10-Q 1 form10q20110930.htm FORM 10-Q QUARTERLY REPORT AS OF SEPTEMBER 30, 2011 form10q20110930.htm

 
 

 

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 September 30, 2011.
 
Or
     
[ ]Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
for the transition period from                                                       to                                               
     
Commission File Number 000-50266
   

TRINITY CAPITAL CORPORATION LOGO
 
TRINITY CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)

New Mexico
 
85-0242376
(State or other jurisdiction of incorporation of organization)
 
(I.R.S. Employer Identification No.)
     
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 has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [ X ] No [ ]
 


 
 
 

 
 

Indicate by check mark whether the registrant is a large accelerated filed, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large Accelerated Filer  [ ]
Accelerated Filer  [ X ]
Non-Accelerated Filer  [ ]
Smaller Reporting Company[ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
[ ]  Yes  [ X ]  No
APPLICABLE ONLY TO CORPORATE ISSUERS:
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 6,449,726 shares of common stock, no par value, outstanding as of November 4, 2011.
 


 

 
 

 
 





 

 
 


 
Item 1. Financial Statements
 
TRINITY CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 2011 and December 31, 2010
(Amounts in thousands, except share data)

   
September 30, 2011
   
December 31, 2010
 
   
(Unaudited)
       
ASSETS
           
Cash and due from banks
 
$
17,309
   
$
16,765
 
Interest-bearing deposits with banks
   
36,868
     
89,316
 
Securities purchased under resell agreements
   
20,322
     
110
 
Cash and cash equivalents
   
74,499
     
106,191
 
Investment securities available for sale
   
136,122
     
162,591
 
Investment securities held to maturity, at amortized cost (fair value of $11,861 at September 30, 2011 and $10,951 at December 31, 2010)
   
10,863
     
11,107
 
Other investments
   
8,992
     
9,335
 
Loans held for sale
   
21,036
     
25,080
 
Loans (net of allowance for loan losses of $27,177 at September 30, 2011 and $28,722 at December 31, 2010)
   
1,158,484
     
1,161,216
 
Premises and equipment, net
   
29,258
     
30,264
 
Leased property under capital leases, net
   
2,211
     
2,211
 
Accrued interest receivable
   
5,426
     
6,736
 
Mortgage servicing rights, net
   
6,322
     
7,960
 
Other intangible assets
   
57
     
546
 
Other real estate owned
   
14,898
     
21,860
 
Prepaid expenses
   
4,247
     
6,076
 
Net deferred tax assets
   
6,980
     
5,587
 
Other assets
   
3,438
     
8,682
 
Total assets
 
$
1,482,833
   
$
1,565,442
 

(Continued on following page)
 


TRINITY CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 2011 and December 31, 2010
(Amounts in thousands, except share and per share data)
(Continued from prior page)


   
September 30, 2011
   
December 31, 2010
 
   
(Unaudited)
       
LIABILITIES AND STOCKHOLDERS' EQUITY
           
Liabilities
           
Deposits:
           
Noninterest-bearing
 
$
138,755
   
$
109,891
 
Interest-bearing
   
1,138,376
     
1,248,454
 
Total deposits
   
1,277,131
     
1,358,345
 
Short-term borrowings
   
10,000
     
1,152
 
Long-term borrowings
   
22,300
     
32,300
 
Long-term capital lease obligations
   
2,211
     
2,211
 
Junior subordinated debt owed to unconsolidated trusts
   
37,116
     
37,116
 
Accrued interest payable
   
2,180
     
4,873
 
Other liabilities
   
6,732
     
5,990
 
Total liabilities
   
1,357,670
     
1,441,987
 
                 
Commitments and contingencies (Note 12)                
Stock owned by Employee Stock Ownership Plan (ESOP) participants; 643,675 shares and 628,914 shares at September 30, 2011 and December 31, 2010, respectively, at fair value
 
$
6,759
   
$
6,132
 
Stockholders' equity
               
Preferred stock, no par, authorized 1,000,000 shares
               
Series A, 5% cumulative perpetual, 35,539 shares issued and outstanding at September 30, 2011 and December 31, 2010, $1,000 liquidation value per share, at amortized cost
 
$
33,965
   
$
33,808
 
Series B, 9% cumulative perpetual, 1,777 shares issued and outstanding at September 30, 2011 and December 31, 2010, $1,000 liquidation value per share, at amortized cost
   
2,020
     
2,044
 
Common stock, no par, authorized 20,000,000 shares; issued 6,856,800 shares, shares outstanding 6,449,726 at September 30, 2011 and December 31, 2010
   
6,836
     
6,836
 
Additional paid-in capital
   
1,957
     
1,899
 
Retained earnings
   
84,705
     
83,018
 
Accumulated other comprehensive (loss) gain
   
(105
)
   
692
 
Total stockholders' equity before treasury stock
   
129,378
     
128,297
 
Treasury stock, at cost, 407,074 shares at September 30, 2011 and December 31, 2010
   
(10,974
)
   
(10,974
)
Total stockholders' equity
   
118,404
     
117,323
 
Total liabilities and stockholders' equity
 
$
1,482,833
   
$
1,565,442
 

The accompanying notes are an integral part of these unaudited consolidated financial statements.
 

