UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended March 31, 2006.
Or
o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from to
Commission File Number 000-50266
TRINITY CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
New Mexico |
| 85-0242376 |
(State of incorporation) |
| (I.R.S. Employer Identification Number) |
1200 Trinity Drive, Los Alamos, New Mexico 87544
(Address of principal executive offices)
(505) 662-5171
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No
Indicate by check mark whether the registrant is a large accelerated filed, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one)
Large Accelerated Filer o |
| Accelerated Filer x |
| 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 x No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 6,588,717 shares of common stock, no par value, outstanding as of May 10, 2006.
TRINITY CAPITAL CORPORATION AND SUBSIDIARIES
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| Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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PART I — FINANCIAL INFORMATION
TRINITY CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 2006 and December 31, 2005
(Amounts in thousands, except share data)
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| March 31, |
| December 31, |
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| (Unaudited) |
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ASSETS |
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Cash and due from banks |
| $ | 22,194 |
| $ | 24,547 |
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Interest bearing deposits with banks |
| 3,677 |
| 29,122 |
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Federal funds sold and securities purchased under resell agreements |
| 56 |
| 1,013 |
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Cash and cash equivalents |
| 25,927 |
| 54,682 |
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Investment securities available for sale |
| 85,729 |
| 91,231 |
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Investment securities held to maturity, at amortized cost (fair value of $18,331 at March 31, 2006 and $26,565 at December 31, 2005) |
| 18,357 |
| 26,612 |
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Other investments |
| 8,270 |
| 7,965 |
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Loans (net of allowance for loan losses of $9,256 at March 31, 2006 and $8,842 at December 31, 2005) |
| 1,041,411 |
| 1,010,538 |
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Loans held for sale |
| 15,183 |
| 7,588 |
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Premises and equipment, net |
| 24,096 |
| 24,401 |
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Accrued interest receivable |
| 6,720 |
| 7,321 |
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Mortgage servicing rights, net |
| 9,545 |
| 9,779 |
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Other real estate owned |
| 290 |
| 375 |
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Other assets |
| 3,394 |
| 3,524 |
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Total assets |
| $ | 1,238,922 |
| $ | 1,244,016 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Liabilities |
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Deposits: |
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Noninterest bearing |
| $ | 91,315 |
| $ | 79,030 |
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Interest bearing |
| 947,132 |
| 962,818 |
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Total deposits |
| 1,038,447 |
| 1,041,848 |
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Short-term borrowings |
| 16,704 |
| 10,000 |
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Long-term borrowings |
| 63,628 |
| 72,306 |
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Junior subordinated debt owed to unconsolidated trusts |
| 32,992 |
| 32,992 |
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Borrowings made by Employee Stock Ownership Plan (ESOP) to outside parties |
| 743 |
| 1,214 |
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Accrued interest payable |
| 4,086 |
| 4,047 |
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Other liabilities |
| 3,991 |
| 5,991 |
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Total liabilities |
| 1,160,591 |
| 1,168,398 |
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Stock owned by Employee Stock Ownership Plan (ESOP) participants; 629,327 shares and 614,558 shares at March 31, 2006 and December 31, 2005, respectively, at fair value; net of unearned ESOP shares of 45,697 shares and 72,243 shares at March 31, 2006 and December 31, 2005, respectively, at historical cost |
| 16,008 |
| 16,100 |
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Commitments and contingencies (Note 8) |
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Stockholders’ equity |
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Common stock, no par, authorized 20,000,000 shares; issued 6,856,800 shares, shares outstanding 6,588,717 and 6,554,559 at March 31, 2006 and December 31, 2005, respectively |
| 6,836 |
| 6,836 |
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Additional paid-in capital |
| 957 |
| 922 |
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Retained earnings |
| 60,644 |
| 58,013 |
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Accumulated other comprehensive loss |
| (321 | ) | (273 | ) | ||
Total stockholders’ equity before treasury stock |
| 68,116 |
| 65,498 |
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Treasury stock, at cost, 222,386 shares and 229,998 shares at March 31, 2006 and December 31, 2005, respectively |
| (5,793 | ) | (5,980 | ) | ||
Total stockholders’ equity |
| 62,323 |
| 59,518 |
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Total liabilities and stockholders’ equity |
| $ | 1,238,922 |
| $ | 1,244,016 |
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The accompanying notes are an integral part of these unaudited consolidated financial statements.
1
TRINITY CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended March 31, 2006 and 2005
(Amounts in thousands except share and per share data)
(Unaudited)
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| Three Months Ended |
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| March 31, 2006 |
| March 31, 2005 |
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Interest income: |
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Loans, including fees |
| $ | 17,903 |
| $ | 14,222 |
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Investment securities: |
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Taxable |
| 991 |
| 656 |
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Nontaxable |
| 203 |
| 180 |
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Federal funds sold and repurchase agreements |
| 3 |
| 4 |
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Other interest bearing deposits |
| 132 |
| 20 |
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Investment in unconsolidated trusts |
| 22 |
| 16 |
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Total interest income |
| 19,254 |
| 15,098 |
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Interest expense: |
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Deposits |
| 6,542 |
| 3,981 |
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Short-term borrowings |
| 138 |
| 102 |
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Long-term borrowings |
| 680 |
| 577 |
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Junior subordinated debt owed to unconsolidated trusts |
| 728 |
| 519 |
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Total interest expense |
| 8,088 |
| 5,179 |
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Net interest income |
| 11,166 |
| 9,919 |
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Provision for loan losses |
| 1,900 |
| 525 |
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Net interest income after provision for loan losses |
| 9,266 |
| 9,394 |
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Other income: |
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Mortgage loan servicing fees |
| 640 |
| 602 |
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Loan and other fees |
| 709 |
| 588 |
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Service charges on deposits |
| 381 |
| 331 |
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Gain on sale of loans |
| 300 |
| 463 |
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Other operating income |
| 366 |
| 76 |
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| 2,396 |
| 2,060 |
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Other expenses: |
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Salaries and employee benefits |
| 4,425 |
| 4,058 |
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Occupancy |
| 857 |
| 799 |
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Data processing |
| 468 |
| 490 |
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Marketing |
| 437 |
| 324 |
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Amortization and valuation of mortgage servicing rights |
| 551 |
| 130 |
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Supplies |
| 201 |
| 209 |
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Loss on sale of other real estate owned |
| 198 |
| 518 |
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Postage |
| 157 |
| 170 |
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Other |
| 1,099 |
| 960 |
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| 8,393 |
| 7,658 |
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Income before income taxes |
| 3,269 |
| 3,796 |
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Income taxes |
| 1,168 |
| 1,428 |
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Net income |
| $ | 2,101 |
| $ | 2,368 |
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Basic earnings per common share |
| $ | 0.32 |
| $ | 0.35 |
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Diluted earnings per common share |
| $ | 0.32 |
| $ | 0.35 |
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The accompanying notes are an integral part of these unaudited consolidated financial statements.
