| ||||||
Net change in unrealized gain on investment securities, available-for sale, net of taxes of $140 |
|
|
|
|
|
|
|
|
|
|
|
|
| (227 | ) |
|
| ||||||
Reclassification of unrealized gains to realized gains, net of taxes of $66 |
|
|
|
|
|
|
|
|
|
|
|
|
| (108 | ) |
|
| ||||||
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 10,054 |
| ||||||
Dividends |
|
|
|
|
|
|
|
|
| (76 | ) | (4,023 | ) |
|
| (4,099 | ) | ||||||
Treasury shares purchased |
|
|
|
|
| (3,770 | ) | (117 | ) |
|
|
|
|
|
| (117 | ) | ||||||
Treasury shares issued from exercise of stock options |
|
|
|
|
| 7,164 |
| 72 |
|
|
|
|
|
|
| 72 |
| ||||||
Tax benefit from the exercise of stock options |
|
|
|
|
|
|
|
|
| 53 |
|
|
|
|
| 53 |
| ||||||
Decrease in stock owned by ESOP participants, 16,466 shares |
|
|
|
|
|
|
|
|
|
|
| 511 |
|
|
| 511 |
| ||||||
Net change in the fair value of stock owned by ESOP participants |
|
|
|
|
|
|
|
|
|
|
| 127 |
|
|
| 127 |
| ||||||
Allocation of ESOP shares |
|
|
|
|
|
|
|
|
| 475 |
|
|
|
|
| 475 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Balance, December 31, 2004 |
| 6,856,800 |
| 6,836 |
| (25,734 | ) | (604 | ) | 997 |
| 47,849 |
| (200 | ) | 54,878 |
| ||||||
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net income |
|
|
|
|
|
|
|
|
|
|
| 11,960 |
|
|
|
|
| ||||||
Net change in unrealized gain on investment securities, available-for sale, net of taxes of $44 |
|
|
|
|
|
|
|
|
|
|
|
|
| (73 | ) |
|
| ||||||
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 11,887 |
| ||||||
Dividends |
|
|
|
|
|
|
|
|
| (59 | ) | (4,205 | ) |
|
| (4,264 | ) | ||||||
Treasury shares purchased |
|
|
|
|
| (246,983 | ) | (6,422 | ) |
|
|
|
|
|
| (6,422 | ) | ||||||
Treasury shares issued from exercise of stock options |
|
|
|
|
| 42,719 |
| 1,046 |
| (652 | ) |
|
|
|
| 394 |
| ||||||
Tax benefit from the exercise of stock options |
|
|
|
|
|
|
|
|
| 272 |
|
|
|
|
| 272 |
| ||||||
Decrease in stock owned by ESOP participants, 22,357 shares |
|
|
|
|
|
|
|
|
|
|
| 688 |
|
|
| 688 |
| ||||||
Net change in the fair value of stock owned by ESOP participants |
|
|
|
|
|
|
|
|
|
|
| 1,721 |
|
|
| 1,721 |
| ||||||
Allocation of ESOP shares |
|
|
|
|
|
|
|
|
| 364 |
|
|
|
|
| 364 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Balance, December 31, 2005 |
| 6,856,800 |
| $ | 6,836 |
| (229,998 | ) | $ | (5,980 | ) | $ | 922 |
| $ | 58,013 |
| $ | (273 | ) | $ | 59,518 |
|
The accompanying notes are an integral part of these consolidated financial statements.
44
TRINITY CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2005, 2004 and 2003
(Amounts in thousands)
|
| 2005 |
| 2004 |
| 2003 |
| |||
|
|
|
|
|
|
|
| |||
Cash Flows From Operating Activities |
|
|
|
|
|
|
| |||
Net income |
| $ | 11,960 |
| $ | 10,389 |
| $ | 12,858 |
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
|
|
|
|
|
|
| |||
Depreciation and amortization |
| 2,620 |
| 2,261 |
| 1,945 |
| |||
Net amortization (accretion) of: |
|
|
|
|
|
|
| |||
Mortgage servicing rights |
| 2,758 |
| 2,739 |
| 1,249 |
| |||
Premiums and discounts on investment securities |
| 814 |
| 1,367 |
| 1,517 |
| |||
Junior subordinated debt owed to unconsolidated trusts issuance costs |
| 20 |
| 24 |
| 18 |
| |||
Provision for loan losses |
| 2,850 |
| 2,100 |
| 3,350 |
| |||
Change in mortgage servicing rights valuation allowance |
| (2,257 | ) | (1,089 | ) | 754 |
| |||
Loss on sale of premises and equipment |
| 183 |
| — |
| — |
| |||
Gain on sale of available for sale securities |
| — |
| (272 | ) | — |
| |||
Federal Home Loan Bank (FHLB) stock dividends received |
| (203 | ) | (103 | ) | (89 | ) | |||
Gain on sale of loans |
| (2,377 | ) | (3,129 | ) | (10,859 | ) | |||
Loss (gain) on disposal of other real estate owned |
| 157 |
| 148 |
| (219 | ) | |||
Write-down of value of other real estate owned |
| 793 |
| 351 |
| 580 |
| |||
(Increase) decrease in other assets |
| (2,376 | ) | 3,380 |
| (1,050 | ) | |||
Increase (decrease) in other liabilities |
| 1,794 |
| (754 | ) | 1,495 |
| |||
Release of Employee Stock Ownership Plan (ESOP) shares |
| 794 |
| 935 |
| 1,003 |
| |||
Tax benefit recognized for exercise of stock options |
| 272 |
| 53 |
| — |
| |||
Net cash provided by operating activities before originations and gross sales of loans |
| 17,802 |
| 18,400 |
| 12,552 |
| |||
Gross sales of loans held for sale |
| 182,271 |
| 221,029 |
| 577,225 |
| |||
Origination of loans held for sale |
| (180,757 | ) | (219,252 | ) | (505,825 | ) | |||
Net cash (used in) provided by operating activities |
| 19,316 |
| 20,177 |
| 83,952 |
| |||
Cash Flows From Investing Activities |
|
|
|
|
|
|
| |||
Proceeds from maturities and paydowns of investment securities available for sale |
| 14,075 |
| 49,760 |
| 18,120 |
| |||
Proceeds from maturities and paydowns of investment securities held to maturity |
| 34,550 |
| 11,350 |
| 7,555 |
| |||
Proceeds from sale of investment securities, available for sale |
| — |
| 28,388 |
| — |
| |||
Proceeds from sale of investment securities, other |
| — |
| 300 |
| — |
| |||
Purchase of investment securities available for sale |
| (61,636 | ) | (28,095 | ) | (82,373 | ) | |||
Purchase of investment securities held to maturity |
| — |
| — |
| (12,057 | ) | |||
Purchase of investment securities other |
| (1,013 | ) | (1,516 | ) | (1,815 | ) | |||
Proceeds from sale of other real estate owned |
| 5,633 |
| 2,604 |
| 4,065 |
| |||
Loans funded, net of repayments |
| (127,954 | ) | (157,057 | ) | (90,740 | ) | |||
Purchases of premises and equipment |
| (1,854 | ) | (8,772 | ) | (3,531 | ) | |||
Proceeds from sale of premises and equipment |
| 100 |
| — |
| — |
| |||
Net cash used in investing activities |
| (137,368 | ) | (103,038 | ) | (160,776 | ) | |||
Cash Flows From Financing Activities |
|
|
|
|
|
|
| |||
Net increase in demand deposits, NOW accounts and savings accounts |
| 39,492 |
| 42,439 |
| 46,960 |
| |||
Net increase (decrease) in time deposits |
| 121,775 |
| 1,947 |
| (851 | ) | |||
Proceeds from issuances of borrowings |
| 30,000 |
| 481,700 |
| 95,596 |
| |||
Repayment of borrowings |
| (42,100 | ) | (464,094 | ) | (58,288 | ) | |||
Repayment of ESOP debt |
| (472 | ) | (471 | ) | (731 | ) | |||
Proceeds from issuance of junior subordinated debt owed to unconsolidated trusts |
| 10,310 |
| 6,186 |
| — |
| |||
Purchase of treasury stock |
| (6,422 | ) | (117 | ) | — |
| |||
Issuance of common stock for stock option plan |
| 394 |
| 72 |
| — |
| |||
Dividend payments |
| (4,057 | ) | (4,098 | ) | (3,730 | ) | |||
Net cash provided by financing activities |
| 148,920 |
| 63,564 |
| 78,956 |
| |||
Net increase (decrease) in cash and cash equivalents |
| 30,868 |
| (19,297 | ) | 2,132 |
| |||
Cash and cash equivalents: |
|
|
|
|
|
|
| |||
Beginning of year |
| 23,814 |
| 43,111 |
| 40,979 |
| |||
End of year |
| $ | 54,682 |
| $ | 23,814 |
| $ | 43,111 |
|
Supplemental Disclosures of Cash Flow Information |
|
|
|
|
|
|
| |||
Cash payments for: |
|
|
|
|
|
|
| |||
Interest |
| $ | 25,049 |
| $ | 17,122 |
| $ | 17,448 |
|
Income taxes |
| 7,921 |
| 3,843 |
| 10,742 |
| |||
Non-cash investing and financing activities: |
|
|
|
|
|
|
| |||
Transfers from loans to other real estate owned |
| 520 |
| 2,158 |
| 8,102 |
| |||
Dividends declared, not yet paid |
| 2,256 |
| 2,050 |
| 2,048 |
| |||
Change in unrealized (loss) gain on investment securities, net of taxes |
| (73 | ) | (334 | ) | (304 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies
Consolidation: The accompanying consolidated financial statements include the consolidated balances and results of operations of Trinity Capital Corporation (“Trinity”) and its wholly owned subsidiaries: Los Alamos National Bank (the “Bank”) 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 (see “Consolidation” accounting policy below.) The business activities of the Company consist solely of the operations of its wholly owned subsidiaries. All significant inter-company balances and transactions have been eliminated in consolidation. TCC Appraisal Services Corporation (“TCC Appraisal”), TCC Advisors Corporation and TCC Funds are not included as they were not created until 2006.
Basis of financial statement presentation: The consolidated financial statements include the accounts of the Company and its subsidiaries. The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America and general practices within the financial services industry. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the year. Actual results could differ from those estimates. Areas involving the use of management’s estimates and assumptions, and which are more susceptible to change in the near term include the allowance for loan losses and initial recording and subsequent valuation for impairment of mortgage servicing rights.