 
 
 
 


TRINITY CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Nine Months Ended September 30, 2011 and 2010
(Amounts in thousands except per share data)
(Unaudited)

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2011
   
2010
   
2011
   
2010
 
Interest income:
                       
Loans, including fees
 
$
15,788
   
$
17,963
   
$
47,561
   
$
51,873
 
Investment securities:
                               
Taxable
   
636
     
747
     
1,774
     
2,156
 
Nontaxable
   
268
     
285
     
832
     
882
 
Federal funds sold
   
48
     
-
     
55
     
-
 
Other interest-bearing deposits
   
38
     
74
     
172
     
254
 
Investment in unconsolidated trusts
   
21
     
21
     
61
     
62
 
Total interest income
   
16,799
     
19,090
     
50,455
     
55,227
 
Interest expense:
                               
Deposits
   
2,046
     
3,281
     
6,599
     
10,849
 
Short-term borrowings
   
64
     
18
     
168
     
251
 
Long-term borrowings
   
189
     
253
     
592
     
634
 
Long-term capital lease obligations
   
67
     
67
     
201
     
201
 
Junior subordinated debt owed to unconsolidated trusts
   
684
     
694
     
2,092
     
2,061
 
Total interest expense
   
3,050
     
4,313
     
9,652
     
13,996
 
Net interest income
   
13,749
     
14,777
     
40,803
     
41,231
 
Provision for loan losses
   
1,300
     
500
     
4,879
     
15,858
 
Net interest income after provision for loan losses
   
12,449
     
14,277
     
35,924
     
25,373
 
Other income:
                               
Mortgage loan servicing fees
   
650
     
659
     
1,982
     
1,959
 
Trust fees
   
489
     
442
     
1,450
     
1,253
 
Loan and other fees
   
832
     
759
     
2,433
     
2,229
 
Service charges on deposits
   
408
     
372
     
1,220
     
1,213
 
Net gain on sale of loans
   
600
     
1,590
     
2,339
     
3,068
 
Net gain on sale of securities
   
861
     
-
     
1,057
     
47
 
Title insurance premiums
   
251
     
308
     
556
     
770
 
Other operating income
   
174
     
198
     
386
     
309
 
Total other income
   
4,265
     
4,328
     
11,423
     
10,848
 

(Continued on following page)
 


TRINITY CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Nine Months Ended September 30, 2011 and 2010
(Amounts in thousands except per share data)
(Unaudited)
(Continued from prior page)

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2011
   
2010
   
2011
   
2010
 
Other expenses:
                       
Salaries and employee benefits
 
$
5,636
   
$
5,152
   
$
16,594
   
$
15,321
 
Occupancy
   
1,013
     
1,089
     
2,898
     
3,094
 
Data processing
   
895
     
686
     
2,615
     
2,119
 
Marketing
   
377
     
306
     
1,145
     
1,037
 
Amortization and valuation of mortgage servicing rights
   
1,808
     
1,304
     
2,612
     
2,587
 
Amortization and valuation of other intangible assets
   
163
     
110
     
489
     
332
 
Supplies
   
92
     
102
     
598
     
311
 
Loss on sale of other real estate owned
   
530
     
1,938
     
2,861
     
3,423
 
Postage
   
153
     
164
     
510
     
486
 
Bankcard and ATM network fees
   
397
     
361
     
1,114
     
859
 
Legal, professional and accounting fees
   
783
     
896
     
2,433
     
2,222
 
FDIC insurance premiums
   
256
     
638
     
1,765
     
2,470
 
Collection expenses
   
491
     
446
     
1,472
     
1,274
 
Other
   
724
     
16
     
2,505
     
1,335
 
Total other expense
   
13,318
     
13,208
     
39,611
     
36,870
 
Income (loss) before provision for income taxes
   
3,396
     
5,397
     
7,736
     
(649
)
Provision for income taxes
   
1,680
     
1,947
     
3,165
     
59
 
Net income (loss)
 
$
1,716
   
$
3,450
   
$
4,571
   
$
(708
)
Dividends and discount accretion on preferred shares
   
529
     
532
     
1,613
     
1,589
 
Net income (loss) available to common shareholders
 
$
1,187
   
$
2,918
   
$
2,958
   
$
(2,297
)
Basic earnings (loss) per common share
 
$
0.19
   
$
0.45
   
$
0.46
   
$
(0.36
)
Diluted earnings (loss) per common share
 
$
0.19
   
$
0.45
   
$
0.46
   
$
(0.36
)

The accompanying notes are an integral part of these unaudited consolidated financial statements.


 
 
 
 


TRINITY CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2011 and 2010
(Amounts in thousands)
(Unaudited)

   
Nine Months Ended September 30,
 
   
2011
   
2010
 
Cash Flows From Operating Activities
       
Net income (loss)
 
$
4,571
   
$
(708
)
Adjustments to reconcile net income to net cash provided by operating activities:
 
Depreciation and amortization
   
2,264
     
2,283
 
Net amortization of:
               
Mortgage servicing rights
   
1,124
     
1,280
 
Other intangible assets
   
489
     
347
 
Premium and discounts on investment securities, net
   
1,257
     
641
 
Junior subordinated debt owed to unconsolidated trusts issuance costs
   
10
     
10
 
Provision for loan losses
   
4,879
     
15,858
 
Change in mortgage servicing rights valuation allowance
   
1,488
     
1,307
 
Loss on disposal of premises and equipment
   
-
     
9
 
Net (gain) on sale of investment securities
   
(1,057
)
   
(47
)
Federal Home Loan Bank (FHLB) stock dividends received
   
(7
)
   
(7
)
Loss on venture capital investments
   
457
     
99
 
Net gain on sale of loans
   
(2,339
)
   
