**UNITED STATES**

**SECURITIES ANDEXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

 

**FORM 10-Q**

 

 

**(Mark One)**

**ý****Quarterly Report Pursuant to Section 13or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended March31, 2005.**

**Or**

** **

**o****Transition Report Pursuant to Section13 or 15(d) of the Securities Exchange Act of 1934 for the transition periodfrom                                               to                                               **

 

Commission File Number **000-50266**

 

 

**TRINITY CAPITALCORPORATION**

(Exact name of registrant as specified in itscharter)

 

 

| **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** |
|-------------------------|
| Telephone number        |

 

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  Yes ý No o

 

Indicate by check mark whether the registrant is anaccelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of1934).  Yes ý No o

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

Indicate the number of shares outstanding of each of theissuer’s classes of common stock, as of the latest practicable date: 6,603,873 sharesof common stock, no par value, outstanding as of May 6, 2005.

 

----

 

**TRINITYCAPITAL CORPORATION AND SUBSIDIARIES**

 
| **PART I. FINANCIAL INFORMATION** |
|-----------------------------------|
|                              |   |
| Item 1.                           | Financial Statements |
|                              |   |
| Item  2.                          | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |
|                              |   |
| Item  3.                          | Quantitative  and Qualitative Disclosures About Market Risk |
|                              |   |
| Item  4.                          | Controls  and Procedures |
| ** **                        | ** ** |
| **PART II. OTHER INFORMATION**    |
|                              |   |
| Item  1.                          | Legal  Proceedings |
|                              |   |
| Item  2.                          | Unregistered  Sales of Equity Securities and Use of Proceeds |
|                              |   |
| Item  3.                          | Defaults  Upon Senior Securities |
|                              |   |
| Item  4.                          | Submission  of Matters to a Vote of Securities Holders |
|                              |   |
| Item  5.                          | Other  Information |
|                              |   |
| Item  6.                          | Exhibits |
|                              |   |
|                              | SIGNATURES |
|                              |   |
|                              | CERTIFICATIONS |

 

1

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**PART I****— FINANCIAL INFORMATION**

**Item 1****.  Financial Statements**

**TRINITY CAPITAL CORPORATION & SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

**March 31, 2005 and December 31, 2004**

** (Amounts in thousands,except share data)**

**(Unaudited)**

** **
| ** **                                                                                                                                                                                                                                                                                                                                 | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------|------------|------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                                                 | ** ** | **2005**      | ** ** | **2004**         | ** ** |
| **ASSETS**                                                                                                                                                                                                                                                                                                                                 | ** ** | ** **    | ** ** | ** **       | ** ** |
| Cash and due from banks                                                                                                                                                                                                                                                                                                                    |       | $             | 38,047     |             | $          | 23,678 |   |
| Interest bearing deposits with banks                                                                                                                                                                                                                                                                                                       |       | 23,208        |       | 96               |       |
| Federal funds sold and securities purchased under resell agreements                                                                                                                                                                                                                                                                        |       | 301           |       | 40               |       |
| **Cash and cash equivalents**                                                                                                                                                                                                                                                                                                              |       | 61,556        |       | 23,814           |       |
| Investment securities available for sale                                                                                                                                                                                                                                                                                                   |       | 41,786        |       | 44,105           |       |
| Investment securities held to maturity, at amortized cost (fair value  of $52,384 at March 31, 2005 and $61,883 at December 31, 2004)                                                                                                                                                                                            |       | 52,377        |       | 61,658           |       |
| Other investments                                                                                                                                                                                                                                                                                                                          |       | 7,321         |       | 7,480            |       |
| Loans (net of allowance for loan losses of $8,689 at March 31,  2005 and $8,367 at December 31, 2004)                                                                                                                                                                                                                            |       | 925,038       |       | 885,954          |       |
| Loans held for sale                                                                                                                                                                                                                                                                                                                        |       | 8,319         |       | 8,634            |       |
| Premises and equipment, net                                                                                                                                                                                                                                                                                                                |       | 24,774        |       | 25,450           |       |
| Accrued interest receivable                                                                                                                                                                                                                                                                                                                |       | 6,547         |       | 5,941            |       |
| Mortgage servicing rights, net                                                                                                                                                                                                                                                                                                             |       | 8,628         |       | 8,371            |       |
| Other real estate owned                                                                                                                                                                                                                                                                                                                    |       | 3,523         |       | 6,438            |       |
| Other assets                                                                                                                                                                                                                                                                                                                               |       | 3,019         |       | 2,548            |       |
| **Total assets**                                                                                                                                                                                                                                                                                                                           |       | $             | 1,142,888  |             | $          | 1,080,393 |   |
|                                                                                                                                                                                                                                                                                                                                       |       |          |       |             |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                                                                                                                              |       |          |       |             |       |
| Liabilities                                                                                                                                                                                                                                                                                                                                |       |          |       |             |       |
| Deposits:                                                                                                                                                                                                                                                                                                                                  |       |          |       |             |       |
| Noninterest bearing                                                                                                                                                                                                                                                                                                                        |       | $             | 72,929     |             | $          | 63,070 |   |
| Interest bearing                                                                                                                                                                                                                                                                                                                           |       | 889,160       |       | 817,511          |       |
| **Total deposits**                                                                                                                                                                                                                                                                                                                         |       | 962,089       |       | 880,581          |       |
| Short-term borrowings                                                                                                                                                                                                                                                                                                                      |       | —        |       | 34,400           |       |
| Long-term borrowings                                                                                                                                                                                                                                                                                                                       |       | 78,111        |       | 60,006           |       |
| Junior subordinated debt owed to unconsolidated trusts                                                                                                                                                                                                                                                                                     |       | 22,682        |       | 22,682           |       |
| Borrowings made by Employee Stock Ownership Plan (ESOP) to outside  parties                                                                                                                                                                                                                                                                |       | 1,214         |       | 1,686            |       |
| Accrued interest payable                                                                                                                                                                                                                                                                                                                   |       | 2,834         |       | 2,768            |       |
| Other liabilities                                                                                                                                                                                                                                                                                                                          |       | 4,138         |       | 5,314            |       |
| **Total liabilities**                                                                                                                                                                                                                                                                                                                      |       | 1,071,068     |       | 1,007,437        |       |
| Stock owned by Employee Stock Ownership Plan (ESOP) participants;  636,896 shares and 636,915 shares at March 31, 2005 and December  31, 2004, respectively, at fair value; net of unearned ESOP shares of  73,347 shares and 98,318 shares at March 31, 2005 and December 31,  2004, respectively, at historical cost |       | 16,981        |       | 18,078           |       |
| Commitments and contingencies (Note 8)                                                                                                                                                                                                                                                                                                     |       |          |       |             |       |
| Stockholders’ equity                                                                                                                                                                                                                                                                                                                  |       |          |       |             |       |
| Common stock, no par, authorized 20,000,000 shares; issued  6,856,800 shares, shares outstanding 6,603,873 and 6,732,748 at March  31, 2005 and December 31, 2004, respectively                                                                                                                                                  |       | 6,836         |       | 6,836            |       |
| Additional paid-in capital                                                                                                                                                                                                                                                                                                                 |       | 1,172         |       | 997              |       |
| Retained earnings                                                                                                                                                                                                                                                                                                                          |       | 51,746        |       | 47,849           |       |
| Accumulated other comprehensive loss                                                                                                                                                                                                                                                                                                       |       | (311          | )          | (200             | )          |
| Total stockholders’ equity before treasury stock                                                                                                                                                                                                                                                                                      |       | 59,443        |       | 55,482           |       |
| Treasury stock, at cost, 179,580 shares and 25,734 shares at  March 31, 2005 and December 31, 2004, respectively                                                                                                                                                                                                                      |       | (4,604        | )          | (604             | )          |
| **Total stockholders’ equity**                                                                                                                                                                                                                                                                                                        |       | 54,839        |       | 54,878           |       |
| **Total liabilities and stockholders’ equity**                                                                                                                                                                                                                                                                                        |       | $             | 1,142,888  |             | $          | 1,080,393 |   |
|                                                                                                                                                                                                                                                                                                                                       |       |          |       |             |       |

Theaccompanying notes are an integral part of these unaudited consolidatedfinancial statements.

 

2

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**TRINITY CAPITAL CORPORATION & SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF INCOME**