Nature of operations: The Company provides a variety of financial services to individuals, businesses and government organizations through its offices in Los Alamos and Santa Fe. Its primary deposit products are term certificate, NOW and savings accounts and its primary lending products are commercial, residential and construction real estate loans. The Company also offers trust and wealth management services, title insurance products and residential real estate appraisal services.
The Bank conducts its operations from its main office in Los Alamos and separate office locations in Santa Fe and White Rock, New Mexico and provides loan services from its loan production office in Albuquerque, New Mexico. The Bank also operates drive-up facilities and 29 automatic teller machines (ATM’s) in Los Alamos and surrounding geographic areas. Title Guaranty conducts its operations from its offices in Los Alamos and Santa Fe. TCC Appraisal conducts real estate appraisals in Los Alamos County from its office in the Company headquarters..
Deposits with banks, federal funds sold and securities purchased under resell agreements: For purposes of reporting cash flows, cash and cash equivalents includes cash on hand, amounts due from banks (including cash items in process of clearing), interest-bearing deposits with banks and federal funds sold.
Investment securities available for sale: Securities classified as available for sale are those securities that the Company intends to hold for an indefinite period of time, but not necessarily to maturity. Any decision to sell a security classified as available for sale would be based on various factors, including significant movements in interest rates, changes in the maturity mix of assets and liabilities, liquidity needs, regulatory capital considerations, and other similar factors.
Securities available for sale are reported at fair value with unrealized gains or losses reported as accumulated other comprehensive income, net of the related deferred tax effect. The amortization of premiums and accretion of discounts, computed by the interest method over their contractual lives, are recognized in interest income. Realized gains or losses, determined on the basis of the cost of specific securities sold, are included in earnings. In addition, if a loss is deemed to be other than temporary, it is recognized as a realized loss in the income statement.
Investment securities held to maturity: Securities classified as held to maturity are those securities that the Company has the ability and positive intent to hold until maturity. These securities are reported at amortized cost. Sales of investment securities held to maturity within three months of maturity are treated as maturities.
Other investments: The Bank, as a member of the Federal Home Loan Bank of Dallas (the “FHLB”), is required to maintain an investment in capital stock of the FHLB based upon borrowings made from the FHLB and based upon various classes of loans in the Bank’s portfolio. FHLB and Federal Reserve Bank stock do not have readily determinable fair values as ownership is restricted and it lacks a market. As a result, these stocks are carried at cost and evaluated periodically by management for impairment.
46
The Company’s investment in the unconsolidated trusts is also reported as an investment in this line of the balance sheet. In addition, the Bank has other non-marketable investments that are carried at cost and evaluated periodically by management for impairment. Investments with fair values that are less than amortized cost are considered impaired. Impairment may result from either a decline in the financial condition of the issuing entity or, in the case of fixed rate investments, from rising interest rates. At each financial statement date, management assesses each investment to determine if impaired investments are temporarily impaired or if the impairment is other than temporary based upon the evidence available. Evidence evaluated includes (if applicable), but is not limited to, industry analyst reports, credit market conditions, and interest rate trends. If negative evidence outweighs positive evidence that the carrying amount is recoverable within a reasonable period of time, the impairment is deemed to be other-than-temporary and the security is written down in the period in which such determination is made.
Loans held for sale: Loans held for sale are those loans the Company intends to sell. They are carried at the lower of aggregate cost or market value. Gains and losses on sales of loans are recognized at settlement dates and are determined by the difference between the sales proceeds plus the value of the mortgage servicing rights compared to the carrying value of the loans. These are generally sold within 30 to 60 days of origination.
Loans: Loans are stated at the amount of unpaid principal reduced by the allowance for loan losses and unearned income.
Loan origination and commitment fees and certain direct loan origination costs are deferred and the net amount amortized as an adjustment of the related loan’s yield. The Company is amortizing these amounts over the estimated life of the loan. Commitment fees based upon a percentage of a customer’s unused line of credit and fees related to standby letters of credit are recognized over the commitment period. Net deferred fees on real estate loans sold in the secondary market reduce the cost basis in such loans.
Interest on loans is accrued and reported as income using the interest method on daily principal balances outstanding. The Bank generally discontinues accruing interest on loans when the loan becomes 90 days or more past due or when management believes that the borrower’s financial condition is such that collection of interest is doubtful. Cash collections on nonaccrual loans are credited to the loan balance, and no interest income is recognized on those loans until the principal balance has been determined to be collectible.
Loans, other than those included in large groups of smaller-balance homogeneous loans, are considered impaired when it is probable the Company will be unable to collect all contractual principal and interest payments due in accordance with the terms of the loan agreement. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical expedient, at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. The amount of impairment, if any, and any subsequent changes are included in the allowance for loan losses.
The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes that collectibility of the principal is unlikely. The allowance is 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. The allowance for loan losses is based on management’s evaluation of the loan portfolio giving consideration to the nature and volume of the loan portfolio, the value of underlying collateral, overall portfolio quality, review of specific problem loans, and prevailing 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, regulatory agencies, as an integral part of their examination process, periodically review the subsidiary Bank’s allowance for loan losses, and may require the subsidiary bank to recognize additions to its allowance based on their judgments of information available to them at the time of their examinations.
Premises and equipment: Premises and equipment are carried at cost less accumulated depreciation and amortization. Depreciation and amortization is computed by the straight-line method for buildings and computer equipment over their estimated useful lives. Leasehold improvements are amortized over the term of the related lease or the estimated useful lives of the improvements, whichever is shorter. For owned and capitalized assets, estimated useful lives range from three to 39 years. Maintenance and repairs are charged to expense as incurred, while major improvements are capitalized and amortized to operating expense over their identified useful life. Generally, the useful life on software is three years; on computer and office equipment, five years; on furniture, 10 years; and on building and building improvements, 10 to 39 years.
Other real estate owned (“OREO”): OREO includes real estate assets that have been received in satisfaction of debt. OREO is initially recorded and subsequently carried at the lower of cost or fair value less estimated selling costs. Any valuation adjustments required at the date of transfer are charged to the allowance for loan losses. Subsequently, unrealized losses and realized gains and losses on sale are included in other non-interest income. Operating results from OREO are recorded in other non-interest expense.
47
Mortgage servicing rights: The Bank recognizes, as separate assets, rights to service mortgage loans for others, whether the rights are acquired through purchase or after origination and sale of mortgage loans. In cases where the mortgage loan is originated and sold, the total cost of the mortgage loan is allocated to the mortgage servicing right and to the loan based on their relative fair values.
The carrying amount of mortgage servicing rights, and the amortization thereon, is periodically evaluated in relation to estimated fair value. The Bank stratifies the underlying mortgage loan portfolio by certain risk characteristics, such as loan type, interest rate and maturity, for purposes of measuring impairment. The Bank estimates the fair value of each stratum by calculating the discounted present value of future net servicing income based on management’s best estimate of remaining loan lives. The Bank has determined that the primary risk characteristic of the mortgage servicing rights is the contractual interest rate of the underlying mortgage loans.
The carrying value of mortgage servicing rights is amortized in proportion to, and over the period of, estimated net servicing revenues.
Earnings per common share: Basic earnings per share represents income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per common share were determined assuming that all stock options were exercised at the beginning of the years presented. Unearned shares owned by the Employee Stock Ownership Plan (ESOP) are treated as not outstanding for the purposes of computing basic earnings per common share.
Average number of shares used in calculation of earnings per common share and diluted earnings per common share are as follows:
|
| 2005 |
| 2004 |
| 2003 |
| |||
|
| (In thousands, except share and per share data) |
| |||||||
Net income |
| $ | 11,960 |
| $ | 10,389 |
| $ | 12,858 |
|
Weighted average common shares issued |
| 6,856,800 |
| 6,856,800 |
| 6,856,800 |
| |||
LESS: Weighted average treasury stock shares |
| (149,569 | ) | (27,394 | ) | (29,128 | ) | |||
LESS: Weighted average unearned Employee Stock Ownership Plan (ESOP) stock shares |
| (74,644 | ) | (101,117 | ) | (166,814 | ) | |||
Weighted average common shares outstanding, net |
| 6,632,587 |
| 6,728,289 |
| 6,660,858 |
| |||
Basic earnings per common share |
| $ | 1.80 |
| $ | 1.54 |
| $ | 1.93 |
|
Weighted average dilutive shares from stock option plan |
| 60,262 |
| 111,731 |
| 95,468 |
| |||
Weighted average common shares outstanding including dilutive shares |
| 6,692,849 |
| 6,840,020 |
| 6,756,326 |
| |||
Diluted earnings per common share |
| $ | 1.79 |
| $ | 1.52 |
| $ | 1.90 |
|
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 $11.9 million, $10.1 million and $12.6 million for 2005, 2004 and 2003.
Segment reporting: The Company is managed as one unit and does not have separate operating segments. The Company’s chief operating decision-makers use consolidated results to make operating and strategic decisions.
Transfers of financial assets: Transfers of financial assets are accounted for as sales only when the control over the financial assets has been surrendered. Control over transferred assets is deemed surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of the right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
Impairment of long-lived assets: Management periodically reviews the carrying value of its long-lived assets to determine if an impairment has occurred or whether changes in circumstances have occurred that would require a revision to the remaining useful life. In making such determination, management evaluates the performance, on an undiscounted basis, of the underlying operations or assets which give rise to such amount.
48
Income taxes: Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss carryforwards, and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
Stock-based compensation: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 and which the Company will follow in 2006, as discussed below, reported net income and earnings per common share would have been reduced to the pro forma amounts shown below:
|
| 2005 |
| 2004 |
| 2003 |
| |||
|
| (In thousands except per share |
| |||||||
Net income: |
|
|
|
|
|
|
| |||
As reported |
| $ | 11,960 |
| $ | 10,389 |
| $ | 12,858 |
|
Pro forma |
| 11,877 |
| 10,289 |
| 12,671 |
| |||
Basic earnings per share: |
|
|
|
|
|
|
| |||
As reported |
| $ | 1.80 |
| $ | 1.54 |
| $ | 1.93 |
|
Pro forma |
| 1.79 |
| 1.53 |
| 1.90 |
| |||
Diluted earnings per share |
|
|
|
|
|
|
| |||
As reported |
| $ | 1.79 |
| $ | 1.52 |
| $ | 1.90 |
|
Pro forma |
| 1.77 |
| 1.50 |
| 1.88 |
|
The fair value of each option grant was estimated using the Black-Scholes option-pricing model with the following assumptions used for December 31, 2005, 2004 and 2003, respectively: dividend yield of 2.3%, 1.9% and 1.9%; expected price volatility of 14.1%, 3.7% and 15.2%; risk free rate of return of 4.2%, 4.2% and 2.0%; and weighted average assumption for expected life of 10 years for all years.