(3,068
)
Loss on disposal of other real estate owned
   
1,057
     
1,762
 
Write-down of value of other real estate owned
   
1,868
     
1,692
 
Decrease in other assets
   
8,712
     
238
 
(Decrease) in other liabilities
   
(1,615
)
   
(1,139
)
Stock options and stock appreciation rights expenses
   
58
     
109
 
Net cash provided by operating activities before originations and gross sales of loans held for sale
   
23,216
     
20,666
 
Gross sales of loans held for sale
   
94,525
     
128,261
 
Origination of loans held for sale
   
(89,116
)
   
(135,106
)
Net cash provided by operating activities
   
28,625
     
13,821
 

(Continued on following page)


 
 
 
 


TRINITY CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2011 and 2010
(Amounts in thousands)
(Unaudited)
(Continued from prior page)

   
Nine Months Ended September 30,
 
   
2011
   
2010
 
Cash Flows From Investing Activities
       
Proceeds from maturities and paydowns of investment securities, available for sale
 
$
75,469
   
$
101,830
 
Proceeds from maturities and paydowns of investment securities, held to maturity
   
245
     
248
 
Proceeds from maturities and paydowns of investment securities, other
   
470
     
171
 
Proceeds from sale of investment securities, available for sale
   
20,507
     
3,422
 
Purchase of investment securities, available for sale
   
(70,958
)
   
(119,769
)
Purchase of investment securities, other
   
(577
)
   
(392
)
Proceeds from sale of other real estate owned
   
1,380
     
13,497
 
Loans funded, net of repayments
   
1,145
     
20,512
 
Purchases of loans
   
(1,914
)
   
-
 
Purchases of premises and equipment
   
(1,258
)
   
(932
)
Net cash provided by investing activities
   
24,509
     
18,587
 
Cash Flows From Financing Activities
         
Net (decrease) in demand deposits, NOW accounts and savings accounts
   
(16,695
)
   
(22,801
)
Net (decrease) in time deposits
   
(64,519
)
   
(47,742
)
Proceeds from issuances of borrowings
   
-
     
20,000
 
Repayment of borrowings
   
(1,152
)
   
(20,030
)
Purchase of treasury stock
   
-
     
(8
)
Issuance of common stock for stock option plan
   
-
     
134
 
Common shares dividend payments
   
-
     
(1,739
)
Preferred shares dividend payments
   
(2,460
)
   
(970
)
Net cash (used in)  financing activities
   
(84,826
)
   
(73,156
)
Net (decrease) in cash and cash equivalents
   
(31,692
)
   
(40,748
)
Cash and cash equivalents:
               
Beginning of period
   
106,191
     
207,495
 
End of period
 
$
74,499
   
$
166,747
 
                 
Supplemental Disclosures of Cash Flow Information
 
Cash payments for:
               
Interest
 
$
12,345
   
$
13,797
 
Income taxes
 
$
810
   
$
510
 
Non-cash investing and financing activities:
 
Transfers from loans to other real estate owned
 
$
6,886
   
$
19,868
 
Transfers from loans to repossessed assets
 
$
1,279
   
$
-
 
Sales of other real estate owned financed by loans
 
$
9,543
   
$
-
 
Dividends declared, not yet paid
 
$
887
   
$
730
 
Change in unrealized gain on investment securities, net of taxes
 
$
(797
)
 
$
538
 

The accompanying notes are an integral part of these unaudited consolidated financial statements.


 
 
 
 


TRINITY CAPITAL CORPORATION & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
Note 1. Basis of Presentation
 
The accompanying unaudited consolidated financial statements include the consolidated balances and results of operations of Trinity Capital Corporation (“Trinity”) and its wholly owned subsidiaries: Los Alamos National Bank (the “Bank”), Title Guaranty & Insurance Company (“Title Guaranty”), TCC Advisors Corporation (“TCC Advisors”) and TCC Funds, collectively referred to as the “Company.”  Trinity Capital Trust I (“Trust I”), Trinity Capital Trust III (“Trust III”), Trinity Capital Trust IV (“Trust IV”) and Trinity Capital Trust V (“Trust V”), collectively referred to as the “Trusts,” are trust subsidiaries of Trinity but are not consolidated in these financial statements (see consolidation accounting policy below).  The Bank holds a 24% interest in Cottonwood Technology Group, LLC (“Cottonwood”).  Cottonwood is owned by the Bank, the Los Alamos Commerce & Development Corporation and an individual not otherwise associated with Trinity or the Bank.  Cottonwood completed the initial close on a pre-seed and seed-stage investment fund in October 2009 and is focused on assisting new technologies, primarily those developed at New Mexico’s research and educational institutions, reaching the market by providing management advice and capital consulting.  The Bank’s full capital investment of $150 thousand was made in July 2009 and is reflected in these consolidated financial statements.  In October 2008, the Bank purchased the assets of Allocca & Brunett, Inc., an investment advisory company in Santa Fe, New Mexico.  In 2009, the Bank created Finance New Mexico Investment Fund IV, LLC (“FNM Investment Fund IV”) and is the only member. FNM Investment Fund IV was created to acquire a 99.99% interest in FNM Investor Series IV, LLC (“FNM Investor Series IV”), 0.01% interest in which is held by Finance New Mexico, a governmental instrumentality.  These entities were both created to enable the funding of loans to, and investments in, a New Market Tax Credit project.  The initial value of these tax credits was $1.9 million.  As of September 30, 2011 and December 31, 2010, the unamortized amount of the new market tax credit was $1.3 million and $1.5 million, respectively, and is included in “other investments” on the consolidated balance sheet.  The initial amount of the loan was $5.2 million.  As of September 30, 2011 and December 31, 2010, the current outstanding loan amount was $5.2 million and is included in “loans, net” on the consolidated balance sheet.  In April 2010, the Bank activated TCC Advisors as a business unit operating one of the Bank’s foreclosed properties, Santa Fe Equestrian Center, in Santa Fe, New Mexico.  The size of the initial investment was $322 thousand.  As of September 30, 2011, the total investment was $574 thousand and is included in “other investments” on the consolidated balance sheet.  In September of 2010, the Bank joined Southwest Medical Technologies, LLC (“SWMT”) as a 20% member.  Participation in this entity is part of the Bank's venture capital investments.  This entity is owned by the Bank (20%), Southwest Medical Ventures, Inc. (60%), and New Mexico Co-Investment Fund II, L.P. (20%).  SWMT is focused on assisting new medical and life science technologies identify investment and financing opportunities.  The Bank’s total capital investment is expected to be $250 thousand.  As of September 30, 2011, the investment in SWMT was $181 thousand and is included in “other investments” on the consolidated balance sheet. 
 