**For the Three Months Ended March 31, 2005 and 2004**

**(Amounts in thousands except share and per share data)**

**(Unaudited)**

 
| ** **                                               | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------------------|------------|------------------------|------------|
| ** **                                               | ** ** | **March 31, 2005**     | ** ** | **March 31, 2004** | ** ** |
| ** **                                               | ** ** | ** **             | ** ** | ** ** | ** ** |
| Interest income:                                         |       |                   |       |   |   |
| Loans, including fees                                    |       | $                      | 14,222     |   | $ | 11,938 |   |
| Investment securities:                                   |       |                   |       |   |   |
| Taxable                                                  |       | 656                    |       | 973 |   |
| Nontaxable                                               |       | 180                    |       | 158 |   |
| Federal funds sold and repurchase agreements             |       | 4                      |       | — |   |
| Other interest bearing deposits                          |       | 20                     |       | 6 |   |
| Investment in unconsolidated trusts                      |       | 16                     |       | 13 |   |
| **Total interest income**                                |       | 15,098                 |       | 13,088 |   |
| Interest expense:                                        |       |                   |       |   |   |
| Deposits                                                 |       | 3,981                  |       | 2,968 |   |
| Short-term borrowings                                    |       | 102                    |       | 67 |   |
| Long-term borrowings                                     |       | 577                    |       | 607 |   |
| Junior subordinated debt owed to unconsolidated trusts   |       | 519                    |       | 439 |   |
| **Total interest expense**                               |       | 5,179                  |       | 4,081 |   |
| **Net interest income**                                  |       | 9,919                  |       | 9,007 |   |
| Provision for loan losses                                |       | 525                    |       | 600 |   |
| **Net interest income after provision for loan  losses** |       | 9,394                  |       | 8,407 |   |
| Other income:                                            |       |                   |       |   |   |
| Mortgage loan servicing fees                             |       | 602                    |       | 574 |   |
| Loan and other fees                                      |       | 588                    |       | 557 |   |
| Service charges on deposits                              |       | 331                    |       | 331 |   |
| Gain on sale of loans                                    |       | 463                    |       | 1,016 |   |
| Gain on sale of securities                               |       | —                 |       | 272 |   |
| Other operating income                                   |       | 76                     |       | 267 |   |
|                                                     |       | 2,060                  |       | 3,017 |   |
| Other expenses:                                          |       |                   |       |   |   |
| Salaries and employee benefits                           |       | 4,058                  |       | 3,853 |   |
| Occupancy                                                |       | 799                    |       | 494 |   |
| Data processing                                          |       | 490                    |       | 435 |   |
| Marketing                                                |       | 324                    |       | 226 |   |
| Amortization and valuation of mortgage servicing rights  |       | 130                    |       | 987 |   |
| Supplies                                                 |       | 209                    |       | 172 |   |
| Other                                                    |       | 1,648                  |       | 1,362 |   |
|                                                     |       | 7,658                  |       | 7,529 |   |
| **Income before income taxes**                           |       | 3,796                  |       | 3,895 |   |
| Income taxes                                             |       | 1,428                  |       | 1,445 |   |
| **Net income**                                           |       | $                      | 2,368      |   | $ | 2,450 |   |
| Basic earnings per common share                          |       | $                      | 0.35       |   | $ | 0.36 |   |
| Diluted earnings per common share                        |       | $                      | 0.35       |   | $ | 0.36 |   |

 

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

 

3

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** TRINITY CAPITALCORPORATION & SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**For the Three Months Ended March 31, 2005 and 2004**

**(Amounts in thousands)**

**(Unaudited)**

 
| ** **                                                                                   | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                   | ** ** | **March 31,**          | ** ** | **March 31,** | ** ** |
| ** **                                                                                   | ** ** | **2005**               | ** ** | **2004** | ** ** |
| ** **                                                                                   | ** ** | ** **             | ** ** | ** ** | ** ** |
| Cash Flows From Operating Activities                                                         |       |                   |       |   |   |
| Net income                                                                                   |       | $                      | 2,368      |   | $ | 2,450 |   |
| Adjustments to reconcile net income to net cash provided by (used in)  operating activities: |       |                   |       |   |   |
| Depreciation and amortization                                                                |       | 631                    |       | 527 |   |
| Net amortization of:                                                                         |       |                   |       |   |   |
| Mortgage servicing rights                                                                    |       | 694                    |       | 624 |   |
| Premiums and discounts on investment securities                                              |       | 293                    |       | 387 |   |
| Junior subordinated debt owed to unconsolidated trusts issuance costs                        |       | 5                      |       | 4 |   |
| Provision for loan losses                                                                    |       | 525                    |       | 600 |   |
| Change in mortgage servicing rights valuation allowance                                      |       | (564                   | )          | 364 |   |
| Loss on sale or disposal of premises and equipment                                           |       | 143                    |       | — |   |
| Gain on sale of available for sale securities                                                |       | —                 |       | (272 | ) |
| Federal Home Loan Bank (FHLB) stock dividends received                                       |       | (41                    | )          | (20 | ) |
| Gain on sale of loans                                                                        |       | (463                   | )          | (1,016 | ) |
| Loss on disposal of other real estate owned                                                  |       | 211                    |       | 159 |   |
| Write-down of value of other real estate owned                                               |       | 307                    |       | — |   |
| (Increase) decrease in other assets                                                          |       | (1,082                 | )          | 1,600 |   |
| Increase (decrease) in other liabilities                                                     |       | 1,005                  |       | (2,008 | ) |
| Release of Employee Stock Ownership Plan (ESOP) shares                                       |       | 606                    |       | 587 |   |
| **Net cash provided by operating activities before  originations and gross sales of loans**  |       | 4,638                  |       | 3,986 |   |
| Gross sales of loans held for sale                                                           |       | 38,581                 |       | 61,980 |   |
| Origination of loans held for sale                                                           |       | (38,190                | )          | (68,480 | ) |
| **Net cash provided by (used in) provided by  operating activities**                         |       | 5,029                  |       | (2,514 | ) |
| Cash Flows From Investing Activities                                                         |       |                   |       |   |   |
| Proceeds from maturities and paydowns of investment securities  available for sale           |       | 2,025                  |       | 19,585 |   |
| Proceeds from maturities and paydowns of investment securities held  to maturity             |       | 9,106                  |       | 26 |   |
| Proceeds from maturities and paydowns of investment securities, other                        |       | 325                    |       | — |   |
| Proceeds from sale of investment securities, available for sale                              |       | —                 |       | 28,388 |   |
| Purchase of investment securities available for sale                                         |       | —                 |       | (1,620 | ) |
| Purchase of investment securities held to maturity                                           |       | —                 |       | — |   |
| Purchase of investment securities, other                                                     |       | (125                   | )          | — |   |
| Proceeds from sale of other real estate owned                                                |       | 2,872                  |       | 1,505 |   |
| Loans funded, net of repayments                                                              |       | (40,084                | )          | (30,038 | ) |
| Purchases of premises and equipment                                                          |       | (198                   | )          | (2,528 | ) |
| Proceeds from sale of premises and equipment                                                 |       | 100                    |       | — |   |
| **Net cash provided by (used in) investing  activities**                                     |       | (25,979                | )          | 15,318 |   |
| Cash Flows From Financing Activities                                                         |       |                   |       |   |   |
| Net increase in demand deposits, NOW accounts and savings accounts                           |       | 33,558                 |       | 9,673 |   |
| Net increase (decrease) in time deposits                                                     |       | 47,950                 |       | (3,153 | ) |
| Proceeds from issuances of borrowings                                                        |       | 20,000                 |       | 83,600 |   |
| Repayment of borrowings                                                                      |       | (36,295                | )          | (89,818 | ) |
| Repayment of ESOP debt                                                                       |       | (472                   | )          | (471 | ) |
| Purchase of treasury stock                                                                   |       | (4,000                 | )          | — |   |
| Dividend payments                                                                            |       | (2,049                 | )          | (2,048 | ) |
| **Net cash provided by (used in) provided by  financing activities**                         |       | 58,692                 |       | (2,217 | ) |
| **Net increase in cash and cash equivalents**                                                |       | $                      | 37,742     |   | $ | 10,587 |   |
| Cash and cash equivalents:                                                                   |       |                   |       |   |   |
| Beginning of year                                                                            |       | 23,814                 |       | 43,111 |   |
| End of period                                                                                |       | $                      | 61,556     |   | $ | 53,698 |   |
| Supplemental Disclosures of Cash Flow Information                                            |       |                   |       |   |   |
| Cash payments (receipts) for:                                                                |       |                   |       |   |   |
| Interest                                                                                     |       | $                      | 5,113      |   | $ | 4,419 |   |
| Income taxes                                                                                 |       | 404                    |       | (230 | ) |
| Non-cash investing and financing activities:                                                 |       |                   |       |   |   |
| Transfers from loans to other real estate owned                                              |       | 475                    |       | 1,124 |   |
| Change in unrealized (loss) gain on investment securities, net of  taxes                     |       | (111                   | )          | 12 |   |

 

Theaccompanying notes are an integral part of these unaudited consolidated financialstatements.

 

4

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**TRINITY CAPITAL CORPORATION & SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

** (Unaudited)**

 

**Note 1.  Basis of Presentation**

 

                Theaccompanying unaudited consolidated financial statements include theconsolidated balances and results of operations of Trinity Capital Corporation(“Trinity” or the “Company”) and its wholly owned subsidiaries: Los AlamosNational Bank (the “Bank”) and Title Guaranty & Insurance Company (“TitleGuaranty”), collectively referred to as the “Company.”  Trinity Capital Trust I (“Trust I”),Trinity Capital Trust II (“Trust II”) and Trinity Capital Trust III (“TrustIII”), collectively referred to as the “Trusts”, which are also wholly ownedsubsidiaries of Trinity, are not consolidated in these financial statements(see “Consolidation” accounting policy below.) The business activities of the Company consist solely of the operationsof its wholly owned subsidiaries.  Allsignificant intercompany balances and transactions have been eliminated inconsolidation.  In the opinion ofmanagement, all adjustments (consisting only of normal recurring adjustments)necessary for a fair presentation of the financial position, results ofoperations and cash flows for the interim periods have been made.  The results of operations for the threemonths ended March 31, 2005 are not necessarily indicative of the results to beexpected for the entire fiscal year.

 

                Theunaudited interim financial statements have been prepared in conformity withaccounting principles generally accepted in the United States of America andindustry practice.  Certain informationin footnote disclosures normally included in financial statements prepared inaccordance with accounting principles generally accepted in the United Statesof America and industry practice has been condensed or omitted pursuant torules and regulations of the Securities and Exchange Commission.  These financial statements should be read inconjunction with the consolidated financial statements and notes theretoincluded in the Company’s December 31, 2004 audited financial statements filedon Form 10-K.

 

                Thepreparation of financial statements in conformity with accounting principalsgenerally accepted in the United States of America requires management to makeestimates and assumptions which affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities as of the dateof the financial statements, as well as the reported amounts of income andexpenses during the reported periods. Actual results could differ from those estimates.