Recent accounting pronouncements:
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 and restricted stock awards, 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 12 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. The adoption of this standard will decrease earnings for the Company by approximately $143 thousand in 2006. The impact in the years following 2006 will be dependent upon stock options granted, the estimated value of these options and the vesting terms for the options granted.
49
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. Management does not believe that this statement will have a material impact on the Company’s financial statements.
In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments—an amendment of FASB Statements No. 133 and 140. This Statement resolves issues addressed in Statement 133 Implementation Issue No. D1, “Application of Statement 133 to Beneficial Interests in Securitized Financial Assets.” This Statement improves financial reporting by eliminating the exemption from applying Statement 133 to interests in securitized financial assets so that similar instruments are accounted for similarly regardless of the form of the instruments. This Statement also improves financial reporting by allowing a preparer to elect fair value measurement at acquisition, at issuance, or when a previously recognized financial instrument is subject to a remeasurement (new basis) event, on an instrument-by-instrument basis, in cases in which a derivative would otherwise have to be bifurcated. Providing a fair value measurement election also results in more financial instruments being measured at what the Board regards as the most relevant attribute for financial instruments, fair value. This Statement is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. Management does not believe that this statement will have a material impact on the Company’s financial statements.
Trust Assets: Assets held by the Bank in fiduciary or agency capacities for its customers are not included in the accompanying consolidated balance sheets as such items are not assets of the Bank.
Reclassifications: Certain prior year amounts have been reclassified to conform to the current year’s presentation.
Note 2. Restrictions on Cash and Due From Banks
The Bank is required to maintain reserve balances in cash or on deposit with the Federal Reserve Bank, based on a percentage of deposits. The total of those reserve balances was approximately $619 thousand and $4.3 million at December 31, 2005 and 2004. The main reason for this decline was because of a reclassification of deposits from transaction accounts to non-transaction accounts. As the amount required for reserves is based upon transaction accounts, this lowered the reserve requirement for the bank.
The Company maintains some of its cash in bank deposit accounts at financial institutions other than its subsidiaries that, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company believes it is not exposed to any significant credit risk on cash and cash equivalents.
50
Note 3. Investment Securities
Carrying amounts and fair values of investment securities are summarized as follows:
AVAILABLE FOR SALE |
| Amortized Cost |
| Gross Unrealized |
| Gross Unrealized |
| Fair Value |
| ||||
|
| (In thousands) |
| ||||||||||
December 31, 2005: |
|
|
|
|
|
|
|
|
| ||||
U.S. Government agencies |
| $ | 85,687 |
| $ | 2 |
| $ | (400 | ) | $ | 85,289 |
|
States and political subdivisions |
| 5,984 |
| — |
| (47 | ) | 5,937 |
| ||||
Equity securities |
| 1 |
| 4 |
| — |
| 5 |
| ||||
Totals |
| $ | 91,672 |
| $ | 6 |
| $ | (447 | ) | $ | 91,231 |
|
|
|
|
|
|
|
|
|
|
| ||||
December 31, 2004: |
|
|
|
|
|
|
|
|
| ||||
U.S. Government agencies |
| $ | 42,218 |
| — |
| $ | (311 | ) | $ | 41,907 |
| |
States and political subdivisions |
| 2,210 |
| $ | 2 |
| (21 | ) | 2,191 |
| |||
Equity securities |
| 1 |
| 6 |
| — |
| 7 |
| ||||
Totals |
| $ | 44,429 |
| $ | 8 |
| $ | (332 | ) | $ | 44,105 |
|
HELD TO MATURITY |
| Amortized Cost |
| Gross Unrealized |
| Gross Unrealized |
| Fair Value |
| ||||
|
| (In thousands) |
| ||||||||||
December 31, 2005: |
|
|
|
|
|
|
|
|
| ||||
U.S. Government agencies |
| $ | 13,687 |
| — |
| $ | (40 | ) | $ | 13,647 |
| |
States and political subdivisions |
| 12,925 |
| $ | 19 |
| (26 | ) | 12,918 |
| |||
Totals |
| $ | 26,612 |
| $ | 19 |
| $ | (66 | ) | $ | 26,565 |
|
|
|
|
|
|
|
|
|
|
| ||||
December 31, 2004: |
|
|
|
|
|
|
|
|
| ||||
U.S. Government agencies |
| $ | 46,547 |
| $ | 158 |
| — |
| $ | 46,705 |
| |
States and political subdivisions |
| 15,111 |
| 78 |
| $ | (11 | ) | 15,178 |
| |||
Totals |
| $ | 61,658 |
| $ | 236 |
| $ | (11 | ) | $ | 61,883 |
|
OTHER INVESTMENTS |
| Amortized Cost |
| Gross Unrealized |
| Gross Unrealized |
| Fair Value |
| ||
|
| (In thousands) |
| ||||||||
December 31, 2005: |
|
|
|
|
|
|
|
|
| ||
Non-marketable equity securities (including FRB and FHLB stock) |
| $ | 6,973 |
| — |
| — |
| $ | 6,973 |
|
Investment in unconsolidated trusts |
| 992 |
| — |
| — |
| 992 |
| ||
Totals |
| $ | 7,965 |
| — |
| — |
| $ | 7,965 |
|
|
|
|
|
|
|
|
|
|
| ||
December 31, 2004: |
|
|
|
|
|
|
|
|
| ||
Non-marketable equity securities (including FRB and FHLB stock) |
| $ | 6,798 |
| — |
| — |
| $ | 6,798 |
|
Investment in unconsolidated trusts |
| 682 |
| — |
| — |
| 682 |
| ||
Totals |
| $ | 7,480 |
| — |
| — |
| $ | 7,480 |
|
51
Realized net gains on sale of securities available for sale are summarized as follows:
|
| For the Years Ended |
| |||||
|
| 2005 |
| 2004 |
| 2003 |
| |
|
| (In thousands) |
| |||||
Realized gains |
| — |
| $ | 272 |
| — |
|
Realized losses |
| — |
| — |
| — |
| |
Net gains |
| — |
| $ | 272 |
| — |
|
A summary of unrealized loss information for investment securities, categorized by security type, at December 31, 2005 and 2004 is as follows:
|
| Less than 12 Months |
| 12 Months or Longer |
| Total |
| ||||||||||||
AVAILABLE FOR SALE |
| Fair Value |
| Unrealized |
| Fair Value |
| Unrealized |
| Fair Value |
| Unrealized |
| ||||||
|
|
|
| ||||||||||||||||
December 31, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
U.S. Government agencies |
| $ | 55,465 |
| $ | (76 | ) | $ | 27,770 |
| $ | (324 | ) | $ | 83,235 |
| $ | (400 | ) |
States and political subdivisions |
| 4,444 |
| (26 | ) | 1,493 |
| (21 | ) | 5,937 |
| (47 | ) | ||||||
Equity securities |
| — |
| — |
| — |
| — |
| — |
| — |
| ||||||
Totals |
| $ | 59,909 |
| $ | (102 | ) | $ | 29,263 |
| $ | (345 | ) | $ | 89,172 |
| $ | (447 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
December 31, 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
U.S. Government agencies |
| $ | 33,837 |
| $ | (202 | ) | $ | 7,044 |
| $ | (109 | ) | $ | 40,881 |
| $ | (311 | ) |
States and political subdivisions |
| 1,797 |
| (21 | ) | — |
| — |
| 1,797 |
| (21 | ) | ||||||
Equity securities |
| — |
| — |
| — |
| — |
| — |
| — |
| ||||||
Totals |
| $ | 35,634 |
| $ | (223 | ) | $ | 7,044 |
| $ | (109 | ) | $ | 42,678 |
| $ | (332 | ) |
|
| Less than 12 Months |
| 12 Months or Longer |
| Total |
| ||||||||||||
HELD TO MATURITY |
| Fair Value |
| Unrealized |
| Fair Value |
| Unrealized |
| Fair Value |
| Unrealized |
| ||||||
|
| (In thousands) |
| ||||||||||||||||
December 31, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
U.S. Government agencies |
| $ | 13,647 |
| $ | (40 | ) | — |
| — |
| $ | 13,647 |
| $ | (40 | ) | ||
States and political subdivisions |
| 497 |
| (5 | ) | $ | 1,579 |
| $ | (21 | ) | 2,076 |
| (26 | ) | ||||
Totals |
| $ | 14,144 |
| $ | (45 | ) | $ | 1,579 |
| $ | (21 | ) | $ | 15,723 |
| $ | (66 | ) |
|
| �� |
|
|
|
|
|
|
|
|
|
|
| ||||||
December 31, 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
U.S. Government agencies |
| — |
| — |
| — |
| — |
| — |
| — |
| ||||||
States and political subdivisions |
| $ | 2,591 |
| $ | (11 | ) | — |
| — |
| $ | 2,591 |
| $ | (11 | ) | ||
Totals |
| $ | 2,591 |
| $ | (11 | ) | — |
| — |
| $ | 2,591 |
| $ | (11 | ) |
(1) $324 thousand of the total unrealized losses twelve months or longer as of December 31, 2005 relates to unrealized losses on U.S. government sponsored agencies with an S&P quality rating of AAA. The Company has the ability to hold these securities until they mature. The remaining $21 thousand of unrealized losses twelve months or longer as of December 31, 2005 relates to unrealized losses on state, county and municipal securities with Moody ratings of Aaa to Aa2. The Company has the ability to hold these securities until they mature.
(2) All of the $109 thousand total unrealized losses twelve months or longer as of December 31, 2004 relates to unrealized losses on U.S. government sponsored agencies with an S&P quality rating of AAA. The Company has the ability to hold these securities until they mature.