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 consolidated financial position, results of operations and cash flows for the interim periods have been made.  The results of operations for the three and nine months ended September 30, 2011, 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, 2010 audited financial statements in its Form 10-K, filed with the SEC on March 10, 2011.
 

 


The consolidated financial statements include the accounts of the Company.  The accounting and reporting policies of the Company conform to generally accepted accounting principles (“GAAP”) in the United States of America and general practices within the financial services industry.  In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the year.  Actual results could differ from those estimates.  Areas involving the use of management’s estimates and assumptions, and which are more susceptible to change in the near term, include the allowance for loan losses, valuation of other real estate owned, valuation of deferred tax assets and initial recording and subsequent valuation for impairment of mortgage servicing rights.
 
Certain items have been reclassified from prior period presentations in conformity with the current classification.  These reclassifications did not result in any changes to previously reported net income (loss) or stockholders’ equity.
 
Note 2. Comprehensive Income
 
Comprehensive income includes net income (loss), as well as the change in net unrealized gain (loss) on investment securities available for sale, net of tax.  Comprehensive income is presented in the following table:
 
   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2011
   
2010
   
2011
   
2010
 
   
(Unaudited; in thousands)
 
Net income (loss)
 
$
1,716
   
$
3,450
   
$
4,571
   
$
(708
)
Securities available for sale:
 
Net unrealized (losses) gains arising during the period
   
(736
)
   
494
     
(192
)
   
810
 
Related income tax benefit (expense)
   
152
     
(173
)
   
20
     
(221
)
Net securities gains reclassified into earnings
   
(861
)
   
-
     
(1,057
)
   
(47
)
Related income tax benefit
   
426
     
-
     
432
     
(4
)
Net effect on other comprehensive income (loss) for the period
   
(1,019
)
   
321
     
(797
)
   
538
 
Comprehensive income (loss)
 
$
697
   
$
3,771
   
$
3,774
   
$
(170
)

Note 3. Earnings (Loss) Per Share Data
 
The following table sets forth the computation of basic and diluted earnings (loss) per share for the periods indicated:
 
   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2011
   
2010
   
2011
   
2010
 
   
(In thousands, except share and per share data)
 
Net income (loss)
 
$
1,716
   
$
3,450
   
$
4,571
   
$
(708
)
Dividends and discount accretion on preferred shares
   
529
     
532
     
1,613
     
1,589
 
Net income (loss) available to common shareholders
 
$
1,187
   
$
2,918
   
$
2,958
   
$
(2,297
)
Weighted average common shares issued
   
6,856,800
     
6,856,800
     
6,856,800
     
6,856,800
 
LESS: Weighted average treasury stock shares
   
(407,074
)
   
(407,013
)
   
(407,074
)
   
(412,667
)
Weighted average common shares outstanding, net
   
6,449,726
     
6,449,787
     
6,449,726
     
6,444,133
 
Basic earnings (loss) per common share
 
$
0.19
   
$
0.45
   
$
0.46
   
$
(0.36
)
Weighted average common shares outstanding including dilutive shares
   
6,449,726
     
6,449,787
     
6,449,726
     
6,444,133
 
Diluted earnings (loss) per common share
 
$
0.19
   
$
0.45
   
$
0.46
   
$
(0.36
)



Certain stock options were not included in the above calculation, as these stock options would have an anti-dilutive effect as the exercise price is greater than current market price.  The total number of shares excluded was 304,000 and 412,500 as of September 30, 2011 and September 30, 2010, respectively.
 
Note 4. Recent Accounting Pronouncements and Regulatory Developments
 
ASU No. 2010-20, “Receivables (Topic 310) - Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.”  ASU 2010-20 requires entities to provide disclosures designed to facilitate financial statement users’ evaluation of (i) the nature of credit risk inherent in the entity’s portfolio of financing receivables, (ii) how that risk is analyzed and assessed in arriving at the allowance for credit losses and (iii) the changes and reasons for those changes in the allowance for credit losses.  Disclosures must be disaggregated by portfolio segment, the level at which an entity develops and documents a systematic method for determining its allowance for credit losses, and class of financing receivable, which is generally a disaggregation of portfolio segment.  The required disclosures include, among other things, a rollforward of the allowance for credit losses as well as information about modified, impaired, non-accrual and past due loans and credit quality indicators.  ASU 2010-20 became effective for the Company’s financial statements as of December 31, 2010, as it relates to disclosures required as of the end of a reporting period.  Disclosures that relate to activity during a reporting period became effective for the Corporation’s financial statements beginning on January 1, 2011.  ASU 2011-01, “Receivables (Topic 310) - Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20,” temporarily deferred the effective date for disclosures related to troubled debt restructurings to coincide with the effective date of the then proposed ASU 2011-02, “Receivables (Topic 310) - A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring,” which is further discussed below.
 