 

**Note 2.  Comprehensive Income**

 

                Comprehensiveincome includes net income, as well as the change in net unrealized (loss) gainon investment securities available for sale, net of tax.  Comprehensive income was $2.3 million and $2.5million for the three month periods ended March 31, 2005 and 2004, respectively.

 

**Note 3.  Earnings Per Share Data**

 

                Thefollowing table sets forth the computation of basic and diluted earnings pershare for the periods indicated:

 
| ** **                                                                         | ** ** | **Three Months Ended March 31,**                                    | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2005**                                                            | ** ** | **2004** | ** ** |
| ** **                                                                         | ** ** | **(Unaudited; In thousands except   for share and per share data)** | ** ** |
| Net income                                                                         |       | $                                                                   | 2,368      |   | $ | 2,450 |   |
| Weighted average common shares issued                                              |       | 6,856,800                                                           |       | 6,856,800 |   |
| LESS: Weighted average treasury stock shares                                       |       | (99,238                                                             | )          | (29,128 | ) |
| LESS: Weighted average unearned Employee Stock Ownership Plan (ESOP)  stock shares |       | (78,619                                                             | )          | (105,270 | ) |
| Weighted average common shares outstanding, net                                    |       | 6,678,943                                                           |       | 6,722,402 |   |
| Basic earnings per common share                                                    |       | $                                                                   | 0.35       |   | $ | 0.36 |   |
| Weighted average dilutive shares from stock option plan                            |       | 98,879                                                              |       | 117,782 |   |
| Weighted average common shares outstanding including dilutive shares               |       | 6,777,822                                                           |       | 6,840,184 |   |
| Diluted earnings per common share                                                  |       | $                                                                   | 0.35       |   | $ | 0.36 |   |

 

5

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**Note 4.  Recent Accounting Pronouncements andRegulatory Developments**

 

                In September 2004, the FASBissued FASB Staff Position (FSP) Emerging Issues Task Force (EITF) IssueNo. 03-1-1 delaying the effective date of paragraphs 10-20 of EITF 03-1, *The Meaning of Other-Than-Temporary Impairment and Its Application toCertain Investments*, which provides guidance for determining themeaning of “other-than-temporarily impaired” and its application to certaindebt and equity securities within the scope of SFAS No. 115, *Accounting for Certain Investments in Debt and Equity Securities*,and investments accounted for under the cost method.  The guidance requires that investments whichhave declined in value due to credit concerns or solely due to changes ininterest rates must be recorded as other-than-temporarily impaired unless theCompany can assert and demonstrate its intention to hold the security for aperiod of time sufficient to allow for a recovery of fair value up to or beyondthe cost of the investment which might mean maturity.  The delay of the effective date of EITF 03-1will be superseded concurrent with the final issuance of proposed FSP Issue03-1-a. Proposed FSP Issue 03-1-a is intended to provide implementationguidance with respect to all securities analyzed for impairment underparagraphs 10-20 of EITF 03-1. Management continues to closely monitor and evaluate how the provisionsof EITF 03-1 and proposed FSP Issue 03-1-a will affect the Company.

 

                InDecember 2004, the FASB issued SFAS No. 123R,*Share-BasedPayment*, which is an Amendment of FASB Statement Nos. 123 and95.  SFAS No. 123R changes, among otherthings, the manner in which share-based compensation, such as stock options,will be accounted for by both public and non-public companies.  For public companies, the cost of employee servicesreceived in exchange for equity instruments including options and restrictedstock awards generally will be measured at fair value at the grant date.  The grant date fair value will be estimatedusing option-pricing models adjusted for the unique characteristics of thoseoptions and instruments, unless observable market prices for the same orsimilar options are available.  The costwill be recognized over the requisite service period, often the vesting period,and will be remeasured at each reporting date through settlement date.

 

            The changes in accounting willreplace existing requirements under SFAS No. 123, *Accountingfor Stock-Based Compensation*, and will eliminate the ability toaccount for share-based compensation transactions using APB OpinionNo. 25, *Accounting for Stock Issued to Employees*,which does not require companies to expense options if the exercise price isequal to the trading price at the date of grant.  The accounting for similar transactionsinvolving parties other than employees or the accounting for employee stock ownershipplans that are subject to AICPA Statement of Position 93-6, *Employers’ Accounting for Employee Stock Ownership Plans*,would remain unchanged.

 

            On April 14, 2005, the Securitiesand Exchange Commission (SEC) announced the adoption of a new rule that amendsthe compliance dates for SFAS No. 123R. Under SFAS No. 123R, the Company would have been required to implementthe standard as of the beginning of the first interim period that begins afterJune 15, 2005.  The SEC’s new rule allowscompanies to implement SFAS No. 123R at the beginning of their next fiscalyear, instead of the next reporting period, that begins after June 15,2005.  The SEC’s new rule does not changethe accounting required by SFAS No. 123R; it changes only the dates forcompliance with the standard.

###### ** **

 

 

**Note 5.  Short TermBorrowings**

 

                TheCompany had no borrowings with maturities of less than one year as of March 31,2005.  As of December 31, 2004, theCompany had Federal Home Loan Bank advances with maturities of less than one yearof $34.4 million.

 

**Note 6.  Long TermBorrowings**

 

                The Company had Federal Home Loan Bank advances withmaturity dates greater than one year of $78.1 million and $60.0 million as of March31, 2005 and December 31, 2004, respectively. As of March 31, 2005, the advances have fixed interest rates rangingfrom 3.22% to 6.34%.

 

6

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**Note 7.  Junior Subordinated Debt Owed toUnconsolidated Trusts**

 

                    The following table presents details on the junior subordinated debt owed to unconsolidated trusts as of March 31, 2005:

 
| ** **                                                 | ** ** | **Trust I**                | ** ** | **Trust II**       | ** ** | **Trust III**      | ** ** |
|------------------------------------------------------------|------------|----------------------------|------------|--------------------|------------|--------------------|------------|
| ** **                                                 | ** ** | **(Dollars in thousands)** | ** ** |
| Date of issue                                              |       | March  23, 2000            |       | November  28, 2001 |       | May  11, 2004      |       |
| Amount of trust preferred securities issued                |       | $                          | 10,000     |               | $          | 6,000              |       | $ | 6,000 |   |
| Rate on trust preferred securities                         |       | 10.875                     | %          | 9.95               | %          | 5.61%  (variable)  |       |
| Maturity                                                   |       | March  8, 2030             |       | December  8, 2031  |       | September  8, 2034 |       |
| Date of first redemption                                   |       | March  8, 2010             |       | December  8, 2006  |       | September  8, 2009 |       |
| Common equity securities issued                            |       | $                          | 310        |               | $          | 186                |       | $ | 186 |   |
| Junior subordinated deferrable interest debentures owed    |       | $                          | 10,310     |               | $          | 6,186              |       | $ | 6,186 |   |
| Rate on junior subordinated deferrable interest debentures |       | 10.875                     | %          | 9.95               | %          | 5.61%  (variable)  |       |

 

                    On the dates of issue indicated above, the Trusts, being Delaware statutory business trusts, issued trust preferred securities (the “trust preferred securities”) in the amount and at the rate indicated above.  These securities represent preferred beneficial interests in the assets of the Trusts.  The trust preferred securities will mature on the dates indicated, and are redeemable in whole or in part at the option of the Company at any time after the date of first redemption indicated above, with the approval of the Federal Reserve Board and in whole at any time upon the occurrence of certain events affecting their tax or regulatory capital treatment.  The Trusts also issued common equity securities to Trinity in the amounts indicated above.  The Trusts used the proceeds of the offering of the trust preferred securities to purchase junior subordinated deferrable interest debentures (the debentures) issued by the Company, which have terms substantially similar to the trust preferred securities.  The Company has the right to defer payments of interest on the debentures at any time or from time to time for a period of up to ten consecutive semi-annual periods with respect to each interest payment deferred.  Under the terms of the debentures, in the event that under certain circumstances there is an event of default under the debentures 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 capital in order to support its growth.

 

                    Trinity owns all of the outstanding common stock 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.

 

                    The trust preferred securities are currently included in the Tier 1 capital of Trinity for regulatory capital purposes.  However, because the Trusts are no longer a part of the Company’s financial statements, the Federal Reserve Board may in the future disallow inclusion of the trust preferred securities in Tier 1 capital for regulatory capital purposes.  The most recent rule issued by the Federal Reserve Board indicated that it will continue to recognize these trust preferred securities as Tier 1 capital within certain limitations.  Please refer to Note 4, “Recent Accounting and Regulatory Developments”, for more information.  However, there can be no assurance that the Federal Reserve Board will continue to permit institutions to include trust preferred securities in Tier I capital for regulatory capital purposes.  As of March 31, 2005, assuming the Company was not permitted to include the $23 million in trust preferred securities issued by the Trusts in its Tier 1 capital, the Company would still exceed the regulatory required minimums for capital adequacy purposes.  If the trust preferred securities were no longer permitted to be included in Tier 1 capital, the Company would also be permitted to redeem the capital securities without penalty.

 

                    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.

 

7

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                Issuancecosts of $615 thousand related to the trust preferred securities were deferredand are being amortized over the period until mandatory redemption of thesecurities in March 2030, December 2031 and September 2034, respectively.  During the three months ended March 31, 2005and 2004, respectively, $5 thousand and $4 thousand of these issuance costswere amortized.  Unamortized issuancecosts were $534 thousand and $476 thousand at March 31, 2005 and 2004,respectively.

 

                Distributionsaccrued and unpaid to securities holders totaled $286 thousand and $265thousand on March 31, 2005 and 2004, respectively.

 

**Note 8.  Commitments, Contingencies and Off-BalanceSheet Activities**

 

                *Credit-related financial instruments:*  The Company is a party to credit-relatedcommitments with off-balance-sheet risk in the normal course of businessto 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, tovarying degrees, elements of credit and interest rate risk in excess of theamount recognized in the consolidated balance sheets.