2
TRINITY CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2006 and 2005
(Amounts in thousands)
(Unaudited)
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| Three Months Ended |
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| March 31, |
| March 31, |
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Cash Flows From Operating Activities |
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Net income |
| $ | 2,101 |
| $ | 2,368 |
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Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
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Depreciation and amortization |
| 655 |
| 631 |
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Net amortization of: |
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Mortgage servicing rights |
| 674 |
| 694 |
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Premiums and discounts on investment securities |
| (40 | ) | 293 |
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Junior subordinated debt owed to unconsolidated trusts issuance costs |
| 5 |
| 5 |
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Provision for loan losses |
| 1,900 |
| 525 |
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Change in mortgage servicing rights valuation allowance |
| (123 | ) | (564 | ) | ||
Loss on sale or disposal of premises and equipment |
| — |
| 143 |
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Federal Home Loan Bank (FHLB) stock dividends received |
| (59 | ) | (41 | ) | ||
Gain on sale of loans |
| (300 | ) | (463 | ) | ||
(Gain) Loss on disposal of other real estate owned |
| (15 | ) | 211 |
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Write-down of value of other real estate owned |
| 40 |
| 307 |
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Decrease (increase) in other assets |
| 726 |
| (1,082 | ) | ||
Increase in other liabilities |
| 341 |
| 1,005 |
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Release of Employee Stock Ownership Plan (ESOP) shares |
| 573 |
| 606 |
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Net cash provided by operating activities before originations and gross sales of loans |
| 6,478 |
| 4,638 |
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Gross sales of loans held for sale |
| 29,950 |
| 38,581 |
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Origination of loans held for sale |
| (37,562 | ) | (38,190 | ) | ||
Net cash (used in) provided by operating activities |
| (1,134 | ) | 5,029 |
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Cash Flows From Investing Activities |
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Proceeds from maturities and paydowns of investment securities available for sale |
| 5,490 |
| 2,025 |
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Proceeds from maturities and paydowns of investment securities held to maturity |
| 8,213 |
| 9,106 |
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Proceeds from maturities and paydowns of investment securities, other |
| — |
| 325 |
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Purchase of investment securities, other |
| (246 | ) | (125 | ) | ||
Proceeds from sale of other real estate owned |
| 60 |
| 2,872 |
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Loans funded, net of repayments |
| (32,773 | ) | (40,084 | ) | ||
Purchases of premises and equipment |
| (350 | ) | (198 | ) | ||
Proceeds from sale of premises and equipment |
| — |
| 100 |
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Net cash used in investing activities |
| (19,606 | ) | (25,979 | ) | ||
Cash Flows From Financing Activities |
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Net increase in demand deposits, NOW accounts and savings accounts |
| 8,451 |
| 33,558 |
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Net (decrease) increase in time deposits |
| (11,852 | ) | 47,950 |
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Proceeds from issuances of borrowings |
| — |
| 20,000 |
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Repayment of borrowings |
| (1,974 | ) | (36,295 | ) | ||
Repayment of ESOP debt |
| (471 | ) | (472 | ) | ||
Purchase of treasury stock |
| (285 | ) | (4,000 | ) | ||
Issuance of common stock for stock option plan |
| 258 |
| — |
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Dividend payments |
| (2,256 | ) | (2,049 | ) | ||
Tax benefit recognized for exercise of stock options |
| 114 |
| — |
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Net cash (used in) provided by financing activities |
| (8,015 | ) | 58,692 |
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Net (decrease) increase in cash and cash equivalents |
| $ | (28,755 | ) | $ | 37,742 |
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Cash and cash equivalents: |
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Beginning of year |
| 54,682 |
| 23,814 |
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End of period |
| $ | 25,927 |
| $ | 61,556 |
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Supplemental Disclosures of Cash Flow Information |
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Cash payments (receipts) for: |
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Interest |
| $ | 8,049 |
| $ | 5,113 |
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Income taxes |
| (155 | ) | 404 |
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Non-cash investing and financing activities: |
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Transfers from loans to other real estate owned |
| — |
| 475 |
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Change in unrealized (loss) gain on investment securities, net of taxes |
| (48 | ) | (111 | ) |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
3
TRINITY CAPITAL CORPORATION & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements include the consolidated balances and results of operations of Trinity Capital Corporation (“Trinity”) and its wholly owned subsidiaries: Los Alamos National Bank (the “Bank”) and Title Guaranty & Insurance Company (“Title Guaranty”), TCC Appraisal Services Corporation (“TCC Appraisal”), TCC Advisors Corporation (“TCC Advisors”) and TCC Funds, 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,” are trust subsidiaries of Trinity but 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. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods have been made. The results of operations for the three months ended March 31, 2006 are not necessarily indicative of the results to be expected for the entire fiscal year.
The unaudited consolidated interim financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and industry practice. Certain information in footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America and industry practice has been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s December 31, 2005 audited financial statements filed on Form 10-K.
The preparation of financial statements in conformity with accounting principals generally accepted in the United States of America requires management to make estimates and assumptions which affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements, as well as the reported amounts of income and expenses during the reported periods. Actual results could differ from those estimates.
Note 2. Comprehensive Income
Comprehensive income includes net income, as well as the change in net unrealized (loss) gain on investment securities available for sale, net of tax. Comprehensive income was $2.1 million and $2.3 million for the three month periods ended March 31, 2006 and 2005, respectively.
Note 3. Earnings Per Share Data
The following table sets forth the computation of basic and diluted earnings per share for the periods indicated:
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| Three Months Ended March 31, |
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| 2006 |
| 2005 |
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| (Unaudited; In thousands except |
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Net income |
| $ | 2,101 |
| $ | 2,368 |
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Weighted average common shares issued |
| 6,856,800 |
| 6,856,800 |
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LESS: Weighted average treasury stock shares |
| (224,268 | ) | (99,238 | ) | ||
LESS: Weighted average unearned Employee Stock Ownership Plan (ESOP) stock shares |
| (51,122 | ) | (78,619 | ) | ||
Weighted average common shares outstanding, net |
| 6,581,410 |
| 6,678,943 |
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Basic earnings per common share |
| $ | 0.32 |
| $ | 0.35 |
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Weighted average dilutive shares from stock option plan |
| 39,289 |
| 98,879 |
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Weighted average common shares outstanding including dilutive shares |
| 6,620,699 |
| 6,777,822 |
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Diluted earnings per common share |
| $ | 0.32 |
| $ | 0.35 |
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4
Note 4. Recent Accounting Pronouncements and Regulatory Developments
In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment, which is an Amendment of FASB Statement Nos. 123 and 95. SFAS No. 123R changes, among other things, the manner in which share-based compensation, such as stock options 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 replaced the 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 amended 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 allowed 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 did not change the accounting required by SFAS No. 123R; it changed only the dates for compliance with the standard. The adoption of this standard decreased earnings for the Company by approximately $73 thousand during the first three months of 2006, and is projected to decrease income approximately $293 thousand for the entire year of 2006. The exact impact for 2006 and in the years following will be dependent upon stock options granted, the estimated value of these options and the vesting terms for the options granted.
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 eliminates 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.
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets. The new Standard, which is an amendment to SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities—a replacement of FASB Statement No. 125, will simplify the accounting for servicing assets and liabilities, such as those common with mortgage securitization activities. Specifically, the new Standard addresses the recognition and measurement of separately recognized servicing assets and liabilities and provides an approach to simplify efforts to obtain hedge-like (offset) accounting. The standard also: (1) clarifies when an obligation to service financial assets should be separately recognized as a servicing asset or a servicing liability; (2) requires that a separately recognized servicing asset or servicing liability be initially measured at fair value, if practicable; (3) permits an entity with a separately recognized servicing asset or servicing liability to choose either the amortization method or the fair value method for subsequent measurement. FAS No. 156 permits a servicer that uses derivative financial instruments to offset risks on servicing to report both the derivative financial instrument and related servicing asset or liability by using a consistent measurement attribute — 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 has not yet determined which method to adopt under this standard, and the estimated impact on the Company’s financial statements is not yet known.
5
Note 5. 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. Both of these plans were approved by the Company’s shareholders. 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. Stock appreciation rights granted after December 31, 2005 were also granted at or above the fair value of the stock at the date of the grant, vest over five years and must be exercised within five years of and pricing the date of and pricing the date of grant.
Effective January 1, 2006, the Company adopted SFAS No. 123(R), Share-Based Payment, which is an Amendment of FASB Statement Nos. 123 and 95. The Company adopted this standard using the modified prospective transaction method. Prior to the adoption of SFAS 123(R), the Company measured stock-based compensation cost in accordance with the methods prescribed in Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees. Accordingly, no compensation cost was recognized for options granted and vested before January 1, 2006.
Under the provisions of SFAS 123(R), the Company is required to recognize compensation expense for share-based compensation that vest after adoption of the new standard. The Company uses a Black-Sholes model to value the stock options on the date of the grant, and recognizes this expense over the remaining vesting term for the stock options or stock appreciation rights. Key assumptions used in this valuation method (detailed below) are the volatility of the Company’s stock price, a risk-free rate of return (using the U.S. Treasury yield curve) based on the expected term from grant date to exercise date and an annual dividend rate based upon the current market price. Expected term from grant date is based upon the historical time from grant to exercise experienced by the Company. Because share-based compensation vesting in the current periods were granted on a variety of dates, the assumptions are presented as ranges in those assumptions.