52
The amortized cost and fair value of investment securities as of December 31, 2005 by contractual maturity are shown below. Maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties.
|
| Available for Sale |
| Held to Maturity |
| Other Investments |
| ||||||||||||
|
| Amortized Cost |
| Fair Value |
| Amortized Cost |
| Fair Value |
| Amortized Cost |
| Fair Value |
| ||||||
|
| (In thousands) |
| ||||||||||||||||
One year or less |
| $ | 34,937 |
| $ | 33,882 |
| $ | 15,453 |
| $ | 15,410 |
| $ | 100 |
| $ | 100 |
|
One to five years |
| 56,734 |
| 56,586 |
| 1,605 |
| 1,601 |
| — |
| — |
| ||||||
Five to ten years |
| 763 |
| 758 |
| — |
| — |
| — |
| — |
| ||||||
Over ten years |
| — |
| — |
| 9,554 |
| 9,554 |
| — |
| — |
| ||||||
Equity investments with no stated maturity |
| 1 |
| 5 |
| — |
| — |
| 7,865 |
| 7,865 |
| ||||||
|
| $ | 91,672 |
| $ | 91,231 |
| $ | 26,612 |
| $ | 26,565 |
| $ | 7,965 |
| $ | 7,965 |
|
Securities with carrying amounts of $20.4 million and $84.8 million at December 31, 2005 and 2004, respectively, were pledged as collateral on public deposits and for other purposes as required or permitted by law.
Note 4. Loans
Loans consisted of:
|
| December 31, |
| ||||
|
| 2005 |
| 2004 |
| ||
|
| (In thousands) |
| ||||
Commercial loans |
| $ | 93,579 |
| $ | 92,736 |
|
Commercial real estate |
| 379,884 |
| 346,454 |
| ||
Residential real estate |
| 313,693 |
| 282,380 |
| ||
Construction real estate |
| 178,068 |
| 121,769 |
| ||
Installment and other |
| 56,309 |
| 52,984 |
| ||
Total loans |
| 1,021,533 |
| 896,323 |
| ||
Unearned income |
| (2,153 | ) | (2,002 | ) | ||
Gross loans |
| 1,019,380 |
| 894,321 |
| ||
Allowance for loan losses |
| (8,842 | ) | (8,367 | ) | ||
Loans, net |
| $ | 1,010,538 |
| $ | 885,954 |
|
Loans are made to individuals as well as commercial and tax exempt entities. Specific loan terms vary as to interest rate, repayment and collateral requirements based on the type of loan requested and the credit worthiness of the prospective borrower. Credit risk tends to be geographically concentrated in that the majority of the loan customers are located in the markets serviced by the Bank.
Non-performing loans as of December 31, 2005, 2004 and 2003 were as follows:
|
| December 31, |
| |||||||
|
| 2005 |
| 2004 |
| 2003 |
| |||
|
| (In thousands) |
| |||||||
Non-accruing loans |
| $ | 8,037 |
| $ | 5,714 |
| $ | 3,112 |
|
Loans 90 days or more past due, still accruing interest |
| — |
| 8 |
| 80 |
| |||
Total non-performing loans |
| $ | 8,037 |
| $ | 5,722 |
| $ | 3,192 |
|
The reduction in interest income associated with loans on non-accrual status was $198 thousand, $216 thousand and $118 thousand for the years ended December 31, 2005, 2004 and 2003.
53
Information about impaired loans as of and for the years ended December 31, 2005, 2004 and 2003 is as follows:
|
| December 31, |
| |||||||
|
| 2005 |
| 2004 |
| 2003 |
| |||
|
| (In thousands) |
| |||||||
Loans for which there was a related allowance for credit losses |
| $ | 6,233 |
| $ | 3,282 |
| $ | 2,187 |
|
Other impaired loans |
| 480 |
| 3,391 |
| 486 |
| |||
Total impaired loans |
| $ | 6,713 |
| $ | 6,673 |
| $ | 2,673 |
|
|
|
|
|
|
|
|
|
|
|
|
Average monthly balance of impaired loans |
| $ | 5,790 |
| $ | 772 |
| $ | 638 |
|
Related allowance for credit losses |
| $ | 1,396 |
| $ | 446 |
| $ | 325 |
|
Interest income recognized on an accrual basis |
| — |
| — |
| — |
| |||
Interest income recognized on a cash basis |
| $ | 253 |
| — |
| — |
|
Activity in the allowance for loan losses was as follows:
|
| Years Ended December 31, |
| |||||||
|
| 2005 |
| 2004 |
| 2003 |
| |||
|
| (In thousands) |
| |||||||
Balance, beginning of year |
| $ | 8,367 |
| $ | 7,368 |
| $ | 6,581 |
|
Provision for loan losses |
| 2,850 |
| 2,100 |
| 3,350 |
| |||
Charge-offs |
| (2,537 | ) | (1,287 | ) | (2,813 | ) | |||
Recoveries |
| 162 |
| 186 |
| 250 |
| |||
Net charge-offs |
| 2,375 |
| 1,101 |
| 2,563 |
| |||
Balance, end of year |
| $ | 8,842 |
| $ | 8,367 |
| $ | 7,368 |
|
Loans outstanding to executive officers and directors of the Company, including companies in which they have management control or beneficial ownership, at December 31, 2005 and 2004, were approximately $3.2 million and $6.1 million. In the opinion of management, these loans have similar terms to other customer loans. An analysis of the activity related to these loans for the year ended December 31, 2005 is as follows:
|
| 2005 |
| 2004 |
| ||
|
| (In thousands) |
| ||||
Balance, beginning |
| $ | 6,052 |
| $ | 9,135 |
|
Additions |
| 1,022 |
| 2,018 |
| ||
Principal payments and other reductions |
| (3,903 | ) | (5,101 | ) | ||
Balance, ending |
| $ | 3,171 |
| $ | 6,052 |
|
Note 5. Loan Servicing and Mortgage Servicing Rights
Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid balance of these loans at December 31 is summarized as follows:
|
| 2005 |
| 2004 |
| ||
|
| (In thousands) |
| ||||
Mortgage loan portfolios serviced for: |
|
|
|
|
| ||
Federal National Mortgage Association (FNMA) |
| $ | 940,979 |
| $ | 912,204 |
|
Federal Home Loan Mortgage Corporation (FHLMC) |
| 2,428 |
| 4,006 |
| ||
Other investors |
| 574 |
| 611 |
| ||
|
| 943,981 |
| 916,821 |
| ||
Mortgage loans underlying pass-through securities—FNMA |
| 25 |
| 37 |
| ||
|
| $ | 944,006 |
| $ | 916,858 |
|
54
Custodial balances on deposit at the Bank in connection with the foregoing loan servicing were approximately $3.5 million and $2.4 million as of December 31, 2005 and 2004. There were no custodial balances on deposit with other financial institutions during 2005 and 2004.
An analysis of changes in mortgage servicing rights follows:
|
| 2005 |
| 2004 |
| ||
|
| (In thousands) |
| ||||
Balance, beginning of year |
| $ | 8,371 |
| $ | 7,792 |
|
Servicing rights originated and capitalized |
| 1,909 |
| 2,229 |
| ||
Amortization |
| (2,758 | ) | (2,739 | ) | ||
Valuation allowance due to changes in prepayment assumptions |
| 2,257 |
| 1,089 |
| ||
|
| $ | 9,779 |
| $ | 8,371 |
|
The fair value of the mortgage servicing rights was determined by an independent third-party broker of mortgage servicing rights. The values given by the broker were 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. Mortgage servicing rights were valued at $10.5 million at December 31, 2005. The key assumptions used to initially value the mortgage servicing rights recorded in 2005 and 2004 included a Prepayment Standard Assumption speed of 165% and 265% and a discount rate of 9.01% and 9.01%, respectively.
Note 6. Premises and Equipment
Premises and equipment consisted of:
|
| December 31, |
| ||||
|
| 2005 |
| 2004 |
| ||
|
| (In thousands) |
| ||||
Land and land improvements |
| $ | 3,820 |
| $ | 1,241 |
|
Buildings |
| 15,482 |
| 19,176 |
| ||
Furniture and equipment |
| 19,141 |
| 19,285 |
| ||
|
| 38,443 |
| 39,702 |
| ||
Accumulated depreciation |
| (14,042 | ) | (14,252 | ) | ||
|
| $ | 24,401 |
| $ | 25,450 |
|
Depreciation on premises and equipment totaled $2.6 million, $2.3 million and $1.9 million for the years ended December 31, 2005, 2004 and 2003.
Note 7. Deposits
Deposits consisted of:
|
| December 31, |
| ||||
|
| 2005 |
| 2004 |
| ||
|
| (In thousands) |
| ||||
Demand deposits, noninterest bearing |
| $ | 41,651 |
| $ | 42,498 |
|
NOW and money market accounts |
| 279,745 |
| 250,883 |
| ||
Savings deposits |
| 259,344 |
| 247,867 |
| ||
Time certificates, $100,000 or more |
| 294,583 |
| 190,723 |
| ||
Other time certificates |
| 166,525 |
| 148,610 |
| ||
Total |
| $ | 1,041,848 |
| $ | 880,581 |
|
55
At December 31, 2005, the scheduled maturities of time certificates were as follows:
|
| (in thousands) |
| |
2006 |
| $ | 357,358 |
|
2007 |
| 45,203 |
| |
2008 |
| 23,339 |
| |
2009 |
| 7,893 |
| |
2010 |
| 27,281 |
| |
Thereafter |
| 34 |
| |
|
| $ | 461,108 |
|
The Company had no brokered deposits at December 31, 2005 or 2004.
Note 8. Short- and Long-term Borrowings, including Borrowings made by Employee Stock Ownership Plan (ESOP)
Notes payable to the Federal Home Loan Bank (FHLB) at December 31 were secured by a blanket assignment of mortgage loans or other collateral acceptable to FHLB, and generally had a fixed rate of interest, interest payable monthly and principal due at end of term, unless otherwise noted. The total value of loans under the blanket assignment as of December 31, 2004 was $375.1 million.