 

                TheCompany’s exposure to credit loss is represented by the contractual amount ofthese credit-related commitments.  TheCompany follows the same credit policies in making credit-related commitmentsas it does for on-balance-sheet instruments.

 

                AtMarch 31, 2005 and December 31, 2004, the following credit-related commitmentswere outstanding whose contract amounts represent credit risk:

 

| ** **                                 | ** ** | **Contract Amount** | ** ** |
|--------------------------------------------|------------|---------------------|------------|
| ** **                                 | ** ** | **March 31,**       | ** ** | **December 31,** | ** ** |
| ** **                                 | ** ** | **2005**            | ** ** | **2004** | ** ** |
| ** **                                 | ** ** | **(In thousands)**  | ** ** |
| Unfunded commitments under lines of credit |       | $                   | 182,984    |   | $ | 168,794 |   |
| Commercial and standby letters of credit   |       | 33,928              |       | 33,319 |   |
|                                            |            |                     |            |  |  |  |  |

 

                Commitmentsto extend credit are agreements to lend to a customer as long as there is noviolation of any condition established in the contract.  Commitments generally have fixed expirationdates or other termination clauses and may require a payment of a fee.  The commitments for equity lines of creditmay expire without being drawn upon. Therefore, the total commitment amounts do not necessarily representfuture cash requirements.  The amount ofcollateral obtained, if it is deemed necessary by the Company, is based onmanagement’s credit evaluation of the customer. Unfunded commitments under commercial lines of credit, revolving creditlines and overdraft protection agreements are commitments for possible futureextensions of credit to existing customers. Overdraft protection agreements are uncollateralized, but most otherunfunded commitments have collateral. These unfunded lines of credit usually do not contain a specifiedmaturity date and may not necessarily be drawn upon to the total extent towhich the Company is committed.

 

                Commercialand standby letters of credit are conditional credit-related commitments issuedby the Company to guarantee the performance of a customer to a thirdparty.  Those letters of credit areprimarily issued to support public and private borrowing arrangements.  Essentially all letters of credit issued haveexpiration dates within one year. The credit risk involved in issuing lettersof credit is the same as that involved in extending loans to customers.  The Company generally holds collateralsupporting those credit-related commitments, if deemed necessary. In the eventthe customer does not perform in accordance with the terms of the agreementwith the third party, the Company would be required to fund the credit-relatedcommitment.  The maximum potential amountof future payments the Company could be required to make is represented by thecontractual amount shown in the summary above. If the credit-related commitment is funded, the Company would beentitled to seek recovery from the customer. At March 31, 2005 and December 31, 2004, no amounts have beenrecorded as liabilities for the Company’s potential obligations under thesecredit-related commitments.  The fairvalue of these credit-related commitments is approximately equal to the feescollected when granting these letters of credit.  These fees collected were $132 thousand and $60thousand as of March 31, 2005 and December 31, 2004, respectively, and areincluded in “other liabilities” on the Company’s balance sheet.

 

                *Concentrations of credit risk:*  The majority of the loans, commitments toextend credit, and standby letters of credit have been granted to customers inLos Alamos, Santa Fe and surrounding communities.  Although the Company has a diversified loanportfolio, a substantial portion of its loans are made to businesses andindividuals associated with, or employed by, Los Alamos National Laboratory (“theLaboratory”).  The ability of suchborrowers to honor their contracts is predominately dependent upon thecontinued operation and funding of the Laboratory.  Investments in securities issued by statesand political subdivisions involve governmental entities within the state ofNew Mexico.  The distribution ofcommitments to extend credit approximates the distribution of loansoutstanding.  Standby letters of creditwere granted primarily to commercial borrowers.

 

8

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                *Contingencies:*  In the normal course of business, the Companyis involved in various legal proceedings. In the opinion of management, after consulting with counsel, probableliabilities resulting from such proceedings would not have a material adverseeffect on the Company’s consolidated financial statements.

 

**Note 9.  Pro Forma Impact of Stock-Based CompensationPlans**

 

                As allowed under SFAS No. 123, *Accounting for Stock-Based Compensation*,the Company measures stock-based compensation cost in accordance with themethods prescribed in Accounting Principles Board (APB) Opinion No. 25, *Accounting for Stock Issued to Employees*. As stock options are granted at fair value, there are no charges to earningsassociated with stock options granted.  Accordingly, no compensation costhas been recognized for grants made to date.  Had compensation cost beendetermined based on the fair value method prescribed in FASB Statement No. 123,reported net income and earnings per common share would have been reduced tothe pro forma amounts shown below: 
| ** **                                                                                                                                   | ** ** | **Three Months Ended**    | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------|------------|
| ** **                                                                                                                                   | ** ** | **March 31,**             | ** ** |
| ** **                                                                                                                                   | ** ** | **2005**                  | ** ** | **2004** | ** ** |
| ** **                                                                                                                                   | ** ** | **(In thousands, except** | ** ** |
| ** **                                                                                                                                   | ** ** | **per share amounts)**    | ** ** |
| Net income as reported                                                                                                                       |       | $                         | 2,368      |   | $ | 2,450 |   |
| Deduct: Total stock-based employee compensation expense determined  under fair value based method for all awards, net of related tax effects |       | 28                        |       | 28 |   |
| Pro forma net income                                                                                                                         |       | $                         | 2,340      |   | $ | 2,422 |   |
| Earnings per share:                                                                                                                          |       |                      |       |   |   |
| Basic — as reported                                                                                                                     |       | $                         | 0.35       |   | $ | 0.36 |   |
| Basic — pro forma                                                                                                                       |       | $                         | 0.35       |   | $ | 0.36 |   |
| Diluted — as reported                                                                                                                   |       | $                         | 0.35       |   | $ | 0.36 |   |
| Diluted — pro forma                                                                                                                     |       | $                         | 0.35       |   | $ | 0.35 |   |
|                                                                                                                                              |            |                           |            |  |  |  |  |  |  |

 

9

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**Item 2****.  Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

                *This discussion is intended to focus on certainfinancial information regarding the Company and the Bank and is written toprovide the reader with a more thorough understanding of its financialstatements. The following discussion and analysis of the Company’s financial positionand results of operations should be read in conjunction with the informationset forth in Item 3, Quantitative and Qualitative Disclosures about MarketRisk and the annual audited consolidated financial statements filed on Form 10-K.*

 

**Special Note Concerning Forward-LookingStatements**

 

                ThisForm 10-Q (including information incorporated by reference) contains, andour future oral and written statements may contain, forward-lookingstatements, within the meaning of such term in the Private Securities LitigationReform Act of 1995, with respect to our financial condition, results ofoperations, plans, objectives, future performance and business.  Forward-looking statements, which maybe based upon beliefs, expectations and assumptions of our management and oninformation currently available to management, are generally identifiable bythe 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-lookingstatements, speak only as of the date they are made, and we undertake noobligation to update any statement in light of new information or futureevents.

 

                Ourability to predict results or the actual effect of future plans or strategiesis inherently uncertain. Factors which could have a material adverse effect onour operations and future prospects include, but are not limited to, thefollowing:

 

•                                          Thestrength of the United States economy in general and the strength of the localeconomies in which we conduct our operations which may be less favorable thanexpected and may result in, among other things, a deterioration in the creditquality and value of our assets.

 

•                                          Theeconomic impact of any future terrorist threats or attacks, and the response ofthe United States to any such threats and attacks.

 

•                                          Theeffects of, and changes in, federal, state and local laws, regulations andpolicies affecting banking, securities, insurance and monetary and financialmatters.

 

•                                          Theeffects of changes in interest rates (including the effects of changes in therate of prepayments of our assets) and the policies of the Federal Reserve.

 

•                                          Ourability to compete with other financial institutions as effectively as wecurrently intend due to increases in competitive pressures in the financialservices sector.

 

•                                          Ourability to obtain new customers and to retain existing customers.

 

•                                          Thetimely development and acceptance of products and services, including productsand services offered through alternative delivery channels such as theInternet.

 

•                                          Technologicalchanges implemented by us and by other parties, including third party vendors,which may be more difficult or more expensive than anticipated or which may haveunforeseen consequences to us and our customers.

 

•                                          Ourability to develop and maintain secure and reliable electronic systems.

 

•                                          Ourability to retain key executives and employees and the difficulty that we mayexperience in replacing key executives and employees in an effective manner.

 

•                                          Consumerspending and saving habits which may change in a manner that affects ourbusiness adversely.

 

•                                          Businesscombinations and the integration of acquired businesses which may be moredifficult or expensive than expected.

 

•                                          Thecosts, effects and outcomes of existing or future litigation.

 

•                                          Changesin accounting policies and practices, as may be adopted by state and federalregulatory agencies and the Financial Accounting Standards Board.

 

10

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•                                          Ourability to manage the risks associated with the foregoing as well asanticipated.

 

•                                          Changesin the management and national policy regarding the primary employer in LosAlamos County, Los Alamos National Laboratory (the “Laboratory”), includingchanges in the level of funding.

 

                Theserisks and uncertainties should be considered in evaluating forward-lookingstatements and undue reliance should not be placed on such statements.Additional information concerning us and our business, including other factorsthat could materially affect our financial results, will be included in ourfilings with the SEC.

 

**Critical Accounting Policies**

 

                ***Allowance for Loan Losses:***  Management believes the allowance for loanlosses accounting policy is critical to the portrayal and understanding of ourfinancial condition and results of operations. As such, selection andapplication of this “critical accounting policy” involves judgments, estimates,and uncertainties that are susceptible to change. In the event that differentassumptions or conditions were to prevail, and depending upon the severity ofsuch changes, the possibility of materially different financial condition orresults of operations is a reasonable likelihood.