ASU No. 2011-02, “Receivables (Topic 310) - A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring.”  ASU 2011-02 clarifies which loan modifications constitute troubled debt restructurings and is intended to assist creditors in determining whether a modification of the terms of a receivable meets the criteria to be considered a troubled debt restructuring, both for purposes of recording an impairment loss and for disclosure of troubled debt restructurings.  In evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude, under the guidance clarified by ASU 2011-02, that both of the following exist: (a) the restructuring constitutes a concession; and (b) the debtor is experiencing financial difficulties.  ASU 2011-02 was effective for the Company on July 1, 2011, and applied retrospectively to restructurings occurring on or after January 1, 2011.  Adoption of ASU 2011-02 did not have a significant impact on the Company’s financial statements.
 
ASU No. 2011-03, “Transfers and Servicing (Topic 860) - Reconsideration of Effective Control for Repurchase Agreements.”  ASU 2011-03 is intended to improve financial reporting of repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity.  ASU 2011-03 removes from the assessment of effective control (i) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (ii) the collateral maintenance guidance related to that criterion.  ASU 2011-03 will be effective for the Company on January 1, 2012 and is not expected to have a significant impact on the Company’s financial statements.
 
ASU 2011-04, “Fair Value Measurement (Topic 820) - Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRSs.”  ASU 2011-04 amends Topic 820, “Fair Value Measurements and Disclosures,” to converge the fair value measurement guidance in U.S. generally accepted accounting principles and International Financial Reporting Standards.  ASU 2011-04 clarifies the application of existing fair value measurement requirements, changes certain principles in Topic 820 and requires additional fair value disclosures.  ASU 2011-04 is effective for annual periods beginning after December 15, 2011, and is not expected to have a significant impact on the Company’s financial statements.
 


ASU 2011-05, “Comprehensive Income (Topic 220) - Presentation of Comprehensive Income.”  ASU 2011-05 amends Topic 220, “Comprehensive Income,” to require that all non-owner changes in stockholders’ equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements.  Additionally, ASU 2011-05 requires entities to present, on the face of the financial statements, reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement or statements where the components of net income and the components of other comprehensive income are presented.  The option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity was eliminated.  ASU 2011-05 is effective for annual periods beginning after December 15, 2011, and is not expected to have a significant impact on the Company’s financial statements.
 
Note 5. Investment Securities
 
Amortized cost and fair values of investment securities are summarized as follows:
 

AVAILABLE FOR SALE
 
Amortized Cost
   
Gross Unrealized Gains
   
Gross Unrealized Losses
   
Fair Value
 
   
(In thousands)
 
September 30, 2011
                       
U.S. Government sponsored agencies
 
$
59,097
   
$
283
   
$
(46
)
 
$
59,334
 
States and political subdivisions
   
5,971
     
83
     
-
     
6,054
 
Residential mortgage-backed securities
   
71,218
     
356
     
(840
)
   
70,734
 
Totals
 
$
136,286
   
$
722
   
$
(886
)
 
$
136,122
 
                                 
December 31, 2010
                               
U.S. Government sponsored agencies
 
$
42,551
   
$
184
   
$
-
   
$
42,735
 
States and political subdivisions
   
20,263
     
402
     
(81
)
   
20,584
 
Residential mortgage-backed securities
   
98,692
     
1,194
     
(614
)
   
99,272
 
Totals
 
$
161,506
   
$
1,780
   
$
(695
)
 
$
162,591
 

 
HELD TO MATURITY
 
Amortized Cost
   
Gross Unrealized Gains
   
Gross Unrealized Losses
   
Fair Value
 
   
(In thousands)
 
September 30, 2011
                       
States and political subdivisions
 
$
10,863
   
$
1,194
   
$
(196
)
 
$
11,861
 
Totals
 
$
10,863
   
$
1,194
   
$
(196
)
 
$
11,861
 
                                 
December 31, 2010
                               
States and political subdivisions
 
$
11,107
   
$
91
   
$
(247
)
 
$
10,951
 
Totals
 
$
11,107
   
$
91
   
$
(247
)
 
$
10,951
 


OTHER INVESTMENTS
 
Amortized Cost
   
Gross Unrealized Gains
   
Gross Unrealized Losses
   
Fair Value
 
   
(In thousands)
 
September 30, 2011
                       
Non-marketable equity securities (including FRB and FHLB stock)
 
$
7,876
   
$
-
   
$
-
   
$
7,876
 
Investment in unconsolidated trusts
   
1,116
     
-
     
-
     
1,116
 
Totals
 
$
8,992
   
$
-
   
$
-
   
$
8,992
 
                                 
December 31, 2010
                               
Non-marketable equity securities (including FRB and FHLB stock)
 
$
8,219
   
$
-
   
$
-
   
$
8,219
 
Investment in unconsolidated trusts
   
1,116
     
-
     
-
     
1,116
 
Totals
 
$
9,335
   
$
-
   
$
-
   
$
9,335
 
 
Realized net gains on sale of securities available for sale are summarized as follows:
 
   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2011
 
2010
 
2011
 
2010
 
   
(In thousands)
 