Maturity Date |
| Rate |
| Type |
| Index |
| Principal due |
| 2005 |
| 2004 |
| ||
|
|
|
|
|
|
|
|
|
| (In thousands) |
| ||||
01/03/2005 |
| 2.460 |
| Fixed |
| — |
| At maturity |
| — |
| $ | 2,000 |
| |
01/03/2005 |
| 2.360 |
| Fixed |
| — |
| At maturity |
| — |
| 32,400 |
| ||
11/06/2006 |
| 3.923 |
| Fixed |
| — |
| At maturity |
| $ | 10,000 |
| 32,400 |
| |
01/02/2007 |
| 4.121 |
| Fixed |
| — |
| Monthly Amortization |
| 3,517 |
| 6,627 |
| ||
01/02/2007 |
| 4.078 |
| Fixed |
| — |
| Monthly Amortization |
| 5,154 |
| 9,713 |
| ||
07/18/2008 |
| 3.221 |
| Fixed |
| — |
| At maturity |
| 40,000 |
| 40,000 |
| ||
03/22/2010 |
| 4.667 |
| Fixed |
| — |
| At maturity |
| 20,000 |
| 1,366 |
| ||
01/03/2011 |
| 6.031 |
| Fixed |
| — |
| Monthly Amortization |
| 1,335 |
| 1,366 |
| ||
04/27/2021 |
| 6.343 |
| Fixed |
| — |
| At maturity |
| 2,300 |
| 2,300 |
| ||
01/20/2008 |
| 7.250 |
| Variable |
| Citibank Prime |
| Monthly Amortization |
| 1,214 |
| 1,686 |
| ||
|
|
|
|
|
|
|
|
|
| $ | 83,520 |
| $ | 96,092 |
|
The following is a summary of debt payments required for years after 2005. Included are payments for the ESOP debt of $471 thousand each year until maturity:
|
| (In thousands) |
| |
2006 |
| $ | 18,493 |
|
2007 |
| 1,181 |
| |
2008 |
| 305 |
| |
2009 |
| 8,247 |
| |
2010 |
| 10,617 |
| |
Thereafter |
| 44,677 |
| |
|
| $ | 83,520 |
|
56
Note 9. Junior Subordinated Debt Owed to Unconsolidated Trusts
The following table presents details on the junior subordinated debt owed to unconsolidated trusts as of December 31, 2005:
|
| Trust I |
| Trust II |
| Trust III |
| Trust IV |
| ||||
|
| (Dollars in thousands) |
| ||||||||||
Date of issue |
| March 23, 2000 |
| November 28, 2001 |
| May 11, 2004 |
| June 29, 2005 |
| ||||
Amount of trust preferred securities issued |
| $ | 10,000 |
| $ | 6,000 |
| $ | 6,000 |
| $ | 10,000 |
|
Rate on trust preferred securities |
| 10.875 | % | 9.95 | % | 7.11% (variable | ) | 6.88 | % | ||||
Maturity |
| March 8, 2030 |
| December 8, 2031 |
| September 8, 2034 |
| November 23, 2035 |
| ||||
Date of first redemption |
| March 8, 2010 |
| December 8, 2006 |
| September 8, 2009 |
| August 23, 2010 |
| ||||
Common equity securities issued |
| $ | 310 |
| $ | 186 |
| $ | 186 |
| $ | 310 |
|
Junior subordinated deferrable interest debentures owed |
| $ | 10,310 |
| $ | 6,186 |
| $ | 6,186 |
| $ | 10,310 |
|
Rate on junior subordinated deferrable interest debentures |
| 10.875 | % | 9.95 | % | 7.11% (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 subordinated 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 statements of the Company. The Company’s p rior 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.
57
Issuance costs of $615 thousand related to the first three trust preferred securities 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 2005, 2004 and 2003, respectively, $20 thousand, $24 thousand and $18 thousand of these issuance costs were amortized. Unamortized issuance costs were $519 thousand, $539 thousand and $481 thousand at December 31, 2005, 2004 and 2003, respectively.
Dividends accrued and unpaid to securities holders totaled $494 thousand and $399 thousand on December 31, 2005 and 2004, respectively.
Note 10. Lease Commitments and Rental Expense
The Company leases certain equipment, ATM location space, office space and storage space from other parties under operating leases expiring through 2010. Lease payments for the years ended December 31, 2005, 2004 and 2003, totaled $112 thousand, $143 thousand and $165 thousand, respectively. Commitments for minimum future rentals under these operating leases were as follows at December 31, 2005:
|
| (In thousands) |
| |
2006 |
| $ | 133 |
|
2007 |
| 127 |
| |
2008 |
| 111 |
| |
2009 |
| 100 |
| |
2010 |
| 100 |
| |
|
| $ | 571 |
|
Note 11. Retirement Plans
The Company has a qualified Employee Stock Ownership Plan (“ESOP”) for the benefit of all employees who are at least 18 years of age and have completed 1,000 hours of service during the Plan year. The employees interest in the ESOP vests over a period of seven years. The ESOP was established in January 1989 and is a defined contribution plan subject to the requirements of the Employee Retirement Income Security Act of 1974.
The ESOP provides for annual discretionary contributions by the Company as determined by its Board of Directors. The Company’s discretionary contributions to the ESOP in 2005, 2004 and 2003 were approximately $462 thousand, $573 thousand and $463 thousand, respectively.
The ESOP had a note payable of $1.2 million outstanding with a local bank as of December 31, 2005. The note requires annual principal payments of $471 thousand with a final payment of principal on January 20, 2008. Interest is variable at Citibank Prime (7.25% at December 31, 2005) and is payable semi-annually. Collateral for this loan is in the form of Company stock owned by the ESOP and unallocated to the plan participants. Shares are released from collateral based upon the ratio of principal and interest paid during the year to total principal and interest paid for the current year and payable for all future plan years. Allocations of common stock released and forfeitures are based on the eligible compensation of each participant. The note payable is recorded as debt and the shares pledged as collateral netted against stock owned by ESOP participants in the accompanying balance sheets. Dividends on allocated ESOP shares are recorded as a reduction of retained earnings; dividends on unallocated ESOP shares are recorded as a reduction of debt and accrued interest.
All shares held by the ESOP, which were acquired prior to the issuance of AICPA Statement of Position 93-6, Employers’ Accounting for Employee Stock Ownership Plans (SOP 93-6), are included in the computation of average common shares and common share equivalents. This accounting treatment is grandfathered under SOP 93-6 for shares purchased prior to December 31, 1992. As permitted by SOP 93-6, compensation expense for shares released is equal to the original acquisition cost of the shares if they were acquired prior to December 31, 1992. As shares acquired after SOP 93-6 are released from collateral, the Company reports compensation expense equal to the current fair value of the shares, and the shares become outstanding for earnings-per-share computations.
Shares of the Company held by the ESOP that were acquired prior to December 31, 1992 totaled 268,289 and 292,782 shares at December 31, 2005 and 2004, respectively.
58
Shares of the Company held by the ESOP that were acquired after December 31, 1992 are as follows:
|
| December 31, |
| ||||
|
| 2005 |
| 2004 |
| ||
Allocated shares |
| 247,951 |
| 217,939 |
| ||
Shares committed to be released |
| 26,075 |
| 27,876 |
| ||
Unallocated (unearned) shares |
| 72,243 |
| 98,318 |
| ||
Total shares acquired after December 31, 1992 |
| 346,269 |
| 344,133 |
| ||
Estimated fair value of unallocated (unearned) shares |
| $ | 2,023,000 |
| $ | 3,028,000 |
|
There was no compensation expense recognized for ESOP shares acquired prior to December 31, 1992 during the years 2005, 2004 and 2003. Compensation expense recognized for ESOP shares acquired after December 31, 1992 during 2005, 2004 and 2003 was $683 thousand, $1.0 million and $1.0 million, respectively.
Under federal income tax regulations, the employer securities that are held by the Plan and its participants and that are not readily tradable on an established market or that are subject to trading limitations include a put option (liquidity put). The liquidity put is a right to demand that the Company buy shares of its stock held by the participant for which there is no market. The put price is representative of the fair market value of the stock. The Company pays for the purchase within a five-year period. The purpose of the liquidity put is to ensure that the participant has the ability to ultimately obtain cash. The fair value of the allocated shares subject to repurchase was $15.2 million and $16.6 million as of December 31, 2005 and 2004.
The Company’s employees may also participate in a tax-deferred savings plan (401(k)) to which the Company does not contribute.