 

                Theallowance for loan losses is maintained at an amount that management believeswill be adequate to absorb probable losses on existing loans, based on anevaluation of the collectibility of loans and prior loss experience.  Three methods are used to evaluate theadequacy of the allowance for loan losses: (1) historical loss experience,based on loss experience by quality classification in the previous twelvecalendar quarters; (2) specific identification, based upon management’sassessment of loans and the probability that a charge off will occur in theupcoming quarter; and (3) loan concentrations, based on current orexpected economic factors in the geographic and industry sectors wheremanagement believes we may eventually experience some loan losses.  This evaluation also takes into considerationsuch factors as changes in the nature and volume of the loan portfolio, thevalue of underlying collateral, overall portfolio quality, review of specificproblem loans, and current economic conditions that may affect the borrower’sability to pay.

 

                Whilemanagement uses the best information available to make its evaluation, futureadjustments to the allowance may be necessary if there are significant changesin economic conditions. In addition, as an integral part of their examinationprocess regulatory agencies periodically review our allowance for loan lossesand may require us to make additions to the allowance based on their evaluationof information available at the time of their examinations.  Although we believe the allowance for loanlosses is sufficient to cover probable losses inherent in the loan portfolio,there can be no assurance that the allowance will prove sufficient to coveractual future loan losses.

 

 

                    ***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, 2005, mortgage loans serviced for others totaled $918.5 million.  The MSRs on these loans total $8.6 million as of March 31, 2005.  The expected and actual rates of mortgage loan prepayments are the most significant factors driving the value of MSRs.  Increases in mortgage loan prepayments reduce estimated future net servicing cash flows because the life of the underlying loan is reduced.  In determining the fair value of the MSRs, mortgage interest rates, which are used to determine prepayment rates and discount rates are held constant over the estimated life of the portfolio.  Fair values of the 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.  In the first three months of 2005, we recognized income of $564 thousand due to a decrease in the valuation allowance associated with MSRs; in the first three months of 2004, we incurred an expense of $364 thousand due to a increase in the valuation allowance associated with MSRs.  We can have no certainty on the direction and amount of interest rate changes looking forward, and therefore, the amount or direction of the change in valuation.

 

11

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**Overview**

 

                The first quarter of 2005 was characterized by strongasset growth and flat income growth due to the anticipated drop in the mortgageloan refinance business due to higher rates, which was largely offset by stronggrowth in net interest income.  Netincome was $2.4 million, a 3.3% decrease from the prior year first quarter earningsof $2.5 million.  Total assets grew $62.5million from the prior year end, which is an annualized growth rate of 23.1%.

 

                Net interest income (not tax-equivalent), our majorsource of income, increased $912 thousand (or 10.1%) over the prior year firstquarter.  This increase was mainly due toour growth in earning assets, while our net interest margin (not tax-equivalent)decreased from 3.92% in the first quarter of 2004 to 3.89% in the first quarterof 2005.  This decrease in margin was dueto our decision to be more competitive in interest rates paid on depositproducts in order to attract new deposits in the new Santa Fe office and tofund increasing loan demand.

 

                Looking forward to the remainder of the year 2005, weexpect continued growth in deposits and loans from the newly opened branch inSanta Fe.  We also anticipate that TitleGuaranty’s operations in Santa Fe will generate additional income.  We believe that we have sufficient capital tosupport this growth and remain well-capitalized.  The additional personnel and other costsassociated with the new Santa Fe office as well as the new Title Guarantyoffice will likely increase other expenses compared to the prior year, since in2004 the new office was opened only for a partial year.  However, we believe the increased growth inbusiness generated by these offices will likely offset a portion or all ofthese expenses.

 

**Results of Operations-Income StatementAnalysis**

 

                ***Net Income-General.***  Net income for the three months ended March31, 2005 was $2.4 million, compared to $2.5 million for the same period of 2004.  Diluted earnings per share decreased by $0.01to $0.35 for the three months ended March 31, 2005 from $0.36 for the sameperiod of 2004.  This represented a decreasein earnings per share of 2.8%.  This decrease was primarily due to adecline in non-interest income of $957 thousand (31.7%), which was largelyoffset by an increase in net interest income of $912 thousand (10.1%).    The effect of these and other items, net oftaxes, was a decline in unaudited net income of approximately $82 thousand forthe first quarter of 2005 compared to the first quarter of 2004.

 

                Theprofitability of the Company’s operations depends primarily on its net interestincome, which is the difference between total interest earned on interestearning assets and total interest paid on interest bearing liabilities.  The Company’s net income is affected by itsprovision for loan losses as well as other income and other expenses.  The provision for loan losses reflects theamount thought to be adequate to cover probable credit losses in the loanportfolio.  Non-interest income or otherincome consists of mortgage loan servicing fees, loan and other fees, servicecharges on deposits, gain on sale of loans, gain on sale of securities andother operating income.  Other expensesinclude salaries and employee benefits, occupancy expenses, data processingexpenses, marketing, amortization and valuation of mortgage servicing rights,supplies expense and other expenses.

 

                Theamount of net interest income is affected by changes in the volume and mix ofinterest earning assets, the level of interest rates earned on those assets,the volume and mix of interest bearing liabilities, and the level of interestrates paid on those interest bearing liabilities.  The provision for loan losses is dependent onchanges in the loan portfolio and management’s assessment of the collectibilityof the loan portfolio, as well as economic and market conditions.  Other income and other expenses are impactedby growth of operations and growth in the number of accounts through bothacquisitions and core banking business growth.  Growth in operations affects other expenses asa result of additional employees, branch facilities and promotional marketingexpenses.  Growth in the number of accountsaffects other income including service fees as well as other expenses such ascomputer services, supplies, postage, telecommunications and othermiscellaneous expenses.

 

12

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***Net InterestIncome.***  The following tables present, for the periodsindicated, the total dollar amount of interest income from average interestearning assets and the resultant yields, as well as the interest expense onaverage interest bearing liabilities, and the resultant costs, expressed bothin dollars and rates. Borrowings made by the Company’s Employee Stock OwnershipPlan (“ESOP”) from outside parties are not included in this analysis, as theinterest expense on this borrowing is born by the ESOP. Funding for the ESOP isrecognized as part of compensation expense:

 
| ** **                                                | ** ** | **Three Months Ended March 31,** | ** ** |
|-----------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                | ** ** | **2005**                         | ** ** | **2004** | ** ** |
| ** **                                                | ** ** | **Average**                      | ** ** | ** ** | ** ** | ** ** | ** ** | **Average** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                | ** ** | **Balance**                      | ** ** | **Interest** | ** ** | **Yield/Rate** | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Yield/Rate** | ** ** |
| ** **                                                | ** ** | **(Dollars in thousands)**       | ** ** |
| **Interest Earning Assets:**                              |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Loans(1)(2)                                               |       | $                                | 921,441    |   | $ | 14,222 |   | 6.26 | % |  $ | 763,041 |   | $ | 11,938 |   | 6.29 | % |
| Taxable investment securities                             |       | 89,509                           |       | 656 |   | 2.97 |   | 137,337 |   | 973 |   | 2.85 |   |
| Investment securities exempt from federal income taxes(3) |       | 17,288                           |       | 281 |   | 6.59 |   | 20,434 |   | 243 |   | 4.78 |   |
| Federal funds sold                                        |       | 708                              |       | 4 |   | 2.29 |   | 40 |   | — |   | 0.54 |   |
| Other interest bearing deposits                           |       | 3,618                            |       | 20 |   | 2.24 |   | 2,607 |   | 6 |   | 0.93 |   |
| Investment in unconsolidated trust subsidiaries           |       | 682                              |       | 16 |   | 9.51 |   | 496 |   | 13 |   | 10.54 |   |
| Total interest earning assets                             |       | 1,033,246                        |       | 15,199 |   | 5.97 |   | 923,955 |   | 13,173 |   | 5.73 |   |
| Non-interest earning assets                               |       | 69,706                           |       |   |   |   |   | 78,662 |   |   |   |   |   |
| Total assets                                              |       | $                                | 1,102,952  |   |   |   |   |   |  $ | 1,002,617 |   |   |   |   |   |
| **Interest Bearing Liabilities:**                         |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                                 |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| NOW and money market deposits                             |       | $                                | 124,517    |   | $ | 326 |   | 1.06 | % |  $ | 205,885 |   | $ | 394 |   | 0.77 | % |
| Savings deposits                                          |       | 374,263                          |       | 1,045 |   | 1.13 |   | 211,278 |   | 549 |   | 1.05 |   |
| Time deposits                                             |       | 378,205                          |       | 2,610 |   | 2.80 |   | 334,540 |   | 2,025 |   | 2.43 |   |
| Short-term borrowings                                     |       | 16,068                           |       | 102 |   | 2.57 |   | 17,839 |   | 67 |   | 1.51 |   |
| Long-term borrowings, including ESOP borrowings           |       | 62,917                           |       | 577 |   | 3.72 |   | 66,346 |   | 607 |   | 3.68 |   |
| Junior subordinated debt owed to unconsolidated trusts    |       | 22,682                           |       | 519 |   | 9.28 |   | 16,496 |   | 439 |   | 10.70 |   |
| Total interest bearing liabilities                        |       | 978,652                          |       | 5,179 |   | 2.15 |   | 852,384 |   | 4,081 |   | 1.93 |   |
| Demand deposits—non-interest bearing                 |       | 45,955                           |       |   |   |   |   | 57,982 |   |   |   |   |   |
| Other non-interest bearing liabilities                    |       | 5,968                            |       |   |   |   |   | 24,131 |   |   |   |   |   |
| Stockholders’ equity, including stock owned by ESOP  |       | 72,377                           |       |   |   |   |   | 68,120 |   |   |   |   |   |
| Total liabilities and stockholders equity                 |       | $                                | 1,102,952  |   |   |   |   |   |  $ | 1,002,617 |   |   |   |   |   |
| Net interest income/interest rate Spread(4)               |       |                             |       | 10,020 |   | 3.82 | % |   |   | $ | 9,092 |   | 3.80 | % |
| Net interest margin on a fully tax equivalent basis(5)    |       |                             |       |   |   | 3.93 | % |   |   |   |   | 3.96 | % |
| Net interest margin(5)                                    |       |                             |       |   |   | 3.89 | % |   |   |   |   | 3.92 | % |

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(1)                                  Includes non-accrual loans of $5.4 million and $3.2 million for March31, 2005 and 2004, respectively.