The following table details the assumptions used in by the Black-Sholes model for share-based compensation granted:
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| Three Months Ended March 31, |
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| 2006 |
| 2005 |
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Stock price volatility |
| 14.12 | % | — |
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Risk-free rate |
| 4.35 | % | — |
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Expected dividends |
| 2.29 | % | — |
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Expected term (in years) |
| 5 |
| — |
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A summary of stock option and stock appreciation right activity under the plans as of March 31, 2006, and changes during the first three months of the year is presented below:
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| Shares |
| Weighted-Average |
| Weighted-Average |
| Aggregate Intrinsic |
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Outstanding at January 1, 2006 |
| 333,117 |
| $ | 23.15 |
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|
| |
Granted |
| 84,000 |
| 28.00 |
|
|
|
|
| ||
Exercised |
| (18,178 | ) | 10.25 |
|
|
|
|
| ||
Forfeited or expired |
| — |
| — |
|
|
|
|
| ||
Outstanding at March 31, 2006 |
| 398,939 |
| $ | 24.76 |
| 6.08 |
| $ | 1,735 |
|
Exerciseable at March 31, 2006 |
| 233,939 |
| $ | 21.48 |
| 1.38 |
| $ | 953 |
|
The weighted-average grant-date fair value of options granted during the three months ending March 31, 2006 was $4.33. The total intrinsic value of options exercised during the three months ended March 31, 2006 was $21 thousand.
6
As of March 31, 2006, there was $782 thousand of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the plans. That cost is expected to be recognized over a weighted-average vesting period of 4.0 years. There were no shares vested during the three months ending March 31, 2006. However, shares that will vest in August and December, 2006 have been ratably expensed in the amount of $73 thousand in the first three months of 2006.
The following pro forma information presents net income and earnings per share had the fair value medthod of SFAS No. 123 been used to measure compensation cost for stock option plans in the first quarter of 2005.
|
| Three Months |
| |
|
| (In thousands, |
| |
Net income as reported |
| $ | 2,368 |
|
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects |
| 28 |
| |
Pro forma net income |
| $ | 2,340 |
|
Earnings per share: |
|
|
| |
Basic — as reported |
| $ | 0.35 |
|
Basic — pro forma |
| $ | 0.35 |
|
Diluted — as reported |
| $ | 0.35 |
|
Diluted — pro forma |
| $ | 0.35 |
|
Note 6. Short Term Borrowings
The Company had $16.7 million in borrowings with maturities of less than one year as of March 31, 2006. As of December 31, 2005, the Company had Federal Home Loan Bank advances with maturities of less than one year of $10.0 million.
Note 7. Long Term Borrowings
The Company had Federal Home Loan Bank advances with maturity dates greater than one year of $63.6 million and $72.3 million as of March 31, 2006 and December 31, 2005, respectively. As of March 31, 2006, the advances have fixed interest rates ranging from 3.22% to 6.34%.
7
Note 8. Junior Subordinated Debt Owed to Unconsolidated Trusts
The following table presents details on the junior subordinated debt owed to unconsolidated trusts as of March 31, 2006:
|
| 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 | % | 7.52% (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 | % | 7.52% (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 offerings 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.
8
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 prior financial statements have been reclassified to de-consolidate the Company’s investment in the Trusts.
In March 2005, the Board of Governors of the Federal Reserve System issued a final rule allowing bank holding companies to continue to include qualifying trust preferred securities in their Tier 1 Capital for regulatory capital purposes, subject to a 25% limitation to all core (“Tier I”) capital elements, net of goodwill less any associated deferred tax liability. The final rule provides a five-year transition period, ending March 31, 2009, for application of the aforementioned quantitative limitation. As of March 31, 2006, 81.6% of the trust preferred securities noted in the table above qualified as Tier I capital and 18.4% qualified as Tier 2 capital under the final rule adopted in March 2005.
Payments of distributions on the trust preferred securities and payments on redemption of the trust preferred securities are guaranteed by the Company on a limited basis. The Company also entered into an agreement as to expenses and liabilities with the Trusts pursuant to which it agreed, on a subordinated basis, to pay any costs, expenses or liabilities of the Trusts other than those arising under the trust preferred securities. The obligations of the Company under the junior subordinated debentures, the related indenture, the trust agreement establishing the Trusts, the guarantee and the agreement as to expenses and liabilities, in the aggregate, constitute a full and unconditional guarantee by the Company of the Trusts’ obligations under the trust preferred securities.
Issuance costs of $615 thousand related to the first three trust preferred securities were deferred and are being amortized over the period until mandatory redemption of the securities in March 2030, December 2031 and September 2034, respectively. During each of the three months ended March 31, 2006 and March 31, 2005, $5 thousand of these issuance costs were amortized. Unamortized issuance costs were $513 thousand and $519 thousand at March 31, 2006 and December 31, 2005, respectively. There were no issuance costs associated with the fourth trust preferred security issue.
Dividends accrued and unpaid to securities holders totaled $369 thousand and $286 thousand on March 31, 2006 and March 31, 2005, respectively.
Note 9. Commitments, Contingencies and Off-Balance Sheet Activities
Credit-related financial instruments: The Company is a party to credit-related commitments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These credit-related commitments include commitments to extend credit, standby letters of credit and commercial letters of credit. Such credit-related commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets.
The Company’s exposure to credit loss is represented by the contractual amount of these credit-related commitments. The Company follows the same credit policies in making credit-related commitments as it does for on-balance-sheet instruments.
At March 31, 2006 and December 31, 2005, the following credit-related commitments were outstanding whose contract amounts represent credit risk:
|
| Contract Amount |
| ||||
|
| March 31, |
| December 31, |
| ||
|
| (In thousands) |
| ||||
Unfunded commitments under lines of credit |
| $ | 198,140 |
| $ | 182,641 |
|
Commercial and standby letters of credit |
| 40,321 |
| 37,436 |
| ||
9
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 March 31, 2006 and December 31, 2005, 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 $94 thousand and $33 thousand as of March 31, 2006 and December 31, 2005, respectively, and are included in “other liabilities” on the Company’s balance sheets.
Concentrations of credit risk: The majority of the loans, commitments to extend credit, and standby letters of credit have been granted to customers in Los Alamos, 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.
10
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This discussion is intended to focus on certain financial information regarding the Company and its subsidiaries and is written to provide the reader with a more thorough understanding of its financial statements. The following discussion and analysis of the Company’s financial position and results of operations should be read in conjunction with the information set forth in Item 3, Quantitative and Qualitative Disclosures about Market Risk and the annual audited consolidated financial statements filed on Form 10-K.
Special Note Concerning Forward-Looking Statements
This 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 II of the Company’s Form 10-K for the fiscal year ended December 31, 2005. 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.
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.
11
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. Management is in the process of analyzing the methodology used in determining the allowance for loan losses which may result in future changes to the Company’s calculations and accruals. 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 March 31, 2006, mortgage loans serviced for others totaled $943.5 million. The MSRs on these loans total $9.5 million as of March 31, 2006. The expected and actual rates of mortgage loan prepayments are the most significant factors driving the value of MSRs. Increases in mortgage loan prepayments reduce estimated future net servicing cash flows because the life of the underlying loan is reduced. In determining the fair value of the MSRs, mortgage interest rates, which are used to determine prepayment rates and discount rates are held constant over the estimated life of the portfolio. Fair values of the MSRs are 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 increasing the value of these assets. Lower interest rates increase the likelihood of repayment, contracting the life of the MSRs and decreasing the value of these assets. This can have a significant impact on our income. There is no certainty on the direction and amount of interest rate changes looking forward, and therefore, there is no certainty on the amount or direction of the change in valuation.