(In thousands)
 
Gross realized gains
 
$
862
   
$
-
   
$
1,064
   
$
47
 
Gross realized losses
   
(1
)
   
-
     
(7
)
   
-
 
Net gains
 
$
861
   
$
-
   
$
1,057
   
$
47
 

A summary of unrealized loss information for investment securities, categorized by security type, at September 30, 2011 and December 31, 2010, is as follows:
 
   
Less than 12 Months
   
12 Months or Longer
   
Total
 
AVAILABLE FOR SALE
 
Fair Value
   
Unrealized Losses
   
Fair Value
   
Unrealized Losses
   
Fair Value
   
Unrealized Losses
 
   
(In thousands)
 
September 30, 2011
                                   
U.S. Government sponsored agencies
 
$
15,956
   
$
(46
)
 
$
-
   
$
-
   
$
15,956
   
$
(46
)
Residential mortgage-backed securities
   
35,853
     
(736
)
   
7,677
     
(104
)
   
43,530
     
(840
)
Totals
 
$
51,809
   
$
(782
)
 
$
7,677
   
$
(104
)
 
$
59,486
   
$
(886
)
                                                 
December 31, 2010
                                               
States and political subdivisions
 
3,682
   
(81
)
 
-
   
-
   
3,682
   
(81
)
Residential mortgage-backed securities
   
38,796
     
(614
)
   
-
     
-
     
38,796
     
(614
)
Totals
 
$
42,478
   
$
(695
)
 
$
-
   
$
-
   
$
42,478
   
$
(695
)



   
Less than 12 Months
   
12 Months or Longer
   
Total
 
HELD TO MATURITY
 
Fair Value
   
Unrealized Losses
   
Fair Value
   
Unrealized Losses
   
Fair Value
   
Unrealized Losses
 
   
(In thousands)
 
September 30, 2011
                                   
States and political subdivisions
 
$
-
   
$
-
   
$
1,222
   
$
(196
)
 
$
1,222
   
$
(196
)
Totals
 
$
-
   
$
-
   
$
1,222
   
$
(196
)
 
$
1,222
   
$
(196
)
                                                 
December 31, 2010
                                               
States and political subdivisions
 
$
-
   
$
-
   
$
1,089
   
$
(247
)
 
$
1,089
   
$
(247
)
Totals
 
$
-
   
$
-
   
$
1,089
   
$
(247
)
 
$
1,089
   
$
(247
)

At September 30, 2011, $61.8 million in amortized cost of debt securities (representing a total of 50 different securities) had unrealized losses with aggregate depreciation of 1.8% of the Company’s amortized cost basis.  Of these securities, $9.2 million (representing 15 securities) had a continuous unrealized loss position for twelve months or longer with an aggregate depreciation of 3.3%.  The unrealized losses relate principally to the general change in interest rates and illiquidity, and not credit quality, that has occurred since the securities purchase dates, and such unrecognized losses or gains will continue to vary with general interest rate level fluctuations in the future.  As management does not intend to sell the securities, and it is unlikely that the Company will be required to sell the securities before their anticipated recovery, no declines are deemed to be other-than-temporary.
 
The amortized cost and fair value of investment securities, as of September 30, 2011, by contractual maturity are shown below.  Maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties.
 
   
Available for Sale
   
Held to Maturity
   
Other Investments
 
   
Amortized Cost
   
Fair Value
   
Amortized Cost
   
Fair Value
   
Amortized Cost
   
Fair Value
 
   
(In thousands)
 
One year or less
 
$
7,265
   
$
7,290
   
$
-
   
$
-
   
$
150
   
$
150
 
One to five years
   
63,759
     
64,034
     
-
     
-
     
-
     
-
 
Five to ten years
   
13,808
     
13,772
     
1,222
     
1,026
     
-
     
-
 
Over ten years
   
51,454
     
51,026
     
9,641
     
10,835
     
1,116
     
1,116
 
Equity investments with no stated maturity
   
-
     
-
     
-
     
-
     
7,726
     
7,726
 
   
$
136,286
   
$
136,122
   
$
10,863
   
$
11,861
   
$
8,992
   
$
8,992
 

Securities with carrying amounts of $21.7 million and $36.9 million at September 30, 2011 and December 31, 2010, respectively, were pledged as collateral on public deposits and for other purposes as required or permitted by law.
 


Note 6. Loans
 
Loans consisted of:

   
At September 30, 2011
   
At December 31, 2010
 
   
(In thousands)
 
Commercial
 
$
143,715
   
$
149,987
 
Commercial real estate
   
439,111
     
425,172
 
Residential real estate
   
390,504
     
400,713
 
Construction real estate
   
155,812
     
164,721
 
Installment and other
   
58,821
     
51,632
 
Total loans
   
1,187,963
     
1,192,225
 
Unearned income
   
(2,302
)
   
(2,287
)
Gross loans
   
1,185,661
     
1,189,938
 
Allowance for loan losses
   
(27,177
)
   
(28,722
)
Net loans
 
$
1,158,484
   
$
1,161,216
 

Loan Origination/Risk Management. The Company has certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk.  Management and the board of directors reviews and approves these policies and procedures on a regular basis.  A reporting system supplements the review process by providing management with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies and non-performing and potential problem loans.
 
Commercial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and prudently expand its business.  Underwriting standards are designed to promote relationship banking rather than transactional banking.  Once it is determined that the borrower’s management possesses sound ethics and solid business acumen, the Company’s management examines current and projected cash flows to determine the ability of the borrower to repay their obligations as agreed.  Commercial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower.  The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value.  Most commercial and industrial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis.  In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.
 