Note 12. Stock Option Plan
The Company has the 1998 Stock Option Plan and the 2005 Stock Incentive Plan created for the benefit of key management and select employees. Under the 1998 Stock Option Plan, 400,000 shares (as adjusted for the stock split of December 19, 2002) from shares held in treasury or authorized but unissued common stock are reserved for granting options. Under the 2005 Stock Incentive Plan, 500,000 shares from shares held in treasury or authorized but unissued common stock are reserved for granting stock-based incentive awards. The Board of Directors determines vesting and pricing of the awards. All stock options granted through December 31, 2005 were granted at or above the fair value of the stock at the date of the grant, vest over three years and must be exercised within ten years of and pricing the date of grant. The following table summarizes data concerning stock options:
|
| 2005 |
| 2004 |
| 2003 |
| ||||||||||||
|
| Shares |
| Weighted |
| Shares |
| Weighted |
| Shares |
| Weighted |
| ||||||
Outstanding at beginning of year |
| 333,836 |
| $ | 20.45 |
| 313,000 |
| $ | 19.29 |
| 252,000 |
| $ | 16.21 |
| |||
Granted |
| 42,000 |
| 30.50 |
| 28,000 |
| 30.50 |
| 61,000 |
| 32.00 |
| ||||||
Exercised |
| (42,719 | ) | 9.23 |
| (7,164 | ) | 9.00 |
| — |
| — |
| ||||||
Forfeited |
| — |
| — |
| — |
| — |
| — |
| — |
| ||||||
Outstanding at end of year |
| 333,117 |
| $ | 23.15 |
| 333,836 |
| $ | 20.45 |
| 313,000 |
| $ | 19.29 |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Exercisable at end of year |
| 252,116 |
| $ | 20.67 |
| 251,169 |
| $ | 17.37 |
| 210,000 |
| $ | 15.18 |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Weighted average fair value per option of options granted during the year |
| $ | 5.22 |
|
|
| $ | 5.51 |
|
|
| $ | 5.21 |
|
|
| |||
59
The following table presents certain information with respect to outstanding and exercisable stock options:
|
| Options Outstanding |
| Options Exercisable |
| |||||||||
Range of Exercise Prices |
| Number Outstanding |
| Weighted |
| Weighted |
| Options |
| Weighted |
| |||
$ | 9-$10.25 |
| 34,117 |
| 2.94 |
| $ | 10.25 |
| 34,117 |
| $ | 10.25 |
|
$ | 16.00 |
| 42,000 |
| 3.95 |
| 16.00 |
| 42,000 |
| 16.00 |
| ||
$ | 20-$22.00 |
| 126,000 |
| 5.96 |
| 20.67 |
| 126,000 |
| 20.67 |
| ||
$ | 30.50 |
| 70,000 |
| 9.36 |
| 30.50 |
| 9,332 |
| 30.50 |
| ||
$ | 32.00 |
| 61,000 |
| 7.96 |
| 32.00 |
| 40,667 |
| 32.00 |
| ||
|
| 333,117 |
|
|
| $ | 23.15 |
| 252,116 |
| $ | 20.67 |
|
Note 13. Income Taxes
The current and deferred components of the provision for Federal income tax expense for the years 2005, 2004 and 2003 are as follows:
|
| Years Ended December 31, |
| |||||||
|
| 2005 |
| 2004 |
| 2003 |
| |||
|
| (In thousands) |
| |||||||
Current income tax expense: |
|
|
|
|
|
|
| |||
Federal |
| $ | 5,658 |
| $ | 5,660 |
| $ | 5,193 |
|
State |
| 983 |
| 974 |
| 850 |
| |||
Deferred income tax (benefit) expense: |
|
|
|
|
|
|
| |||
Federal |
| 468 |
| (176 | ) | 1,493 |
| |||
State |
| 60 |
| (29 | ) | 258 |
| |||
Total income tax expense |
| $ | 7,169 |
| $ | 6,429 |
| $ | 7,794 |
|
A deferred tax asset or liability is recognized to reflect the net tax effects of temporary differences between the carrying amounts of existing assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant temporary differences that gave rise to the deferred tax assets and liabilities as of December 31, 2005 and 2004 were as follows:
|
| 2005 Deferred |
| 2004 Deferred |
| ||||||||
|
| Asset |
| Liability |
| Asset |
| Liability |
| ||||
|
| (In thousands) |
| ||||||||||
Prepaid Expenses |
| $ | 122 |
| — |
| — |
| — |
| |||
Allowance for loan losses |
| 3,500 |
| — |
| $ | 3,146 |
| — |
| |||
Mortgage servicing rights |
| — |
| $ | 3,871 |
| — |
| $ | 3,147 |
| ||
Investment securities |
| — |
| 86 |
| — |
| 41 |
| ||||
Premises and equipment |
| — |
| 1,436 |
| — |
| 1,327 |
| ||||
Stock dividends on FHLB stock |
| — |
| 365 |
| — |
| 312 |
| ||||
Loans |
| 100 |
| — |
| 128 |
| — |
| ||||
Unrealized gain on securities available for sale |
| 16 |
| �� |
| 122 |
| — |
| ||||
Accrued compensation |
| 217 |
| — |
| 183 |
| — |
| ||||
Employee stock ownership plan (ESOP) compensation |
| 540 |
| — |
| 434 |
| — |
| ||||
Other real estate owned (OREO) |
| 53 |
| — |
| 132 |
| — |
| ||||
Total deferred taxes |
| $ | 4,548 |
| $ | 5,758 |
| $ | 4,145 |
| $ | 4,827 |
|
The net deferred tax liability of $1.2 million and $682 thousand in 2005 and 2004, respectively, was reported in other liabilities.
60
Items causing differences between the statutory tax rate and the effective tax rate are summarized as follows:
|
| Year ended December 31 |
| ||||||||||||||
|
| 2005 |
| 2004 |
| 2003 |
| ||||||||||
|
| Amount |
| Rate |
| Amount |
| Rate |
| Amount |
| Rate |
|
| |||
|
| (In thousands) |
| ||||||||||||||
Statutory tax rate |
| $ | 6,695 |
| 35.00 | % | $ | 5,886 |
| 35.00 | % | $ | 7,228 |
| 35.00 | % | |
Net tax exempt interest income |
| (247 | ) | (1.29 | ) | (207 | ) | (1.23 | ) | (175 | ) | (0.85 | ) | ||||
Interest disallowance |
| 23 |
| 0.12 |
| 20 |
| 0.12 |
| 20 |
| 0.10 |
| ||||
Other, net |
| 22 |
| 0.12 |
| 116 |
| 0.69 |
| 1 |
| 0.00 |
| ||||
State income tax net of federal benefit |
| 676 |
| 3.53 |
| 614 |
| 3.65 |
| 720 |
| 3.49 |
| ||||
Provision for income taxes |
| $ | 7,169 |
| 37.48 | % | $ | 6,429 |
| 38.23 | % | $ | 7,794 |
| 37.74 | % | |
Note 14. 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 December 31, 2005 and 2004, the following credit-related commitments were outstanding whose contract amounts represent credit risk:
|
| Contract Amount |
| ||||
|
| December 31, |
| December 31, |
| ||
|
| (In thousands) |
| ||||
Unfunded commitments under lines of credit |
| $ | 182,641 |
| $ | 168,794 |
|
Commercial and standby letters of credit |
| 37,436 |
| 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, if deemed necessary. In the event the customer does not perform in accordance with the terms of the agreement with the third party, the Company would be required to fund the credit-related commitment. The maximum potential amount of future payments the Company could be required to make is represented by the contractual amount shown in the summary above. If the credit-related commitment is funded, the Company would be entitled to seek recovery from the customer. At December 31, 2005 and 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 $33 thousand and $60 thousand as of December 31, 2005 and 2004, respectively, and are included in “other liabilities” on the Company’s balance sheet.
61
Concentrations of credit risk: The majority of the loans, commitments to extend credit, and standby letters of credit have been granted to customers in Los Alamos, Santa Fe and surrounding communities. Although the Company has a diversified loan portfolio, a substantial portion of its loans are made to businesses and individuals associated with, or employed by, Los Alamos National Laboratory (“the Laboratory”). The ability of such borrowers to honor their contracts is predominately dependent upon the continued operation and funding of the Laboratory. Investments in securities issued by states and political subdivisions involve governmental entities within the state of New Mexico. The distribution of commitments to extend credit approximates the distribution of loans outstanding. Standby letters of credit were granted primarily to commercial borrowers.
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.
Note 15. Derivative Financial Instruments
In the normal course of business, the Bank uses a variety of financial instruments to service the financial needs of customers and to reduce its exposure to fluctuations in interest rates. Derivative instruments that the Bank uses as part of its interest rate risk management strategy include mandatory forward delivery commitments and rate lock commitments.
As a result of using over-the-counter derivative instruments, the Bank has potential exposure to credit loss in the event of nonperformance by the counterparties. The Bank manages this credit risk by selecting only well established, financially strong counterparties, spreading the credit risk amongst many such counterparties and by placing contractual limits on the amount of unsecured credit risk from any single counterparty. The Bank’s exposure to credit risk in the event of default by counterparty is the current cost of replacing the contracts net of any available margins retained by the Bank. However, if the borrower defaults on the commitment the Bank requires the borrower to cover these costs.
The Company adopted the provisions of SFAS No. 149 effective July 1, 2003. The Company’s derivative instruments outstanding at December 31, 2005 include commitments to fund loans held for sale. As per Staff Accounting Bulletin No. 105, Application of Accounting Principles to Loan Commitments, the interest rate lock commitment was valued at zero at inception. The rate locks will continue to be adjusted for changes in value resulting from changes in market interest rates.
The Company originates single-family residential loans for sale pursuant to programs with the Federal National Mortgage Association (“FNMA”). At the time the interest rate is locked in by the borrower, the Company concurrently enters into a forward loan sale agreement with respect to the sale of such loan at a set price in an effort to manage the interest rate risk inherent in the locked loan commitment. Any change in the fair value of the loan commitment after the borrower locks in the interest rate is substantially offset by the corresponding change in the fair value of the forward loan sale agreement related to such loan. The period from the time the borrower locks in the interest rate to the time the Company funds the loan and sells it to FNMA is generally 60 days. The fair value of each instrument will rise or fall in response to changes in market interest rates subsequent to the dates the interest rate locks and forward loan sale agreements are entered into. In the event that interest rates rise after the Company enters into an interest rate lock, the fair value of the loan commitment will decline. However, the fair value of the forward loan sale agreement related to such loan commitment should increase by substantially the same amount, effectively eliminating the Company’s interest rate and price risk.
At December 31, 2005 the Company had notional amounts of $4.0 million contracts with customers and $11.6 million contracts with FNMA in interest rate lock commitments outstanding related to loans being originated for sale. The related fair values of these commitments was an asset of $7 thousand and a liability of $26 thousand as of December 31, 2005.
The Company has outstanding loan commitments, excluding undisbursed portion of loans in process and equity lines of credit, of approximately $175.4 million and $165.7 million as of December 31, 2005 and 2004, respectively. Of these commitments outstanding, the breakdown between fixed and adjustable-rate loans is as follows:
|
| At December 31, |
| ||||
|
| 2005 |
| 2004 |
| ||
|
| (In thousands) |
| ||||
Fixed-rate (ranging from 4.0% to 10.5%) |
| $ | 47,596 |
| $ | 68,231 |
|
Adjustable-rate |
| 127,799 |
| 101,465 |
| ||
Total |
| $ | 175,395 |
| $ | 165,696 |
|
62
Note 16. Regulatory Matters
The Company’s primary source of cash is dividends from the Bank. The Bank is subject to certain restrictions on the amount of dividends that it may declare without prior regulatory approval. Generally, the Company cannot pay dividends that exceed its net income or that can only be funded that weaken its financial health. The Bank cannot pay dividends in any calendar year that, in the aggregate, exceed the Bank’s year-to-date net income plus its retained income for the two proceeding years. Additionally, the Bank cannot pay dividends that are in excess of the amount which would cause the Bank to fall below the minimum required for capital adequacy purposes.
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory—and additional discretionary—actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company’s and the Bank’s assets, liabilities, and certain off-balance-sheet items are calculated under regulatory accounting practices. The Company’s and the Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). Management believes the Company and the Bank meet all capital adequacy requirements to which they are subject as of December 31, 2005.
As of December 31, 2005, the Bank was “well capitalized” as defined by OCC regulations. To be categorized as well capitalized the Bank must maintain the total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the well capitalized column in the table below. There are no conditions or events since that notification that management believes have changed the Bank’s category subsequent to this time.