An analysis of changes in mortgage servicing rights asset follows:
|
| Three Months Ended |
| ||||
|
| March 31, |
| March 31, |
| ||
|
| (In thousands) |
| ||||
Balance at beginning of period |
| $ | 11,009 |
| $ | 11,858 |
|
Servicing rights originated and capitalized |
| 317 |
| 387 |
| ||
Amortization |
| (674 | ) | (694 | ) | ||
|
| $ | 10,652 |
| $ | 11,551 |
|
Below is an analysis of changes in the mortgage servicing right asset valuation allowance:
|
| Three Months Ended |
| ||||
|
| March 31, |
| March 31, |
| ||
|
| (In thousands) |
| ||||
Balance at beginning of period |
| $ | (1,230 | ) | $ | (3,487 | ) |
Aggregate reductions credited to operations |
| 123 |
| 643 |
| ||
Aggregate additions charged to operations |
| — |
| (79 | ) | ||
|
| $ | (1,107 | ) | $ | (2,923 | ) |
Overview
The Company’s net income for the first three months of 2006 was $267 thousand less than the net income for the same period in 2005, a decrease of 11.3%. This was largely due to the provision for loan losses being $1.4 million higher in 2006 than in 2005, which was primarily as a result of the provision associated with a single commercial loan. Although this loan is currently performing, it was determined that due to a weakness in the financial position of this borrower that it was appropriate to provide for and subsequently charge off a portion of this loan. The increase in provision of $1.4 million was largely offset by an increase in net interest income of $1.2 million during the first three months of 2006 when compared to the same period in 2005. Total assets decreased slightly by $5.1 million (0.4%) from December 31, 2005 to March 31, 2006, with a shift in assets from cash and investment securities to loans. Total deposits decreased $3.4 million (0.3%) during the same period.
12
Results of Operations-Income Statement Analysis
Net Income-General. Net income for the three months ended March 31, 2006 was $2.1 million, compared to $2.4 million for the same period of 2005. Diluted earnings per share decreased by $0.03 to $0.32 for the three months ended March 31, 2006 from $0.35 for the same period of 2005. This represented a decrease in earnings per share of 8.6%. This decrease was primarily due to an increase in the provision for loan losses of $1.4 million from 2005 to 2006, which was largely due to the provision associated with a single commercial loan. This increase in provision was largely offset by an increase in net interest income of $1.2 million, which was mostly due to an increase in both the volume of average earning assets and the rate earned on those earning assets. Other expenses increased $735 thousand, largely due to a smaller decrease in the valuation allowance on mortgage servicing rights and an increase in salaries and employee benefits. Non-interest income increased $336 thousand, primarily due to an increase in title insurance premium income and a change in the net gain (loss) on the disposal of fixed assets. The effect of those items, net of taxes, was a decrease in net income of $267 thousand for the first quarter of 2006 compared to the same period in 2005.
The profitability of the Company’s operations depends primarily on its net interest income, which is the difference between total interest earned on interest earning assets and total interest paid on interest bearing liabilities. The Company’s net income is affected by its provision for loan losses as well as other income and other expenses. The provision for loan losses reflects the amount thought to be adequate to cover probable credit losses in the loan portfolio. Non-interest income or other income consists of mortgage loan servicing fees, loan and other fees, service charges on deposits, gain on sale of loans, gain on sale of securities and other operating income. Other expenses include salaries and employee benefits, occupancy expenses, data processing expenses, marketing, amortization and valuation of mortgage servicing rights, supplies expense, loss on other real estate owned, postage and other expenses.
The amount of net interest income is affected by changes in the volume and mix of interest earning assets, the level of interest rates earned on those assets, the volume and mix of interest bearing liabilities, and the level of interest rates paid on those interest bearing liabilities. The provision for loan losses is dependent on changes in the loan portfolio and management’s assessment of the collectibility of the loan portfolio, as well as economic and market conditions. Other income and other expenses are impacted by growth of operations and growth in the number of accounts through both acquisitions and core banking business growth. Growth in operations affects other expenses as a result of additional employees, branch facilities and promotional marketing expenses. Growth in the number of accounts affects other income including service fees as well as other expenses such as computer services, supplies, postage, telecommunications and other miscellaneous expenses.
13
Net Interest Income. The following tables present, for the periods indicated, the total dollar amount of interest income from average interest earning assets and the resultant yields, as well as the interest expense on average interest bearing liabilities, and the resultant costs, expressed both in dollars and rates:
|
| Three Months Ended March 31, |
| ||||||||||||||
|
| 2006 |
| 2005 |
| ||||||||||||
|
| Average |
| Interest |
| Yield/Rate |
| Average |
| Interest |
| Yield/Rate |
| ||||
|
| (Dollars in thousands) |
| ||||||||||||||
Interest Earning Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Loans(1)(2) |
| $ | 1,037,684 |
| $ | 17,903 |
| 7.00 | % | $ | 921,441 |
| $ | 14,222 |
| 6.26 | % |
Taxable investment securities |
| 100,363 |
| 991 |
| 4.00 |
| 89,509 |
| 656 |
| 2.97 |
| ||||
Investment securities exempt from federal income taxes(3) |
| 18,889 |
| 324 |
| 6.96 |
| 17,288 |
| 281 |
| 6.59 |
| ||||
Federal funds sold |
| 384 |
| 3 |
| 3.17 |
| 708 |
| 4 |
| 2.29 |
| ||||
Other interest bearing deposits |
| 12,499 |
| 132 |
| 4.28 |
| 3,618 |
| 20 |
| 2.24 |
| ||||
Investment in unconsolidated trust subsidiaries |
| 992 |
| 22 |
| 8.99 |
| 682 |
| 16 |
| 9.51 |
| ||||
Total interest earning assets |
| 1,170,811 |
| 19,375 |
| 6.71 |
| 1,033,246 |
| 15,199 |
| 5.97 |
| ||||
Non-interest earning assets |
| 59,778 |
|
|
|
|
| 69,706 |
|
|
|
|
| ||||
Total assets |
| $ | 1,230,589 |
|
|
|
|
| $ | 1,102,952 |
|
|
|
|
| ||
Interest Bearing Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
NOW and money market deposits |
| $ | 84,772 |
| $ | 362 |
| 1.73 | % | $ | 124,517 |
| $ | 326 |
| 1.06 | % |
Savings deposits |
| 407,407 |
| 1,740 |
| 1.73 |
| 374,263 |
| 1,045 |
| 1.13 |
| ||||
Time deposits |
| 455,040 |
| 4,440 |
| 3.96 |
| 378,205 |
| 2,610 |
| 2.80 |
| ||||
Short-term borrowings |
| 13,761 |
| 138 |
| 4.07 |
| 16,068 |
| 102 |
| 2.57 |
| ||||
Long-term borrowings, including ESOP borrowings |
| 69,539 |
| 680 |
| 3.97 |
| 62,917 |
| 577 |
| 3.72 |
| ||||
Junior subordinated debt owed to unconsolidated trusts |
| 32,992 |
| 728 |
| 8.95 |
| 22,682 |
| 519 |
| 9.28 |
| ||||
Total interest bearing liabilities |
| 1,063,511 |
| 8,088 |
| 3.08 |
| 978,652 |
| 5,179 |
| 2.15 |
| ||||
Demand deposits—non-interest bearing |
| 39,811 |
|
|
|
|
| 45,955 |
|
|
|
|
| ||||
Other non-interest bearing liabilities |
| 49,477 |
|
|
|
|
| 5,968 |
|
|
|
|
| ||||
Stockholders’ equity, including stock owned by ESOP |
| 77,790 |
|
|
|
|
| 72,377 |
|
|
|
|
| ||||
Total liabilities and stockholders equity |
| $ | 1,230,589 |
|
|
|
|
| $ | 1,102,952 |
|
|
|
|
| ||
Net interest income on a fully tax equivalent basis/interest rate Spread(4) |
|
|
| $ | 11,287 |
| 3.63 | % |
|
| $ | 10,020 |
| 3.82 | % | ||
Net interest margin on a fully tax equivalent basis(5) |
|
|
|
|
| 3.91 | % |
|
|
|
| 3.93 | % | ||||
Net interest margin(5) |
|
|
|
|
| 3.87 | % |
|
|
|
| 3.89 | % |
(1) Includes non-accrual loans of $8.1 million and $5.4 million for March 31, 2006 and 2005 respectively.