Commercial real estate loans are subject to underwriting standards and processes similar to commercial non-real estate loans, in addition to those of other real estate loans.  These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate.  Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally largely dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan.  Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy.  The properties securing the Company’s commercial real estate portfolio are geographically concentrated in the markets in which the Company operates.  Management monitors and evaluates commercial real estate loans based on collateral, location and risk grade criteria.  The Company also utilizes third-party sources to provide insight and guidance about economic conditions and trends affecting market areas it serves.  In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans.  At September 30, 2011 and December 31, 2010, approximately 28.0% and 29.3%, respectively, of the outstanding principal balance of the Company’s commercial real estate loans were secured by owner-occupied properties.
 


With respect to loans to developers and builders that are secured by non-owner occupied properties that the Company may originate from time to time, the Company generally requires the borrower to have had an existing relationship with the Company and have a proven record of success.  Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analysis of absorption and lease rates and financial analysis of the developers and property owners.  Construction loans are generally based upon estimates of costs and value associated with the complete project.  These estimates may be inaccurate.  Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project.  Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained.  These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing.
 
The Company originates consumer loans utilizing a credit scoring analysis to supplement the underwriting process.  To monitor and manage consumer loan risk, policies and procedures are developed and modified, as needed, jointly by line and staff personnel.  This activity, coupled with relatively small loan amounts that are spread across many individual borrowers, minimizes risk.  Additionally, trend and outlook reports are reviewed by management on a regular basis.  Underwriting standards for residential real estate and home equity loans are heavily influenced by statutory requirements, which include, but are not limited to, maximum loan-to-value levels, debt-to-income levels, collection remedies, the number of such loans a borrower can have at one time and documentation requirements.
 
The Company maintains an independent loan review department that reviews and validates the credit risk program on a periodic basis.  Results of these reviews are presented to management.  The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Company’s policies and procedures.  In addition, the Company utilizes a third-party to periodically review loans to supplement the Company’s internal review process.
 
Non-performing Loans. Non-performing loans include (i) loans accounted for on a non-accrual basis and (ii) accruing loans contractually past due 90 days or more as to interest and principal.  Management reviews the loan portfolio for problem loans on an ongoing basis.  During the ordinary course of business, management may become aware of borrowers who may not be able to meet the contractual requirements of loan agreements.  Such loans are placed under close supervision with consideration given to placing the loan on a non-accrual status, increasing the allowance for loan losses, and (if appropriate) partial or full charge-off.  After a loan is placed on non-accrual status, any interest previously accrued, but not yet collected, is reversed against current income.  When payments are received on non-accrual loans, such payments will be applied to principal and any interest portion included in the payments are not included in income, but rather are applied to the principal balance of the loan.  Loans will not be placed back on accrual status unless all back interest and principal payments are made.  Our policy is to place loans 90 days past due on non-accrual status.  An exception is made when management believes a loan is well secured and in the process of collection.
 
There were no changes made in the Bank’s credit policy during the third quarter of 2011.
 

 
 
 
 


The following table presents the contractual aging of the recorded investment in current and past due loans by class of loans as of September 30, 2011 and December 31, 2010, including non-performing loans:
 
   
Current
 
30-59 Days
Past Due
 
60-89 Days
Past Due
 
Loans past due 90
days or more
 
Total
Past Due
 
Total
 
September 30, 2011:
 
(In thousands)
 
Commercial
 
$
141,287
   
$
-
   
$
-
   
$
2,428
   
$
2,428
   
$
143,715
 
Commercial real estate
   
417,642
     
-
     
-
     
21,469
     
21,469
     
439,111
 
Residential real estate
   
377,828
     
2,251
     
16
     
10,409
     
12,676
     
390,504
 
Construction real estate
   
136,658
     
1,528
     
269
     
17,357
     
19,154
     
155,812
 
Installment and other
   
55,328
     
252
     
62
     
3,179
     
3,493
     
58,821
 
Total loans
 
$
1,128,743
   
$
4,031
   
$
347
   
$
54,842
   
$
59,220
   
$
1,187,963
 
                                                 
Nonperforming loan classification
 
$
3,558
   
$
491
   
$
16
   
$
54,842
   
$
55,349
   
$
58,907
 
                                                 
December 31, 2010:
 
Commercial
 
$
146,875
   
$
759
   
$
83
   
$
2,270
   
$
3,112
   
$
149,987
 
Commercial real estate
   
405,393
     
808
     
-
     
18,971
     
19,779
     
425,172
 
Residential real estate
   
388,898
     
2,422
     
1,038
     
8,355
     
11,815
     
400,713
 
Construction real estate
   
141,126
     
717
     
9,628
     
13,250
     
23,595
     
164,721
 
Installment and other
   
47,974
     
156
     
38
     
3,464
     
3,658
     
51,632
 
Total loans
 
$
1,130,266
   
$
4,862
   
$
10,787
   
$
46,310
   
$
61,959
   
$
1,192,225
 
                                                 
Nonperforming loan classification
 
$
1,772
   
$
600
   
$
1,286
   
$
46,310
   
$
48,196
   
$
49,968
 
 
The following table presents the recorded investment in nonaccrual loans and loans past due ninety days or more and still accruing by class of loans as of September 30, 2011 and December 31, 2010:
 