The required and actual amounts and ratios for the Company and the Bank are presented below:
|
| Actual |
| For Capital Adequacy |
| To Be Well |
| |||||||||
|
| Amount |
| Ratio |
| Amount |
| Ratio |
| Amount |
| Ratio |
| |||
|
| (Dollars in thousands) |
| |||||||||||||
As of December 31, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Total capital (to risk-weighted assets): |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Consolidated |
| $ | 116,734 |
| 11.67 | % | $ | 80,041 |
| 8.00 | % | N/A |
| N/A |
| |
Bank only |
| 112,691 |
| 11.30 |
| 79,816 |
| 8.00 |
| $ | 99,770 |
| 10.00 | % | ||
Tier 1 capital (to risk-weighted assets): |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Consolidated |
| 101,096 |
| 10.10 |
| 40,020 |
| 4.00 |
| N/A |
| N/A |
| |||
Bank only |
| 103,848 |
| 10.41 |
| 39,908 |
| 4.00 |
| 59,862 |
| 6.00 |
| |||
Tier 1 capital (to average assets): |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Consolidated |
| 101,096 |
| 8.19 |
| 49,348 |
| 4.00 |
| N/A |
| N/A |
| |||
Bank only |
| 103,848 |
| 8.43 |
| 49,255 |
| 4.00 |
| 61,569 |
| 5.00 |
| |||
63
|
| Actual |
| For Capital Adequacy |
| To Be Well |
| |||||||||
|
| Amount |
| Ratio |
| Amount |
| Ratio |
| Amount |
| Ratio |
| |||
|
| (Dollars in thousands) |
| |||||||||||||
As of December 31, 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Total capital (to risk-weighted assets): |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Consolidated |
| $ | 102,994 |
| 11.59 | % | $ | 71,079 |
| 8.00 | % | N/A |
| N/A |
| |
Bank only |
| 95,577 |
| 10.78 |
| 70,940 |
| 8.00 |
| $ | 88,675 |
| 10.00 | % | ||
Tier 1 capital (to risk-weighted assets): |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Consolidated |
| 94,625 |
| 10.65 |
| 35,539 |
| 4.00 |
| N/A |
| N/A |
| |||
Bank only |
| 87,208 |
| 9.83 |
| 35,470 |
| 4.00 |
| 53,205 |
| 6.00 |
| |||
Tier 1 capital (to average assets): |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Consolidated |
| 94,625 |
| 8.87 |
| 42,666 |
| 4.00 |
| N/A |
| N/A |
| |||
Bank only |
| 87,208 |
| 8.19 |
| 42,596 |
| 4.00 |
| 53,246 |
| 5.00 |
| |||
N/A—not applicable
Note 17. Fair Value Information
Fair values are calculated based on the value of one unit without regard to any premium or discount that may result from concentrations of ownership of a financial instrument.
|
| Carrying |
| Estimated Fair Value |
| ||
|
| (In thousands) |
| ||||
December 31, 2005 |
|
|
|
|
| ||
Investments: |
|
|
|
|
| ||
Available for sale |
| $ | 91,231 |
| $ | 91,231 |
|
Held to maturity |
| 26,612 |
| 26,565 |
| ||
Other investments |
| 7,965 |
| 7,965 |
| ||
Loans, net |
| 1,010,538 |
| 1,000,211 |
| ||
Mortgage servicing rights |
| 9,779 |
| 10,486 |
| ||
Rate lock commitments, mandatory forward delivery commitments and pair offs, net asset |
| 7 |
| 7 |
| ||
Rate lock commitments, mandatory forward delivery commitments and pair offs, net liability |
| 26 |
| 26 |
| ||
Time deposits |
| 461,108 |
| 459,967 |
| ||
Short- and long-term borrowings |
| 82,306 |
| 78,756 |
| ||
Junior subordinated debt owed to unconsolidated trusts |
| 32,992 |
| 38,958 |
| ||
Borrowings made by Employee Stock Ownership Plan (ESOP) |
| 1,214 |
| 1,214 |
| ||
|
|
|
|
|
| ||
December 31, 2004 |
|
|
|
|
| ||
Investments: |
|
|
|
|
| ||
Available for sale |
| $ | 44,105 |
| $ | 44,105 |
|
Held to maturity |
| 61,658 |
| 61,883 |
| ||
Other investments |
| 7,480 |
| 7,480 |
| ||
Loans, net |
| 885,954 |
| 888,070 |
| ||
Mortgage servicing rights |
| 8,371 |
| 8,711 |
| ||
Rate lock commitments, mandatory forward delivery commitments and pair offs, net |
| 8 |
| 8 |
| ||
Time deposits |
| 339,333 |
| 339,178 |
| ||
Short- and long-term borrowings |
| 94,406 |
| 93,323 |
| ||
Junior subordinated debt owed to unconsolidated trusts |
| 22,682 |
| 27,110 |
| ||
Borrowings made by Employee Stock Ownership Plan (ESOP) |
| 1,686 |
| 1,686 |
|
64
Financial instruments whose carrying value is estimated to be equal to the fair value include: cash and due from banks, interest bearing deposits with banks, accrued interest receivable and payable, loans held for sale, demand deposits, negotiable orders of withdrawal and savings deposits. Management believes that the Company’s demand deposits, negotiable orders of withdrawal and savings deposits provide significant additional value that is not reflected above.
Commitments to extend lines of credit and standby letters of credit have fair values approximately equal to fees generated to extend such commitments and are not material.
Fair value is best determined upon quoted market prices. However, no active market exists for a significant portion of the Company’s financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using the present value of future cash flows, discounted by the current rates offered on financial instruments of a similar nature and term. Financial instruments with variable rates that reprice frequently and have no significant change in credit risk have a fair value equal to carrying value. Fair values for impaired loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.
Because of the inherent imprecision of estimating fair value discount rates for financial instruments for which no market value exists, management does not believe that the above information reflects the amounts that would be received (including any gains or losses) if assets and liabilities were sold.
Note 18. Condensed Parent Company Financial Information
The condensed financial statements of Trinity Capital Corporation (parent company only) are presented below:
Balance Sheets
|
| December 31, |
| ||||
|
| 2005 |
| 2004 |
| ||
|
| (In thousands) |
| ||||
Assets |
|
|
|
|
| ||
Cash |
| $ | 4,079 |
| $ | 7,921 |
|
Investments in subsidiaries |
| 106,100 |
| 89,766 |
| ||
Other assets |
| 1,237 |
| 546 |
| ||
Total assets |
| $ | 111,416 |
| $ | 98,233 |
|
|
|
|
|
|
| ||
Liabilities and Stockholders’ Equity |
|
|
|
|
| ||
Dividends payable |
| $ | 2,256 |
| $ | 2,050 |
|
Junior subordinated debt owed to unconsolidated trusts |
| 32,992 |
| 22,682 |
| ||
Other liabilities |
| 550 |
| 545 |
| ||
Stock owned by Employee Stock Ownership Plan (ESOP) participants |
| 16,100 |
| 18,078 |
| ||
Stockholders’ equity |
| 59,518 |
| 54,878 |
| ||
Total liabilities and stockholders’ equity |
| $ | 111,416 |
| $ | 98,233 |
|
Statements of Income
|
| Years Ended December 31, |
| |||||||
|
| 2005 |
| 2004 |
| 2003 |
| |||
|
| (In thousands) |
| |||||||
Dividends from subsidiaries |
| $ | 6,366 |
| $ | 9,105 |
| $ | 5,879 |
|
Interest and other expense |
| (2,780 | ) | (2,193 | ) | (2,057 | ) | |||
Income before income tax benefit and equity in undistributed net income of subsidiaries |
| 3,586 |
| 6,912 |
| 3,822 |
| |||
Income tax benefit |
| 1,065 |
| 843 |
| 794 |
| |||
Income before equity in undistributed net income of subsidiaries |
| 4,651 |
| 7,755 |
| 4,616 |
| |||
Equity in undistributed net income of subsidiaries |
| 7,309 |
| 2,634 |
| 8,242 |
| |||
Net income |
| $ | 11,960 |
| $ | 10,389 |
| $ | 12,858 |
|
65
Statements of Cash Flows
|
| Years Ended December 31, |
| |||||||
|
| 2005 |
| 2004 |
| 2003 |
| |||
|
| (In thousands) |
| |||||||
Cash Flows From Operating Activities |
|
|
|
|
|
|
| |||
Net income |
| $ | 11,960 |
| $ | 10,389 |
| $ | 12,858 |
|
Adjustments to reconcile net income to net cash (used in) operating activities: |
|
|
|
|
|
|
| |||
Amortization of junior subordinated debt owed to unconsolidated trusts issuance costs |
| 20 |
| 24 |
| 18 |
| |||
Equity in undistributed net income of subsidiaries |
| (7,309 | ) | (2,634 | ) | (8,242 | ) | |||
Decrease (increase) in taxes receivable from subsidiaries |
| 2 |
| (1,733 | ) | 2,199 |
| |||
(Increase) decrease in other assets |
| (711 | ) | 2,454 |
| (2,542 | ) | |||
(Decrease) increase in other liabilities |
| (346 | ) | 122 |
| (276 | ) | |||
Increase in TPS accrued dividend payable |
| 83 |
| — |
| — |
| |||
Tax benefit recognized for exercise of stock options |
| 272 |
| 53 |
| — |
| |||
Net cash provided by operating activities |
| 3,971 |
| 8,675 |
| 4,015 |
| |||
Cash Flows From Investing Activities |
|
|
|
|
|
|
| |||
Investments in and advances to subsidiaries |
| (8,310 | ) | (6,121 | ) | — |
| |||
Net cash (used in) investing activities |
| (8,310 | ) | (6,121 | ) | — |
| |||
|
|
|
|
|
|
|
| |||
Cash Flows From Financing Activities |
|
|
|
|
|
|
| |||
Purchase of treasury stock |
| (6,422 | ) | (117 | ) | — |
| |||
Issuance of treasury stock |
| 666 |
| 72 |
| — |
| |||
Dividends paid |
| (3,998 | ) | (4,022 | ) | (3,637 | ) | |||
Dividends paid on unearned Employee Stock Ownership Plan (ESOP) stock |
| (59 | ) | (76 | ) | (93 | ) | |||
Proceeds from issuance of junior subordinated debt owed to unconsolidated trusts |
| 10,310 |
| 6,186 |
| — |
| |||
Net cash provided by (used in) financing activities |
| 497 |
| 2,043 |
| (3,730 | ) | |||
Net (decrease) increase in cash |
| (3,842 | ) | 4,597 |
| 285 |
| |||
Cash: |
|
|
|
|
|
|
| |||
Beginning of year |
| 7,921 |
| 3,324 |
| 3,039 |
| |||
End of year |
| $ | 4,079 |
| $ | 7,921 |
| $ | 3,324 |
|
Note 19. Income by Quarter (Unaudited)
Presented in the table below is the income of the Company by quarter:
|
| Three Months Ended 2005 |
| Three Months Ended 2004 |
| ||||||||||||||||||||
|
| December |
| September |
| June |
| March |
| December |
| September |
| June |
| March |
| ||||||||
|
| (Thousands of dollars, except per share data) |
| ||||||||||||||||||||||
Interest income |
| $ | 18,931 |
| $ | 17,554 |
| $ | 16,326 |
| $ | 15,098 |
| $ | 14,557 |
| $ | 13,741 |
| $ | 12,905 |
| $ | 13,088 |
|
Interest expense |
| 7,812 |
| 7,193 |
| 6,144 |
| 5,179 |
| 4,655 |
| 4,304 |
| 4,053 |
| 4,081 |
| ||||||||
Net interest income |
| 11,119 |
| 10,361 |
| 10,182 |
| 9,919 |
| 9,902 |
| 9,437 |
| 8,852 |
| 9,007 |
| ||||||||
Provision for loan losses |
| 750 |
| 750 |
| 825 |
| 525 |
| 450 |
| 450 |
| 600 |
| 600 |
| ||||||||
Net interest income after provision for loan losses |
| 10,369 |
| 9,611 |
| 9,357 |
| 9,394 |
| 9,452 |
| 8,987 |
| 8,252 |
| 8,407 |
| ||||||||
Other income |
| 2,623 |
| 2,873 |
| 2,693 |
| 2,060 |
| 2,502 |
| 2,097 |
| 2,850 |
| 3,017 |
| ||||||||
Other expense |
| 6,995 |
| 6,905 |
| 8,293 |
| 7,658 |
| 7,958 |
| 7,809 |
| 5,450 |
| 7,529 |
| ||||||||
Income before income taxes |
| 5,997 |
| 5,579 |
| 3,757 |
| 3,796 |
| 3,996 |
| 3,275 |
| 5,652 |
| 3,895 |
| ||||||||
Income taxes |
| 2,220 |
| 2,205 |
| 1,316 |
| 1,428 |
| 1,544 |
| 1,147 |
| 2,293 |
| 1,445 |
| ||||||||
Net income |
| $ | 3,777 |
| $ | 3,374 |
| $ | 2,441 |
| $ | 2,368 |
| $ | 2,452 |
| $ | 2,128 |
| $ | 3,359 |
| $ | 2,450 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Basic earnings per share |