(2) Interest income includes loan origination fees of $737 thousand and $682 thousand for the three months ended March 31, 2006 and 2005, respectively.
(3) Non-taxable investment income is presented on a fully tax equivalent basis, adjusting for federal and state exemption of interest income and certain other permanent 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.
14
For the first quarter of 2006, net interest income on a fully tax equivalent basis increased $1.3 million to $11.3 million from $10.0 million for the first quarter of 2005. The increase in net interest income resulted from an increase in interest income on a fully tax equivalent basis of $4.2 million (27.5%), while interest expense increased $2.9 million (56.2%). Interest income on a fully tax equivalent basis increased due in part to an increase in average earning assets of $137.6 million (13.3%), which accounted for $2.1 million of the increase. In addition, the yield on earning assets on a fully tax equivalent basis increased 74 basis points, which accounted for another $2.1 million of the increase. Interest expense increased primarily due to an increase on the cost of interest-bearing liabilities of 93 basis points, which accounted for $2.1 million of the increase. Average interest-bearing liabilities increased $84.9 million (8.7%), accounting for $851 thousand of the increase in interest expense. The net interest margin expressed in a fully tax equivalent basis decreased 2 basis points to 3.91% for the first three months of 2006 from 3.93% during the same period in 2005.
Volume, Mix and Rate Analysis of Net Interest Income. The following tables present the extent to which changes in volume, changes in interest rates, and changes in the interest rates times the changes in volume of interest earning assets and interest bearing liabilities have affected our interest income and interest expense during the periods indicated. Information is provided on changes in each category due to: (i) changes attributable to changes in volume (change in volume times the prior period interest rate); (ii) changes attributable to changes in interest rate (changes in rate times the prior period volume); and (iii) changes attributable to changes in rate/volume (changes in interest rate times changes in volume). Changes attributable to the combined impact of volume and rate have been allocated proportionally to the changes due to volume and the changes due to rate:
|
| Three Months Ended March 31, |
| |||||||
|
| 2006 Compared to 2005 |
| |||||||
|
| Change Due |
| Change Due |
| Total |
| |||
|
| (In thousands) |
| |||||||
Interest Earning Assets: |
|
|
|
|
|
|
| |||
Loans |
| $ | 1,904 |
| $ | 1,777 |
| $ | 3,681 |
|
Taxable investment securities |
| 86 |
| 249 |
| 335 |
| |||
Investment securities exempt from federal income taxes(1) |
| 27 |
| 16 |
| 43 |
| |||
Federal funds sold |
| (3 | ) | 2 |
| (1 | ) | |||
Other interest bearing deposits |
| 82 |
| 30 |
| 112 |
| |||
Investment in unconsolidated trust subsidiaries |
| 6 |
| — |
| 6 |
| |||
Total increase (decrease) in interest income |
| 2,102 |
| 2,074 |
| 4,176 |
| |||
Interest Bearing Liabilities: |
|
|
|
|
|
|
| |||
NOW and money market deposit accounts |
| (126 | ) | 162 |
| 36 |
| |||
Savings deposits |
| 100 |
| 595 |
| 695 |
| |||
Time deposits |
| 602 |
| 1,228 |
| 1,830 |
| |||
Short-term borrowings |
| (17 | ) | 53 |
| 36 |
| |||
Long-term borrowings |
| 63 |
| 40 |
| 103 |
| |||
Junior subordinated debt owed to unconsolidated trusts |
| 229 |
| (20 | ) | 209 |
| |||
Total increase (decrease) in interest expense |
| 851 |
| 2,058 |
| 2,909 |
| |||
Increase (decrease) in net interest income |
| $ | 1,251 |
| $ | 16 |
| $ | 1,267 |
|
(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 tax differences.
15
Other Income. Changes in other income between the three months ended March 31, 2006 and 2005 were as follows:
|
| Three Months Ended |
|
|
| |||||
|
| March 31, |
| March 31, |
| Net difference |
| |||
|
| (In thousands) |
| |||||||
Other income: |
|
|
|
|
|
|
| |||
Mortgage loan servicing fees |
| $ | 640 |
| $ | 602 |
| $ | 38 |
|
Loan and other fees |
| 709 |
| 588 |
| 121 |
| |||
Service charges on deposits |
| 381 |
| 331 |
| 50 |
| |||
Gain on sale of loans |
| 300 |
| 463 |
| (163 | ) | |||
Other operating income |
| 366 |
| 76 |
| 290 |
| |||
|
| $ | 2,396 |
| $ | 2,060 |
| $ | 336 |
|
In the first quarter of 2006, other income increased by $336 thousand (16.3%) to $2.4 million from $2.1 million for the first quarter of 2005. Other operating income increased $290 thousand primarily due to an increase in title insurance premium income ($261 thousand). Title insurance premiums increased due to an increased volume of title insurance business in both the Los Alamos and Santa Fe operations of Title Guaranty. Gain on sale of loans decreased $163 thousand 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 between the two periods, and was experienced across the financial services industry. Loans and other fees increased $121 thousand due to an increase in trust-related fees ($56 thousand) and an increase in ATM switch fees ($29 thousand).
Other Expenses. Changes in other expenses between the three months ended March 31, 2006 and 2005 were as follows:
|
| Three Months Ended |
|
|
| |||||
|
| March 31, |
| March 31, |
| Net difference |
| |||
|
| (In thousands) |
| |||||||
Other expenses: |
|
|
|
|
|
|
| |||
Salaries and employee benefits |
| $ | 4,425 |
| $ | 4,058 |
| $ | 367 |
|
Occupancy |
| 857 |
| 799 |
| 58 |
| |||
Data processing |
| 468 |
| 490 |
| (22 | ) | |||
Marketing |
| 437 |
| 324 |
| 113 |
| |||
Amortization and valuation of mortgage servicing rights |
| 551 |
| 130 |
| 421 |
| |||
Supplies |
| 201 |
| 209 |
| (8 | ) | |||
Loss on sale of other real estate owned |
| 198 |
| 518 |
| (320 | ) | |||
Postage |
| 157 |
| 170 |
| (13 | ) | |||
Other |
| 1,099 |
| 960 |
| 139 |
| |||
|
| $ | 8,393 |
| $ | 7,658 |
| $ | 735 |
|
For the first quarter of 2006, other expenses increased $735 thousand (9.6%) to $8.4 million in 2006 from $7.7 million in the first quarter of 2005. Amortization and valuation of mortgage servicing rights increased $421 thousand due to the decrease in the valuation allowance of $564 thousand in 2005 compared to a decrease of only $123 thousand in 2006. Salaries and employee benefits increased $367 thousand (9.0%) due to the expensing of stock options and stock appreciation rights for the first time as a result of changes in accounting standards ($73 thousand) and a shift from lower-compensated employees to higher-compensated employees. This shift was due to an effort to hire and retain more highly skilled employees in order to improve the efficiency of operations. Loss on sale of other real estate owned decreased $320 thousand (61.8%) due to large other real estate owned losses in 2005 that were not realized in 2006.
Income Taxes. In the first three months of 2006, income tax expense decreased by $260 thousand (18.2%) from the previous year to a total of $1.2 million from $1.4 million. This was due in part to lower taxable income in 2006 compared to 2005, as well as a lower effective tax rate (35.7% compared to 37.6%). This lower effective tax rate was due to the exercise of stock options in the first quarter of 2006 that decreased taxable income, but not book income.