(2)                                  Interest income includes loan origination fees of $682 thousand and $730thousand for the three months ended March 31, 2005 and 2004, respectively.

(3)                                  Non-taxable investment income is presented on a fully tax equivalentbasis, adjusting for federal and state exemption of interest income and certainother permanent tax differences.

(4)                                  Interest rate spread represents the difference between the average yieldon interest earning assets and the average cost of interest bearing liabilitiesand is presented on a fully tax equivalent basis.

(5)                                  Net interest margin represents net interest income as a percentage ofaverage interest earning assets.

 

13

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                Forthe first quarter of 2005, net interest income on a fully tax equivalent basisincreased $928 thousand to $10.0 million from $9.1 million for the firstquarter of 2004.  The increase in netinterest income resulted from an increase in interest income on a fully taxequivalent basis of $2.0 million (15.4%), while interest expense increased $1.1million (26.9%).  Interest income on afully tax equivalent basis increased due primarily to an increase in average earningassets of $109.3 million (11.8%). Interest expense increased due to an increase in average interestbearing liabilities of $126.3 million (14.8%), which accounted for $657thousand of the increase.  The cost oninterest bearing liabilities increased 22 basis points, which accounted for$441 thousand of the increase in interest expense.  The net interest margin expressed in a fully taxequivalent basis decreased 3 basis points to 3.93% for 2005 from 3.96% for 2004.

 

Based on management’s review of the adequacy of theallowance for loan losses, provision for loan losses of $525 thousand wasrecorded for the three-month period ended March 31, 2005 versus provision of$600 thousand recorded during the same period of 2004.  The decrease in the provision for loan lossesfor the period ended March 31, 2005 reflected a number of factors, includingthe level of charge-offs, management’s overall view on current credit quality,the amount and status of impaired loans and the amount and status of past dueaccruing loans (90 days or more), as discussed in more detail below in theanalysis relating to the Company’s financial condition.

 

                ***Volume, Mix and Rate Analysis of NetInterest Income.***  Thefollowing tables present the extent to which changes in volume, changes ininterest rates, and changes in the interest rates times the changes in volumeof interest earning assets and interest bearing liabilities have affected ourinterest income and interest expense during the periods indicated.  Information is provided on changes in eachcategory due to: (i) changes attributable to changes in volume (change involume times the prior period interest rate); (ii) changes attributable tochanges in interest rate (changes in rate times the prior period volume); and(iii) changes attributable to changes in rate/volume (changes in interestrate times changes in volume).  Changesattributable to the combined impact of volume and rate have been allocatedproportionally to the changes due to volume and the changes due to rate:

 
| ** **                                                | ** ** | **Three Months Ended March 31,** | ** ** |
|-----------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                | ** ** | **2005 Compared to 2004**        | ** ** |
| ** **                                                | ** ** | **Change Due**              | ** ** | **Change Due** | ** ** | **Total** | ** ** |
| ** **                                                | ** ** | **to Volume**                    | ** ** | **to Rate** | ** ** | **Change** | ** ** |
| ** **                                                | ** ** | **(In thousands)**               | ** ** |
| **Interest Earning Assets:**                              |       |                             |       |   |   |   |   |
| Loans                                                     |       | $                                | 2,447      |   | $ | (163 | ) | $ | 2,284 |   |
| Taxable investment securities                             |       | (348                             | )          | 31 |   | (317 | ) |
| Investment securities exempt from federal income taxes(1) |       | (41                              | )          | 79 |   | 38 |   |
| Federal funds sold                                        |       | 4                                |       | — |   | 4 |   |
| Other interest bearing deposits                           |       | 3                                |       | 11 |   | 14 |   |
| Investment in unconsolidated trust subsidiaries           |       | 5                                |       | (2 | ) | 3 |   |
| Total increase (decrease) in interest income              |       | 2,070                            |       | (44 | ) | 2,026 |   |
| **Interest Bearing Liabilities:**                         |       |                             |       |   |   |   |   |
| NOW and money market deposit accounts                     |       | (186                             | )          | 118 |   | (68 | ) |
| Savings deposits                                          |       | 452                              |       | 44 |   | 496 |   |
| Time deposits                                             |       | 282                              |       | 303 |   | 585 |   |
| Short-term borrowings                                     |       | (8                               | )          | 43 |   | 35 |   |
| Long-term borrowings                                      |       | (31                              | )          | 1 |   | (30 | ) |
| Junior subordinated debt owed to unconsolidated trusts    |       | 148                              |       | (68 | ) | 80 |   |
| Total increase (decrease) in interest expense             |       | 657                              |       | 441 |   | 1,098 |   |
| Increase (decrease) in net interest income                |       | $                                | 1,413      |   | $ | (485 | ) | $ | 928 |   |

----

 

(1)                                  Non-taxableinvestment income is presented on a fully tax equivalent basis, adjusting forfederal and state exemption of interest income and certain other permanent taxdifferences.

 

14

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***Other Income.***  Changes in other income betweenthe three months ended March 31, 2005 and 2004 are as follows:

 
| ** **                   | ** ** | **Three Months Ended**  | ** ** | ** **              | ** ** |
|------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                   | ** ** | **March 31,**

**2005** | ** ** | **March 31,**

**2004** | ** ** | **Net difference** | ** ** |
| ** **                   | ** ** | **(In thousands)**      | ** ** |
| Other income:                |       |                    |       |                    |       |   |   |
| Mortgage loan servicing fees |       | $                       | 602        |                    | $          | 574 |   | $ | 28 |   |
| Loan and other fees          |       | 588                     |       | 557                     |       | 31 |   |
| Service charges on deposits  |       | 331                     |       | 331                     |       | — |   |
| Gain on sale of loans        |       | 463                     |       | 1,016                   |       | (553 | ) |
| Gain on sale of securities   |       | —                  |       | 272                     |       | (272 | ) |
| Other operating income       |       | 76                      |       | 267                     |       | (191 | ) |
|                         |       | $                       | 2,060      |                    | $          | 3,017 |   | $ | (957 | ) |

 

In the firstquarter of 2005, other income decreased by $957 thousand (31.7%) to $2.1 millionfrom $3.0 million for the first quarter of 2004.  Gain on sale of loans decreased $553 thousanddue to a continued drop in mortgage loan refinance activity due to increasinginterest rates.  This drop in refinancing was expected and wasexperienced generally in the financial services industry.  In the first quarter of 2004, other income alsoincluded a gain of $272 thousand on the sale of securities, while there was nogain on the sale of securities in the first quarter of 2005.

 

                ***OtherExpenses.***  Changes inother expenses between the three months ended March 31, 2005 and 2004 are asfollows:

 
| ** **                                              | ** ** | **Three Months Ended**  | ** ** | ** **              | ** ** |
|---------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                                              | ** ** | **March 31,**

**2005** | ** ** | **March 31,**

**2004** | ** ** | **Net difference** | ** ** |
| ** **                                              | ** ** | **(In thousands)**      | ** ** |
| Other expenses:                                         |       |                    |       |                    |       |   |   |
| Salaries and employee benefits                          |       | $                       | 4,058      |                    | $          | 3,853 |   | $ | 205 |   |
| Occupancy                                               |       | 799                     |       | 494                     |       | 305 |   |
| Data processing                                         |       | 490                     |       | 435                     |       | 55 |   |
| Marketing                                               |       | 324                     |       | 226                     |       | 98 |   |
| Amortization and valuation of mortgage servicing rights |       | 130                     |       | 987                     |       | (857 | ) |
| Supplies                                                |       | 209                     |       | 172                     |       | 37 |   |
| Other                                                   |       | 1,648                   |       | 1,362                   |       | 286 |   |
|                                                    |       | $                       | 7,658      |                    | $          | 7,529 |   | $ | 129 |   |

 

For the first quarter of 2005, other expenses increased $129thousand (1.7%) to $7.7 million in 2005 from $7.5 million in the first quarterof 2004.  The largest change was in theamortization and valuation of mortgage servicing rights, which declined $857thousand from the first quarter of 2004 to the first quarter of 2005.  This was due to a decrease in the valuationallowance of $564 thousand in the first quarter of 2005, compared to anincrease in the valuation allowance of $364 thousand in the first quarter of2004, for a net decline in expense of $928 thousand.  This was partially offset by an increase inthe amortization expense of the mortgage servicing rights of $71 thousand.  Occupancy expenses increased $305 thousand(61.7%), mainly due to the operation of the Santa Fe Downtown office, which wasopened in August 2004.  Salaries andemployee benefits increased by $205 thousand (5.3%), mainly due to an increasein $231 thousand (8.4%) in salary expenses, which was partially offset by adecline in personnel benefits expenses. This increase in salary expenses was mainly due to changes in staffingto open the new Santa Fe Downtown office.