| $ | 0.57 |
| $ | 0.51 |
| $ | 0.37 |
| $ | 0.35 |
| $ | 0.36 |
| $ | 0.32 |
| $ | 0.50 |
| $ | 0.36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Diluted earnings per share |
| $ | 0.57 |
| $ | 0.50 |
| $ | 0.37 |
| $ | 0.35 |
| $ | 0.36 |
| $ | 0.31 |
| $ | 0.49 |
| $ | 0.36 |
|
66
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We have established disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to the officers who certify our financial reports and to other members of senior management and the board of directors and to ensure that information that is required to be disclosed in reports we file with the SEC is properly and timely recorded, processed, summarized and reported. A review and evaluation was performed by our management, including the Company’s Chief Executive Officer (the “CEO”) and Chief Financial Officer (the “CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2005 pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934. Based upon and as of the date of that review and evaluation, the CEO and CFO have concluded that our current disclosure controls and procedures were effective as of December 31, 2005.
Management’s Report on Internal Control Over Financial Reporting
Management’s Report on Internal Control over Financial Reporting appears under Item 8, “Financial Statements and Supplemental Data” on page 40 of this Form 10-K.
Changes in Internal control over Financial Reporting.
There have been no changes to our internal control over financial reporting during the last fiscal quarter that have affected, or are reasonably likely to affect, our internal control over financial reporting.
None
67
Item 10. Director and Executive Officers of Registrant.
Information regarding Trinity’s directors and executive officers and our code of ethics appears in the Company’s Proxy Statement for the Annual Meeting of Shareholders to be held on May 11, 2006 and is incorporated herein by reference.
Section 16(a) of the Exchange Act requires our directors, executive officers and persons owning more than 10% of our common stock file reports of ownership and changes in ownership with the Securities and Exchange Commission. They are also required to furnish us with copies of all Section 16(a) forms they file. Based on our review of the forms filed and representations made to us by reporting persons concerning whether a Form 5 was required to be filed for 2005, we are not aware of any of our directors, executive officers or 10% shareholders who failed to comply with the filing requirements of Section 16(a) during the fiscal year ended December 31, 2005, with the exception the following late filings:
• Lewis A. Muir purchased 3,500 shares on December 6, 2004. This purchase was reported on a Form 4 filed March 18, 2005.
• Deborah U. Johnson purchased 1,000 shares on September 1, 2005. This purchase was reported on a Form 4 filed September 21, 2005.
• Jeffrey Howell purchased 100 shares on May 27, 2004. This purchase was reported on a Form 4 filed April 8, 2005.
• William C. Enloe was granted 28,000 option shares on August 16, 2005. This grant was reported on a Form 8-K filed on August 22, 2005 and a Form 4 filed on October 14, 2005.
• Steve W. Wells was granted 14,000 option shares on August 16, 2005. This grant was reported on a Form 8-K filed on August 22, 2005 and a Form 4 filed on October 14, 2005.
Item 11. Executive Compensation.
The information regarding executive compensation appears in Trinity’s Proxy Statement for the Annual Meeting of Shareholders to be held on May 11, 2006 and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information regarding security ownership of certain beneficial owners and management appears in the Company’s Proxy Statement for the Annual Meeting of Shareholders to be held on May 11, 2006 and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
The information regarding certain relationships and related transactions appears in the Company’s Proxy Statement for the Annual Meeting of Shareholders to be held on May 11, 2006 and is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services.
The information regarding the principal accounting fees and services appears in the Company’s Proxy Statement for the Annual Meeting of Shareholders to be held on May 11, 2006 and is hereby incorporated by reference.
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Item 15. Exhibits and Financial Statement Schedules.
Financial Statements. All financial statements of Trinity are set forth under Item 8 of this Form 10-K.
Exhibits. The following exhibits are filed as part of this Form 10-K:
| Articles of Incorporation of Trinity Capital Corporation | |
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3.2* |
| Amended and Restated By-Laws of Trinity Capital Corporation |
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4.1* |
| Indenture dated as of March 23, 2000 among Trinity Capital Corporation, Trinity Capital Trust I and The Bank of New York |
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4.2* |
| Indenture dated as of November 28, 2001 between Trinity Capital Corporation, Trinity Capital Trust II and Wilmington Trust Company |
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4.3** |
| Indenture dated as of May 11, 2004 between Trinity Capital Corporation, Trinity Capital Trust III and Wells Fargo Bank, National Association |
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4.4 |
| Indenture dated as of June 29, 2005 between Trinity Capital Corporation, Trinity Capital Trust IV and Wilmington Trust Company |
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10.1* |
| Employment Agreement dated March 24, 1998 between Trinity Capital Corporation, Los Alamos National Bank and William C. Enloe |
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10.2* |
| Employment Agreement dated March 24, 1998 between Trinity Capital Corporation, Los Alamos National Bank and Steve W. Wells |
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10.3* |
| Los Alamos National Bank Employee Stock Ownership Plan |
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10.4* |
| Trinity Capital Corporation 1998 Stock Option Plan |
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10.5* |
| Promissory Note dated July 16, 2001, in the original principal amount of $3,300,075, made to the benefit of Valley National Bank, located in Espanola, New Mexico |
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10.6** |
| Form of stock option grant agreement |
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10.7*** |
| Trinity Capital Corporation 2005 Stock Incentive Plan |
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10.8*** |
| Trinity Capital Corporation 2005 Deferred Income Plan |
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10.9** |
| Director fee schedule |
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21.1 |
| Subsidiaries |
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31.1 |
| Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a) |
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31.2 |
| Certification on Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a) |
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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 |
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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 |
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99.1* |
| Audit Committee Charter |
* Incorporated by reference to the Company’s Form 10 filed on April 30, 2003, as amended.
** Incorporated by reference to the Company’s Form 10-K for the fiscal year ended December 31, 2004
*** Incorporated by reference to the Company’s Form S-8 filed on July 28, 2005
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Pursuant to the requirements of Section 12 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.
Date: March 16, 2006 | TRINITY CAPITAL CORPORATION | ||
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| By: | /s/ William C. Enloe |
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| William C. Enloe |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
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| /s/ William C. Enloe |
| President, Chief Executive Officer | March 16, 2006 | ||||||||||||||
| William C. Enloe |
| and Director |
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| /s/ Daniel R. Bartholomew |
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| Daniel R. Bartholomew |
| Chief Financial Officer | March 16, 2006 | ||||||||||||||
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| /s/ George A. Cowan |
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| George A. Cowan |
| Director | March 16, 2006 | ||||||||||||||
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| /s/ Jeffrey F. Howell |
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| Jeffrey F. Howell |
| Chairman of the Board and Director | March 16, 2006 | ||||||||||||||
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| /s/ Deborah U. Johnson |
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| Deborah U. Johnson |
| Director | March 16, 2006 | ||||||||||||||
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| /s/ Jerry Kindsfather |
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| Jerry Kindsfather |
| Director | March 16, 2006 | ||||||||||||||
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| /s/ Arthur B. Montoya, Jr. |
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| Arthur B. Montoya, Jr. |
| Director | March 16, 2006 | ||||||||||||||
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| /s/ Lewis A. Muir |
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| Lewis A. Muir |
| Director | March 16, 2006 | ||||||||||||||
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| /s/ Stanley D. Primak |
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| Stanley D. Primak |
| Director | March 16, 2006 | ||||||||||||||
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| /s/ Charles A. Slocomb |
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| Charles A. Slocomb |
| Director | March 16, 2006 | ||||||||||||||
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| /s/ Steve W. Wells |
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| Steve W. Wells |
| Secretary and Director | March 16, 2006 | ||||||||||||||
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| /s/ Robert P. Worcester |
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| Robert P. Worcester |
| Director | March 16, 2006 | ||||||||||||||
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