16
Financial Condition-Balance Sheet Analysis
General. Total assets at March 31, 2006 were $1.2 billion, a decrease of $5.1 million (0.4%) from December 31, 2005. Net loans increased $31.0 million (3.1%) during 2006, cash and cash equivalents decreased $28.8 million (52.6%) and investments decreased $13.5 million (10.7%). During the same period, total liabilities decreased slightly by $7.8 million (0.7%) remaining at $1.2 billion at March 31, 2006. The decrease in total liabilities was primarily due to a decrease in total deposits of $3.4 million (0.3%) and a decrease in borrowings (including borrowings made by the Employee Stock Ownership Plan) of $2.4 million (2.9%). Stockholders’ equity (including stock owned by the Employee Stock Ownership Plan) increased $2.7 million (3.6%) to $78.3 million on March 31, 2006 compared to $75.6 million on December 31, 2005.
Investment Securities. The primary purposes of the investment portfolio are to provide a source of earnings, for liquidity management, to provide collateral to pledge against public deposits and to control interest rate risk. In managing the portfolio, the Company seeks to obtain the objectives of safety of principal, liquidity, diversification and maximized return on funds. For an additional discussion with respect to these matters, see “Liquidity and Sources of Capital” under Item 2 and “Asset Liability Management” under Item 3 below.
The following tables set forth the amortized cost and fair value of securities by accounting classification category and by type of security as indicated:
|
| At March 31, 2006 |
| At December 31, 2005 |
| At March 31, 2005 |
| ||||||||||||
|
| Amortized |
| Fair Value |
| Amortized |
| Fair Value |
| Amortized |
| Fair Value |
| ||||||
|
| (In thousands) |
| ||||||||||||||||
Investment securities Available for Sale: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
U.S. Government agencies |
| $ | 80,290 |
| $ | 79,793 |
| $ | 85,687 |
| $ | 85,289 |
| $ | 40,088 |
| $ | 39,616 |
|
States and political subdivisions |
| 5,973 |
| 5,931 |
| 5,984 |
| 5,937 |
| 2,198 |
| 2,165 |
| ||||||
Equity securities |
| 1 |
| 5 |
| 1 |
| 5 |
| 1 |
| 5 |
| ||||||
Total investment securities available for sale |
| $ | 86,264 |
| $ | 85,729 |
| $ | 91,672 |
| $ | 91,231 |
| $ | 42,287 |
| $ | 41,786 |
|
Investment securities Held to Maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
U.S. Government agencies |
| $ | 5,521 |
| $ | 5,504 |
| $ | 13,687 |
| $ | 13,647 |
| $ | 37,324 |
| $ | 37,305 |
|
States and political subdivisions |
| 12,836 |
| 12,827 |
| 12,925 |
| 12,918 |
| 15,053 |
| 15,079 |
| ||||||
Total investment securities held to maturity |
| $ | 18,357 |
| $ | 18,331 |
| $ | 26,612 |
| $ | 26,565 |
| $ | 52,377 |
| $ | 52,384 |
|
Other investments: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Non-marketable equity securities (including FRB and FHLB stock) |
| $ | 7,278 |
| $ | 7,278 |
| $ | 6,973 |
| $ | 6,973 |
| $ | 6,639 |
| $ | 6,639 |
|
Investment in unconsolidated trusts |
| 992 |
| 992 |
| 992 |
| 992 |
| 682 |
| 682 |
| ||||||
Total other investments |
| $ | 8,270 |
| $ | 8,270 |
| $ | 7,965 |
| $ | 7,965 |
| $ | 7,321 |
| $ | 7,321 |
|
Loan Portfolio. The following tables set forth the composition of the loan portfolio:
|
| At March 31, 2006 |
| At December 31, 2005 |
| At March 31, 2005 |
| |||||||||
|
| Amount |
| Percent |
| Amount |
| Percent |
| Amount |
| Percent |
| |||
|
| (Dollars in thousands) |
| |||||||||||||
Commercial |
| $ | 96,298 |
| 9.15 | % | $ | 93,579 |
| 9.16 | % | $ | 93,549 |
| 9.99 | % |
Commercial real estate |
| 387,940 |
| 36.84 |
| 379,884 |
| 37.19 |
| 365,805 |
| 39.09 |
| |||
Residential real estate |
| 317,210 |
| 30.12 |
| 313,693 |
| 30.71 |
| 288,515 |
| 30.82 |
| |||
Construction real estate |
| 197,307 |
| 18.74 |
| 178,068 |
| 17.43 |
| 136,375 |
| 14.57 |
| |||
Installment and other |
| 54,238 |
| 5.15 |
| 56,309 |
| 5.51 |
| 51,770 |
| 5.53 |
| |||
Total loans |
| 1,052,993 |
| 100.00 |
| 1,021,533 |
| 100.00 |
| 936,014 |
| 100.00 |
| |||
Unearned income |
| (2,326 | ) |
|
| (2,153 | ) |
|
| (2,287 | ) |
|
| |||
Gross loans |
| 1,050,667 |
|
|
| 1,019,380 |
|
|
| 933,727 |
|
|
| |||
Allowance for loan losses |
| (9,256 | ) |
|
| (8,842 | ) |
|
| (8,689 | ) |
|
| |||
Net loans |
| $ | 1,041,411 |
|
|
| $ | 1,010,538 |
|
|
| $ | 925,038 |
|
|
|
17
Net loans increased $116.4 million (12.6%) to $1.0 billion at March 31, 2006 from $925.0 million at March 31, 2005. The increase was due primarily to growth in the Company’s construction real estate, residential real estate and commercial real estate loan portfolios. This growth as been due to a combination of a strengthening local economy, more activity generated from our newest Santa Fe office and increased marketing of our loan products.
Asset Quality. The following table sets forth the amounts of non-performing loans and non-performing assets at the dates indicated:
|
| At |
| At |
| At |
| |||
|
| (Dollars in thousands) |
| |||||||
Non-accruing loans |
| $ | 8,468 |
| $ | 8,037 |
| $ | 5,580 |
|
Loans 90 days or more past due, still accruing interest |
| — |
| — |
| 4 |
| |||
Total non-performing loans |
| 8,468 |
| 8,037 |
| 5,584 |
| |||
Other real estate owned |
| 290 |
| 375 |
| 3,523 |
| |||
Other repossessed assets |
| 79 |
| 27 |
| 19 |
| |||
Total non-performing assets |
| $ | 8,837 |
| $ | 8,439 |
| $ | 9,126 |
|
Total non-performing loans to total loans |
| 0.80 | % | 0.79 | % | 0.60 | % | |||
Allowance for loan losses to non-performing loans |
| 109.31 | % | 110.02 | % | 155.61 | % | |||
Total non-performing assets to total assets |
| 0.71 | % | 0.68 | % | 0.80 | % |
At March 31, 2006, total non-performing assets decreased $289 thousand (3.2%) to $8.8 million from $9.1 million at March 31, 2005 due to decreases in other real estate owned of $3.2 million, which was partially offset by increases in non-performing loans of $2.9 million. The decreases in other real estate owned was primarily due to the sale of two large residential properties held in other real estate owned totaling $3.0 million. Non-performing loans increased primarily due to a $5.8 million commercial loan that was placed on non-accrual status in 2005 (of which $1.5 million was charged off and $200 thousand received in payment) and an $830 thousand commercial loan that was placed on non-accrual status in 2006. This was partially offset by a $2.4 million commercial real estate loan that was on non-accrual status on March 31, 2005 but collected in full by the end of 2005.
At March 31, 2006, total non-performing assets increased $398 thousand (4.7%) to $8.8 million from $8.4 million at December 31, 2005, primarily due to increases in non-performing loans of $431 thousand, due to $1.4 million in loans being placed on non-accrual, which was partially offset by $968 thousand being charged off or paid on existing non-accrual loans.
Allowance for Loan Losses. Management believes the allowance for loan losses accounting policy is critical to the portrayal and understanding of the Company’s financial condition and results of operations. As such, selection and application of this “critical accounting policy” involves judgments, estimates, and uncertainties that are susceptible to change. In the event that different assumptions or conditions were to prevail, and depending upon the severity of such changes, the possibility of materially different financial condition or results of operations is a reasonable likelihood.