                ***Income Taxes.***  In the first quarter of 2005, income taxexpense was virtually unchanged, decreasing $17 thousand (1.2%) from the firstquarter of 2004 for a total of $1.4 million in both years.  The effective tax rate increased slightly to 37.6%in the first quarter of 2005, compared to 37.1% in the first quarter of 2004.  A lower balance of tax-exempt municipalsecurities accounted for this slight increase.

 

15

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**Financial Condition-Balance SheetAnalysis**

 

                ***General.***  Total assets at March 31, 2005 remained at$1.1 billion, following an increase of $62.5 million (5.8%) from December 31,2004.  During the same period, totalliabilities increased $63.6 million (6.3%) to a total of $1.1 billion on March31, 2005 from $1.0 billion on December 31, 2004.  The increase in total liabilities wasprimarily due to an increase in deposits of $81.5 million (9.3%), which waspartially offset by a decrease in short-and long-term borrowings of $16.3million (17.3%).   Stockholders’ equity(including stock owned by the Employee Stock Ownership Plan) decreased $1.1million (1.6%) to $71.8 million on March 31, 2005 compared to $73.0 million onDecember 31, 2004.  This was primarily dueto a large purchase of treasury stock in the first quarter of 2005 of $4.0million, which was largely offset by an increase in retained earnings fromcurrent year operations of $2.4 million.

 

                ***Investment Securities.***  The primary purposes of the investmentportfolio are to provide a source of earnings, for liquidity management, toprovide collateral to pledge against public deposits and to control interestrate risk.  In managing the portfolio, theCompany seeks to obtain the objectives of safety of principal, liquidity,diversification and maximized return on funds.  For an additional discussion with respect tothese matters, see  “Liquidity and Sourcesof Capital” under Item 2 and “Asset Liability Management” under Item 3below.

 

                Thefollowing tables set forth the amortized cost and fair value of securities byaccounting classification category and by type of security as indicated:

** **
| ** **                                                      | ** ** | **At March 31, 2005** | ** ** | **At December 31, 2004** | ** ** | **At March 31, 2004** | ** ** |
|-----------------------------------------------------------------|------------|-----------------------|------------|-------------------------------|------------|-----------------------|------------|
| ** **                                                      | ** ** | **Amortized**         | ** ** | ** **                    | ** ** | **Amortized**         | ** ** | ** ** | ** ** | **Amortized** | ** ** | ** ** | ** ** |
| ** **                                                      | ** ** | **Cost**              | ** ** | **Fair Value**                | ** ** | **Cost**              | ** ** | **Fair Value** | ** ** | **Cost** | ** ** | **Fair Value** | ** ** |
| ** **                                                      | ** ** | **(In thousands)**    | ** ** |
| Securities Available for Sale:                                  |       |                  |       |                          |       |                  |       |   |   |   |   |   |   |
| U.S. Government agencies                                        |       | $                     | 40,088     |                          | $          | 39,616                |       | $ | 42,218 |   | $ | 41,907 |   | $ | 47,956 |   | $ | 48,187 |   |
| States and political subdivisions                               |       | 2,198                 |       | 2,165                         |       | 2,210                 |       | 2,191 |   | — |   | — |   |
| Equity securities                                               |       | 1                     |       | 5                             |       | 1                     |       | 7 |   | 1 |   | 7 |   |
| Total securities available for sale                             |       | $                     | 42,287     |                          | $          | 41,786                |       | $ | 44,429 |   | $ | 44,105 |   | $ | 47,957 |   | $ | 48,194 |   |
| Securities Held to Maturity:                                    |       |                  |       |                          |       |                  |       |   |   |   |   |   |   |
| U.S. Government agencies                                        |       | $                     | 37,324     |                          | $          | 37,305                |       | $ | 46,547 |   | $ | 46,705 |   | $ | 53,072 |   | $ | 54,438 |   |
| States and political subdivisions                               |       | 15,053                |       | 15,079                        |       | 15,111                |       | 15,178 |   | 20,442 |   | 20,638 |   |
| Total securities held to maturity                               |       | $                     | 52,377     |                          | $          | 52,384                |       | $ | 61,658 |   | $ | 61,883 |   | $ | 73,514 |   | $ | 75,076 |   |
| Other securities:                                               |       |                  |       |                          |       |                  |       |   |   |   |   |   |   |
| Non-marketable equity securities (including FRB and FHLB stock) |       | $                     | 6,639      |                          | $          | 6,639                 |       | $ | 6,798 |   | $ | 6,798 |   | $ | 6,305 |   | $ | 6,305 |   |
| Investment in unconsolidated trusts                             |       | 682                   |       | 682                           |       | 682                   |       | 682 |   | 496 |   | 496 |   |
| Total other securities                                          |       | $                     | 7,321      |                          | $          | 7,321                 |       | $ | 7,480 |   | $ | 7,480 |   | $ | 6,801 |   | $ | 6,801 |   |
|                                                            |       |                  |       |                          |       |                  |       |   |   |   |   |   |   |

 

                ***Loan Portfolio.***  The following tables set forth thecomposition of the loan portfolio:

 
| ** **                | ** ** | **At March 31, 2005**      | ** ** | **At December 31, 2004** | ** ** | **At March 31, 2004** | ** ** |
|---------------------------|------------|----------------------------|------------|--------------------------|------------|-----------------------|------------|
| ** **                | ** ** | **Amount**                 | ** ** | **Percent**              | ** ** | **Amount**            | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| ** **                | ** ** | **(Dollars in thousands)** | ** ** |
| Commercial                |       | $                          | 93,549     |                     | 9.99       | %                     | $          | 92,736 |   | 10.35 | % | $ | 75,548 |   | 9.80 | % |
| Commercial real estate    |       | 365,805                    |       | 39.09                    |       | 346,454               |       | 38.65 |   | 294,266 |   | 38.18 |   |
| Residential real estate   |       | 288,515                    |       | 30.82                    |       | 282,380               |       | 31.50 |   | 232,995 |   | 30.22 |   |
| Construction real estate  |       | 136,375                    |       | 14.57                    |       | 121,769               |       | 13.59 |   | 118,679 |   | 15.39 |   |
| Installment and other     |       | 51,770                     |       | 5.53                     |       | 52,984                |       | 5.91 |   | 49,416 |   | 6.41 |   |
| Total loans               |       | 936,014                    |       | 100.00                   |       | 896,323               |       | 100.00 |   | 770,904 |   | 100.00 |   |
| Unearned income           |       | (2,287                     | )          |                     |       | (2,002                | )          |   |   | (1,701 | ) |   |   |
| Gross loans               |       | 933,727                    |       |                     |       | 894,321               |       |   |   | 769,203 |   |   |   |
| Allowance for loan losses |       | (8,689                     | )          |                     |       | (8,367                | )          |   |   | (7,734 | ) |   |   |
| Net loans                 |       | $                          | 925,038    |                     |       |                  | $          | 885,954 |   |   |   | $ | 761,469 |   |   |   |
|                           |            |                            |            |                          |            |                       |            |  |  |  |  |  |  |  |  |  |  |

 

16

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                Netloans increased $163.6 million (21.5%) to $925.0 million at March 31, 2005from $761.5 million at March 31, 2004.  The increase was due primarily to growth inthe Company’s commercial, commercial real estate and residential real estateloan portfolios.  This growth as been dueto a combination of a strengthening local economy, more activity generated fromour newest Santa Fe office and increased marketing of our loan products.

 

                We project continued growth in our loan portfolio dueto a strengthened local economy, a stabilized Laboratory budget of over $2billion and anticipated increases in interest rates.  We anticipate the volume of commercial realestate and construction loans to increase as the industry strengthens and theNew Mexico economy continues to improve by attracting new business to thestate.  Commercial real estate isstrengthened due to vacancy rates returning to their historical averages anddemand picking up due to new business looking to expand within the state.  The housing market for homes below $500thousand remains strong and we project that market to remain constant.  We expect residential real estate forproperty worth greater than $1.5 million to be as soft as we have experiencedduring the last several years.

 

**               *****Asset Quality.***  The following table sets forththe amounts of non-performing loans and non-performing assets at the datesindicated:

 
| ** **                                                   | ** ** | **At**

**March 31,**

**2005** | ** ** | **At   December 31,  2004** | ** ** | **At**

**March 31,**

**2004** | ** ** |
|--------------------------------------------------------------|------------|---------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| ** **                                                   | ** ** | **(Dollars in thousands)**      | ** ** |
| Non-accruing loans                                           |       | $                               | 5,580      |                        | $          | 5,714                           |       | $ | 3,275 |   |
| Loans 90 days or more past due, still accruing interest |       | 4                               |       | 8                           |       | 11                              |       |
| Total non-performing loans                                   |       | 5,584                           |       | 5,722                       |       | 3,286                           |       |
| Other real estate owned                                      |       | 3,523                           |       | 6,438                       |       | 6,843                           |       |
| Other repossessed assets                                     |       | 19                              |       | 64                          |       | 26                              |       |
| Total non-performing assets                                  |       | $                               | 9,126      |                        | $          | 12,224                          |       | $ | 10,155 |   |
| Total non-performing loans to total loans                    |       | 0.60                            | %          | 0.64                        | %          | 0.43                            | %          |
| Allowance for loan losses to non-performing loans            |       | 155.61                          | %          | 146.23                      | %          | 235.36                          | %          |
| Total non-performing assets to total assets                  |       | 0.80                            | %          | 1.13                        | %          | 1.01                            | %          |

 

                At March31, 2005, total non-performing assets decreased $1.0 million (10.1%) to $9.1 millionfrom $10.2 million at March 31, 2004 due to decreases in other real estateowned of $3.3 million, which was partially offset by increases innon-performing loans of $2.3 million. The decreases in other real estate owned was primarily due to the saleof two large residential construction loans in other real estate owned totaling$3.0 million.  Non-performing loans increasedprimarily due to a $2.4 million commercial real estate loan that was placed onnon-accrual status in 2004.