   
September 30, 2011
   
December 31, 2010
 
   
Nonaccrual
   
Loans past due 90 days or more and still accruing interest
   
Nonaccrual
   
Loans past due 90 days or more and still accruing interest
 
   
(In thousands)
 
Commercial
 
$
2,497
   
$
-
   
$
2,598
   
$
-
 
Commercial real estate
   
22,434
     
-
     
19,419
     
-
 
Residential real estate
   
12,231
     
-
     
10,951
     
-
 
Construction real estate
   
18,278
     
-
     
13,908
     
-
 
Installment and other
   
3,467
     
-
     
3,092
     
-
 
Total
 
$
58,907
   
$
-
   
$
49,968
   
$
-
 


 
 
 
 


The Company utilizes an internal asset classification system as a means of reporting problem and potential problem loans.  Under the Company’s risk rating system, the Company classifies problem and potential problem loans as “Special Mention,” “Substandard,” and “Doubtful”.  Substandard loans include those characterized by the distinct possibility that the Company will sustain some loss if credit deficiencies are not corrected.  Loans 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.  Loans that do not currently expose the Company to sufficient risk to warrant classification in one of the aforementioned categories, but possess weaknesses that deserve management’s close attention are deemed to be Special Mention.  Risk ratings are updated any time the situation warrants.
 
Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass-rated loans.  Loans listed as not rated are included in groups of homogeneous loans with similar risk and loss characteristics.  The following tables present the risk category of loans by class of loans based on the most recent analysis performed and the contractual aging as of September 30, 2011 and December 31, 2010:
 
   
Pass
 
Special
Mention
 
Substandard
 
Doubtful
 
Total
 
September 30, 2011:
 
(In thousands)
 
Commercial
 
$
138,226
   
$
276
   
$
5,213
   
$
-
   
$
143,715
 
Commercial real estate
   
398,767
     
2,399
     
37,945
     
-
     
439,111
 
Residential real estate
   
372,871
     
-
     
17,633
     
-
     
390,504
 
Construction real estate
   
122,772
     
11,126
     
21,914
     
-
     
155,812
 
Installment and other
   
55,129
     
-
     
3,692
     
-
     
58,821
 
Total
 
$
1,087,765
   
$
13,801
   
$
86,397
   
$
-
   
$
1,187,963
 
                                         
December 31, 2010:
 
Commercial
 
$
146,162
   
$
682
   
$
3,143
   
$
-
   
$
149,987
 
Commercial real estate
   
394,673
     
258
     
30,241
     
-
     
425,172
 
Residential real estate
   
387,636
     
151
     
12,926
     
-
     
400,713
 
Construction real estate
   
138,624
     
-
     
26,097
     
-
     
164,721
 
Installment and other
   
48,404
     
-
     
3,228
     
-
     
51,632
 
Total
 
$
1,115,499
   
$
1,091
   
$
75,635
   
$
-
   
$
1,192,225
 

The following table shows all loans, including non-performing loans, by classification and aging, as of September 30, 2011 and December 31, 2010:
 
   
Pass
 
Special Mention
 
Substandard
 
Doubtful
 
Total
 
September 30, 2011:
 
(In thousands)
 
Current
 
$
1,083,770
   
$
13,515
   
$
31,458
   
$
-
   
$
1,128,743
 
Past due 30-59 days
   
3,875
     
75
     
81
     
-
     
4,031
 
Past due 60-89 days
   
120
     
211
     
16
     
-
     
347
 
Past due 90 days or more
   
-
     
-
     
54,842
     
-
     
54,842
 
Total
 
$
1,087,765
   
$
13,801
   
$
86,397
   
$
-
   
$
1,187,963
 
                                         
December 31, 2010:
 
Current
 
$
1,111,092
   
$
1,091
   
$
18,083
   
$
-
   
$
1,130,266
 
Past due 30-59 days
   
3,903
     
-
     
959
     
-
     
4,862
 
Past due 60-89 days
   
504
     
-
     
10,283
     
-
     
10,787
 
Past due 90 days or more
   
-
     
-
     
46,310
     
-
     
46,310
 
Total
 
$
1,115,499
   
$
1,091
   
$
75,635
   
$
-
   
$
1,192,225
 

 

 
 
 
 


The following table presents loans individually evaluated for impairment by class of loans as of September 30, 2011 and December 31, 2010, showing the unpaid principal balance, the recorded investment of the loan (reflecting any loans with partial charge-offs), and the amount of allowance for loan losses specifically allocated for these impaired loans (if any):
 
   
September 30, 2011
 
December 31, 2010
 
   
Unpaid Principal Balance
 
Recorded Investment
 
Allowance for Loan Losses Allocated
 
Unpaid Principal Balance
 
Recorded Investment
 
Allowance for Loan Losses Allocated
 
   
(In thousands)
 
With no related allowance recorded:
 
Commercial
 
$
4,821
   
$
2,428
   
$
-
   
$
4,484
   
$
2,606
   
$
-
 
Commercial real estate
   
22,514
     
22,123
     
-
     
24,442
     
23,901
     
-
 
Residential real estate
   
13,648
     
12,425
     
-
     
12,381
     
11,734
     
-
 
Construction real estate
   
19,702
     
18,278
     
-
     
19,124
     
15,918
     
-
 
Installment and other
   
4,667
     
3,287
     
-
     
4,460
     
3,117
     
-
 
With an allowance recorded:
 
Commercial
   
2,908
     
1,819
     
57
     
479
     
479
     
15
 
Commercial real estate
   
673
     
603
     
58
     
380
     
380
     
45
 
Residential real estate
   
8,668
     
8,406