The allowance for loan losses is maintained at an amount that management believes will be adequate to absorb probable losses on existing loans, based on an evaluation of the collectibility of loans and prior loss experience. This evaluation also takes into consideration such factors as changes in the nature and volume of the loan portfolio, the value of underlying collateral, overall portfolio quality, review of specific problem loans and current economic conditions that may affect the borrower’s ability to pay. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions. Management is in the process of analyzing the methodology used in determining the allowance for loan losses which may result in future changes to the Company’s calculations and accruals. In addition, as an integral part of their examination process, regulatory agencies periodically review the Company’s allowance for loan losses and may require the Company to make additions to the allowance based on their evaluation of information available at the time of their examinations.
18
The following table presents an analysis of the allowance for loan losses for the periods presented:
|
| Three Months Ended |
| ||||
|
| March 31, |
| March 31, |
| ||
|
| (Dollars in thousands) |
| ||||
Balance at beginning of period |
| $ | 8,842 |
| $ | 8,367 |
|
Provision for loan losses |
| 1,900 |
| 525 |
| ||
Charge-offs |
| (1,569 | ) | (238 | ) | ||
Recoveries |
| 83 |
| 35 |
| ||
Net charge-offs |
| (1,486 | ) | (203 | ) | ||
Balance at end of period |
| $ | 9,256 |
| $ | 8,689 |
|
Gross loans at end of period |
| $ | 1,050,667 |
| $ | 933,727 |
|
Ratio of allowance to total loans |
| 0.88 | % | 0.93 | % | ||
Ratio of net charge-offs to average loans(1) |
| 0.58 | % | 0.09 | % |
(1) Net charge-offs are annualized for the purposes of this calculation.
Net charge-offs for the three months ended March 31, 2006 totaled $1.5 million, an increase of $1.3 million (632.0%) from $203 thousand from the three months ended March 31, 2005. The majority of the charge-offs were commercial loans. Additionally the provision for loan losses increased for the three months ended March 31, 2006 from the three months ended March 31, 2005, due to management’s analysis of current non-performing loans. Specifically, $1.0 million of the additional provision was made for a single large commercial loan, of which $950 thousand was subsequently charged-off.
The following table sets forth the allocation of the allowance for loan losses in each loan category for the periods presented and the percentage of loans in each category to total loans. An allocation for a loan classification is only for internal analysis of the adequacy of the allowance and is not an indication of expected or anticipated losses:
|
| At March 31, 2006 |
| At December 31, 2005 |
| At March 31, 2005 |
| |||||||||
|
| Amount |
| Percent |
| Amount |
| Percent |
| Amount |
| Percent |
| |||
|
| (Dollars in thousands) |
| |||||||||||||
Commercial |
| $ | 3,266 |
| 9.15 | % | $ | 2,934 |
| 9.16 | % | $ | 4,398 |
| 9.99 | % |
Commercial and residential real estate |
| 2,581 |
| 66.96 |
| 3,086 |
| 67.90 |
| 2,508 |
| 69.91 |
| |||
Construction real estate |
| 2,381 |
| 18.74 |
| 1,993 |
| 17.43 |
| 995 |
| 14.57 |
| |||
Installment and other |
| 1,001 |
| 5.15 |
| 813 |
| 5.51 |
| 754 |
| 5.53 |
| |||
Unallocated |
| 27 |
| N/A |
| 16 |
| N/A |
| 34 |
| N/A |
| |||
Total |
| $ | 9,256 |
| 100.00 | % | $ | 8,842 |
| 100.00 | % | $ | 8,689 |
| 100.00 | % |
N/A—not applicable
The portion of the allocation that was based upon historical loss experience decreased by $847 thousand (35.6%) in 2006, from $2.4 million on March 31, 2005 to $1.5 million on March 31, 2006. This was largely due to a decrease in the allocation for commercial loans of $934 thousand and a decrease in the allocation for construction real estate loans of $394 thousand. These decreases were partially offset by an increase in the allocation for installment and other loans of $493 thousand. Concentration allocation increased $882 thousand (15.7%), from $5.6 million on March 31, 2005 to $6.5 million on March 31, 2006. This was due to an increase in the allocation for construction real estate loans of $1.8 million, which was partially offset by a lower allocation in commercial loans of $981 thousand. The allocation for specifically identified loans increased by $538 thousand (81.0%), from $664 thousand on March 31, 2005 to $1.2 million on March 31, 2006. Two commercial loans totaling $1.2 million accounted for this increase, which was partially offset by decreases in all other categories.
19
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 continued 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 the first three months of 2006 than in the same period in 2005. This was primarily due to an increase in commercial charge-offs in 2006 due to the single large commercial loan 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.
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 |
| At |
| At |
| |||
|
| (Dollars in thousands) |
| |||||||
Loans classified as: |
|
|
|
|
|
|
| |||
Substandard |
| $ | 14,352 |
| $ | 14,484 |
| $ | 12,431 |
|
Doubtful |
| 1,248 |
| 1,414 |
| 546 |
| |||
Total adversely classified loans |
| 15,600 |
| 15,898 |
| 12,977 |
| |||
Other real estate owned |
| 290 |
| 375 |
| 3,523 |
| |||
Other repossessed assets |
| 79 |
| 27 |
| 19 |
| |||
Total adversely classified assets |
| $ | 15,969 |
| $ | 16,300 |
| $ | 16,519 |
|
Special mention loans |
| $ | 11,383 |
| $ | 14,836 |
| $ | 23,713 |
|
20
Total adversely classified assets decreased $550 thousand (3.3%) from March 31, 2005 to March 31, 2006. The main reason for the decrease was a decrease of $3.2 million in other real estate owned. This was partially offset by an increase in substandard loans of $1.9 million and an increase in doubtful loans of $702 thousand. Special mention loans decreased $12.3 million (52.0%) between March 31, 2005 and March 31, 2006, primarily due to a reduction of commercial real estate loans residing in the risk category.
Sources of Funds
Liquidity and Sources of Capital
The Company’s cash flows are comprised of three classifications: cash flows from operating activities, cash flows from investing activities and cash flows from financing activities. Net cash (used in) provided by operating activities was $(1.1) million and $5.0 million for the three months ended March 31, 2006 and 2005 respectively. Net cash provided by operating activities decreased $6.1 million in the first three months of 2006 compared to the first three months of 2005 largely due to an increase in the origination of loans held for sale, net of sales, by $8.0 million over the first three months of 2005. This was partially offset by a decrease in cash used by other assets of $1.8 million. Net cash used in investing activities was $(19.6) million and $(26.0) million for the three months ended March 31, 2006 and 2005, respectively. The $6.4 million decrease in cash used by investing activities was largely due to a drop in loans funded, net of repayments, of $7.3 million. Net cash (used in) provided by financing activities was $(8.0) million and $58.7 million for the three months ended March 31, 2006 and 2005, respectively. The $66.7 million decrease in cash provided by financing activities was mainly due to a decrease in new deposit growth of $84.9 million from the first three months of 2006 compared to the first three months of 2005, which was partially offset by a decrease in cash used by borrowings (net of repayments) of $14.3 million and a decrease in the purchase of treasury stock of $3.7 million.
In the event that additional short-term liquidity is needed, we have established relationships with several large regional banks to provide short-term borrowings in the form of federal funds purchases. We have borrowed, 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.
At March 31, 2006, the Company’s total risk-based capital ratio was 11.69%, the Tier 1 capital to risk-weighted assets ratio was 10.22%, and the Tier 1 capital to average assets ratio was 8.49%. At December 31, 2005, the Company’s total risk-based capital ratio was 11.67%, the Tier 1 capital to risk-weighted assets ratio was 10.10%, and the Tier 1 capital to average assets ratio was 8.19%.
At March 31, 2006, the Bank’s total risk-based capital ratio was 11.37%, the Tier 1 capital to risk-weighted assets ratio was 10.46%, and the Tier 1 capital to average assets ratio was 8.69%. At December 31, 2005, the Bank’s total risk-based capital ratio was 11.30%, the Tier 1 capital to risk-weighted assets ratio was 10.41%, and the Tier 1 capital to average assets ratio was 8.43%. The Bank was categorized as “well-capitalized” under Federal Deposit Insurance Corporation regulations at March 31, 2006 and December 31, 2005.
At March 31, 2006 and December 31, 2005, the Company’s book value per common share was $11.88 and $11.54, respectively.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Asset Liability Management
The Company’s net interest income is subject to “interest rate risk” to the extent that it can vary based on changes in the general level of interest rates. It is the Company’s policy to maintain an acceptable level of interest rate risk over a range of possible changes in interest rates while remaining responsive to market demand for loan and deposit products. The strategy employed by the Company to manage its interest rate risk is to measure its risk using an asset/liability simulation model and adjust the maturity of securities in its investment portfolio to manage that risk.
Interest rate risk can also be measured by analyzing the extent to which the repricing of assets and liabilities are mismatched to create an interest sensitivity “gap”. An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time period. The interest rate sensitivity gap is defined as the difference between the amount of interest earning assets maturing or repricing within a specific time period and the amount of interest bearing liabilities maturing or repricing within that same time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. During a period of rising interest rates, therefore, a negative gap would tend to adversely affect net interest income. Conversely, during a period of falling interest rates, a negative gap position would tend to result in an increase in net interest income.
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The following table sets forth the amounts of interest earning assets and interest bearing liabilities outstanding at March 31, 2006, which are anticipated by the Company, based upon certain assumptions, to reprice or mature in each of the future time periods shown. Except as stated below, the amount of assets and liabilities shown which reprice or mature during a particular period were determined based on the earlier of the term to repricing or the term to repayment of the asset or liability. The table is intended to provide an approximation of the projected repricing of assets and liabilities at March 31, 2006 on the basis of contractual maturities and scheduled rate adjustments within a three-month period and subsequent selected time intervals. The loan amounts in the table reflect principal balances expected to be reinvested and/or repriced as a result of contractual amortization and rate adjustments on adjustable-rate loans. Loan and investment securities contractual maturities and amortization reflect modest prepayment assumptions. While NOW, money market and savings deposit accounts have adjustable rates, it is assumed that the interest rates on these accounts will not adjust immediately to changes in other interest rates. Therefore, the table is calculated assuming that these accounts will reprice based upon an historical analysis of rate changes of these particular accounts, with repricing assigned to these accounts from one to 11 months.
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| Time to Maturity or Repricing |
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As of March 31, 2006: |
| 0-90 Days |
| 91-365 Days |
| 1-5 Years |
| Over 5 Years |
| Total |
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| (Dollars in thousands) |
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Interest Earning Assets: |
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Loans |
| $ | 494,196 |
| $ | 444,052 |
| $ | 58,225 |
| $ | 54,194 |
| $ | 1,050,667 |
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Loans held for sale |
| 15,183 |
| — |
| — |
| — |
| 15,183 |
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Investment securities |
| 16,295 |
| 38,750 |
| 48,128 |
| 8,191 |
| 111,364 |
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Securities purchased under agreements to resell |
| 56 |
| — |
| — |
| — |
| 56 |
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Interest bearing deposits with banks |
| 3,677 |
| — |
| — |
| — |
| 3,677 |
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Investment in unconsolidated trusts |
| 186 |
| — |
| — |
| 806 |
| 992 |
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Total interest earning assets |
| $ | 529,593 |
| $ | 482,802 |
| $ | 106,353 |
| $ | 63,191 |
| $ | 1,181,939 |
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Interest Bearing Liabilities: |
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NOW and money market deposit accounts |
| $ | 126,605 |
| $ | 115,172 |
| — |
| — |
| $ | 241,777 |
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Savings deposits |
| 169,018 |
| 87,081 |
| — |
| — |
| 256,099 |
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Time deposits |
| 137,097 |
| 223,103 |
| 87,159 |
| 1,897 |
| 449,256 |
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Short- and long-term borrowings |
| 1,993 |
| 14,735 |
| 18,919 |
| 44,685 |
| 80,332 |
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Borrowings made by ESOP to outside parties |
| 743 |
| — |
| — |
| — |
| 743 |
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Junior subordinated debt owed to unconsolidated trusts |
| 6,186 |
| — |
| — |
| 26,806 |
| 32,992 |
| |||||
Total interest bearing liabilities |
| $ | 441,642 |
| $ | 440,091 |
| $ | 106,078 |
| $ | 73,388 |
| $ | 1,061,199 |
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Rate sensitive assets (RSA) |
| $ | 529,593 |
| $ | 1,012,395 |
| $ | 1,118,748 |
| $ | 1,181,939 |
| $ | 1,181,939 |
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Rate sensitive liabilities (RSL) |
| 441,642 |
| 881,733 |
| 987,811 |
| 1,061,199 |
| 1,061,199 |
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Cumulative GAP (GAP=RSA-RSL) |
| 87,951 |
| 130,662 |
| 130,937 |
| 120,740 |
| 120,740 |
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RSA/Total assets |
| 42.75 | % | 81.72 | % | 90.30 | % | 95.40 | % | 95.40 | % | |||||
RSL/Total assets |
| 35.65 | % | 71.17 | % | 79.73 | % | 85.66 | % | 85.66 | % | |||||
GAP/Total assets |
| 7.10 | % | 10.55 | % | 10.57 | % | 9.74 | % | 9.74 | % | |||||
GAP/RSA |
| 16.61 | % | 12.91 | % | 11.70 | % | 10.22 | % | 10.22 | % |
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.
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Based on simulation modeling at March 31, 2006 and December 31, 2005, 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 March 31, 2006 |
| At December 31, 2005 |
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Interest Rates |
| Dollar Change |
| Percentage Change |
| Dollar Change |
| Percentage Change |
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| (Dollars in thousands) |
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+ 2.00 | % | $ | (3,357 | ) | (7.50 | )% | $ | (3,093 | ) | (7.21 | )% |
+ 1.00 |
| (591 | ) | (1.32 | ) | (948 | ) | (2.21 | ) | ||
(1.00 | ) | 1,020 |
| 2.28 |
| 1,047 |
| 2.44 |
| ||
(2.00 | ) | 1,137 |
| 2.54 |
| 721 |
| 1.68 |
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Our simulations used assume the following:
1. Changes in interest rates are immediate.
2. It is our policy that interest rate exposure due to a 2% interest rate rise or fall be limited to 15% of our annual net interest income, as forecasted by the simulation model. As demonstrated by the table above, our interest rate risk exposure was within this policy at March 31, 2006.
Changes in net interest income between the periods above reflect changes in the composition of interest earning assets and interest bearing liabilities, related interest rates, repricing frequencies, and the fixed or variable characteristics of the interest earning assets and interest bearing liabilities. Projections of income given by the model are not actual predictions, but rather show our relative interest rate risk. Actual interest income may vary from model projections.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We have established disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to the officers who certify our financial reports and to other members of senior management and the board of directors and to ensure that information that is required to be disclosed in reports we file with the SEC is properly and timely recorded, processed, summarized and reported. A review and evaluation was performed by our management, including the Company’s Chief Executive Officer (the “CEO”) and Chief Financial Officer (the “CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2006 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 March 31, 2006.
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.
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Neither Trinity, the Bank, Title Guaranty, TCC Appraisal Services, 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.
In addition to the other information in this Quarterly Report on Form 10-Q, shareholders or prospective investors should carefully consider the risk factors appearing in Trinity’s Form 10-K for the year-ending 2005 filed with the Securities and Exchange Commission on March 16, 2006 beginning on page 9. There have been no material changes to the risk factors as previously disclosed in Trinity’s Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
None
31.1 Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a)
31.2 Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a)
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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.
TRINITY CAPITAL CORPORATION | ||
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Date: May 10, 2006 | By: | /s/ WILLIAM C. ENLOE |
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| William C. Enloe |
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| President and Chief Executive Officer |
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Date: May 10, 2006 | By: | /s/ DANIEL R. BARTHOLOMEW |
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| Daniel R. Bartholomew |
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| Chief Financial Officer |
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