 

                At March31, 2005, total non-performing assets decreased $3.1 million (25.3%) to $9.1million from $12.2 million at December 31, 2004, primarily due to decreases in otherreal estate owned of $2.9 million. The decreases in other real estate owned wasprimarily due to the sale of two large residential construction loan in otherreal estate owned totaling $3.0 million.

 

                *Allowance for Loan Losses.*  Management believes the allowance for loanlosses accounting policy is critical to the portrayal and understanding of theCompany’s financial condition and results of operations.  As such, selection and application of this “criticalaccounting policy” involves judgments, estimates, and uncertainties that aresusceptible to change.  In the event thatdifferent assumptions or conditions were to prevail, and depending upon theseverity of such changes, the possibility of materially different financialcondition or results of operations is a reasonable likelihood.

 

                Theallowance for loan losses is maintained at an amount that management believeswill be adequate to absorb probable losses on existing loans, based on anevaluation of the collectibility of loans and prior loss experience.  This evaluation also takes into considerationsuch factors as changes in the nature and volume of the loan portfolio, thevalue of underlying collateral, overall portfolio quality, review of specificproblem loans, and current economic conditions that may affect the borrower’sability to pay.  While management usesthe best information available to make its evaluation, future adjustments tothe allowance may be necessary if there are significant changes in economicconditions. In addition, as an integral part of their examination processregulatory agencies periodically review the Company’s allowance for loan lossesand may require the Company to make additions to the allowance based on theirevaluation of information available at the time of their examinations.

 

17

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                Thefollowing table presents an analysis of the allowance for loan losses for the periodspresented:

 
| ** **                                   | ** ** | **Three Months Ended**     | ** ** |
|----------------------------------------------|------------|----------------------------|------------|
| ** **                                   | ** ** | **March 31,**              | ** ** | **March 31,** | ** ** |
| ** **                                   | ** ** | **2005**                   | ** ** | **2004** | ** ** |
| ** **                                   | ** ** | **(Dollars in thousands)** | ** ** |
| Balance at beginning of period               |       | $                          | 8,367      |   | $ | 7,368 |   |
| Provision for loan losses                    |       | 525                        |       | 600 |   |
| Charge-offs                                  |       | (238                       | )          | (238 | ) |
| Recoveries                                   |       | 35                         |       | 4 |   |
| Net charge-offs                              |       | (203                       | )          | (234 | ) |
| Balance at end of period                     |       | $                          | 8,689      |   | $ | 7,734 |   |
| Gross loans at end of period                 |       | $                          | 933,727    |   | $ | 769,203 |   |
| Ratio of allowance to total loans            |       | 0.93                       | %          | 1.01 | % |
| Ratio of net charge-offs to average loans(1) |       | 0.09                       | %          | 0.13 | % |

----

(1)                                  Net charge-offs are annualized for the purposes of this calculation.

 

                Netcharge-offs for the three months ended March 31, 2005 totaled $203 thousand, adecrease of $31 thousand (13.2%) from $234 thousand from the three months endedMarch 31, 2004.  The majority of thecharge-offs were residential real estate and personal loans.  The provision for loan losses decreased forthe three months ended March 31, 2005 from 2004, due to management’s analysisof current non-performing loans and other factors.

 

                Thefollowing table sets forth the allocation of the allowance for loan losses forthe periods presented and the percentage of loans in each category to totalloans. An allocation for a loan classification is only for internal analysis ofthe adequacy of the allowance and is not an indication of expected oranticipated losses:

 
| ** **                             | ** ** | **At March 31, 2005**      | ** ** | **At December 31, 2004** | ** ** | **At March 31, 2004** | ** ** |
|----------------------------------------|------------|----------------------------|------------|--------------------------|------------|-----------------------|------------|
| ** **                             | ** ** | **Amount**                 | ** ** | **Percent**              | ** ** | **Amount**            | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| ** **                             | ** ** | **(Dollars in thousands)** |
| Commercial                             |       | $                          | 4,398      |                     | 9.99       | %                     | $          | 3,502 |   | 10.35 | % | $ | 1,968 |   | 9.80 | % |
| Commercial and residential real estate |       | 2,508                      |       | 69.91                    |       | 2,511                 |       | 70.15 |   | 3,432 |   | 68.40 |   |
| Construction real estate               |       | 995                        |       | 14.57                    |       | 981                   |       | 13.59 |   | 1,338 |   | 15.39 |   |
| Installment and other                  |       | 754                        |       | 5.53                     |       | 1,369                 |       | 5.91 |   | 949 |   | 6.41 |   |
| Unallocated                            |       | 34                         |       | N/A                      |       | 4                     |       | N/A |   | 47 |   | N/A |   |
| Total                                  |       | $                          | 8,689      |                     | 100.00     | %                     | $          | 8,367 |   | 100.00 | % | $ | 7,734 |   | 100.00 | % |
|                                        |            |                            |            |                          |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |

----

N/A—not applicable

 

                Theportion of the allocation that was based upon historical loss experience decreasedby $162 thousand (6.4%) in 2005, from $2.5 million on March 31, 2004 to $2.4million on March 31, 2005.  This waslargely due to a decrease in the allocation for commercial loans which decreasedby $755 thousand, which was partially offset by an increase in the allocationfor installment and other loans of $290 thousand.  Concentration allocation increased from $4.8million on March 31, 2004 to $5.6 million on March 31, 2005.  This was due to an increase in the allocationfor commercial loans of $1.3 million, which was partially offset by a lowerallocation in real estate loans (a decline of $756 thousand).  The allocation for specifically identifiedloans increased from $345 thousand on March 31, 2004 to $664 thousand on March31, 2005.  A $420 thousand commercialloan accounted for this increase, which was partially offset by decreases inother categories.

 

Total net charge-offs were substantially less in 2004than in the previous two years, and this trend has continued in the firstquarter of 2005. This was primarily due to a decrease in commercial charge-offsin 2004 and the first quarter of 2005. Management projects losses to remain in this average barring anyanomalies.

 

                Additionsto the allowance for loan losses, which are charged to earnings through theprovision for loan losses, are determined based on a variety of factors, asindicated above.  Although we believe theallowance for loan losses is sufficient to cover probable losses 

 

18

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inherent in the loan portfolio, there can be no assurancethat the allowance will prove sufficient to cover actual future loan losses.

 

                *Potential Problem Loans.*  The Company utilizes an internal assetclassification system as a means of reporting problem and potential problemassets.  At scheduled Board of Directorsmeetings every quarter, a list of total adversely classified assets ispresented, showing other real estate owned, other repossessed assets, and allloans 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 “SpecialMention” is also presented.  An asset isclassified Substandard if it is inadequately protected by the current net worthand paying capacity of the obligor or of the collateral pledged, if any.Substandard assets include those characterized by the distinct possibility thatthe Company will sustain some loss if the deficiencies are not corrected.  Assets classified as Doubtful have all theweaknesses inherent in those classified Substandard with the added characteristicthat the weaknesses present make collection or liquidation in full, on thebasis of currently existing facts, conditions and values, highly questionableand improbable.  Assets classified asLoss are those considered uncollectible and viewed as non-bankable assets,worthy of charge-off.  Assets that do notcurrently expose the Company to sufficient risk to warrant classification inone of the aforementioned categories, but possess weaknesses that may or maynot be within the control of the customer are deemed to be Special Mention.

 

                TheCompany’s determination as to the classification of its assets and the amountof its valuation allowances is subject to review by the Bank’s primaryregulators, which can order the establishment of additional general or specificloss allowances.  The Comptroller of theCurrency, in conjunction with the other federal banking agencies, has adoptedan interagency policy statement on the allowance for loan losses.  The policy statement provides guidance forfinancial institutions on both the responsibilities of management for theassessment and establishment of adequate allowances and guidance for bankingagency examiners to use in determining the adequacy of general valuationguidelines.  Generally, the policystatement recommends that (i) institutions have effective systems andcontrols to identify, monitor and address asset quality problems;(ii) management has analyzed all significant factors that affect thecollectibility of the portfolio in a reasonable manner; and(iii) management has established acceptable allowance evaluation processesthat meet the objectives set forth in the policy statement.  Management believes it has established anadequate allowance for probable loan losses. The Company analyzes its process regularly, with modifications made ifneeded, and reports those results quarterly at Board of Directorsmeetings.  However, there can be noassurance that regulators, in reviewing the Company’s loan portfolio, will notrequest the Company to materially increase its allowance for loan losses at afuture time.  Although managementbelieves that adequate specific and general loan loss allowances have beenestablished, actual losses are dependent upon future events and, as such,further additions to the level of specific and general loan loss allowances maybecome necessary.

 

                Thefollowing table shows the amounts of adversely classified assets and specialmention loans as of the periods indicated:

 
| ** **                        | ** ** | **At**

**March 31,**

**2005** | ** ** | **At**

**December 31,**

**2004** | ** ** | **At**

**March 31,**

** 2004** | ** ** |
|-----------------------------------|------------|---------------------------------|------------|------------------------------------|------------|---------------------------------------|------------|
| ** **                        | ** ** | **(Dollars in thousands)**      | ** ** |
| Loans classified as:              |       |                            |       |                               |       |                                  |       |
| Substandard                       |       | $                               | 12,431     |                               | $          | 15,810                                |       | $ | 12,170 |   |
| Doubtful                          |       | 546                             |       | 201                                |       | 95                                    |       |
| Total adversely classified loans  |       | 12,977                          |       | 16,011                             |       | 12,265                                |       |
| Other real estate owned           |       | 3,523                           |       | 6,438                              |       | 6,843                                 |       |
| Other repossessed assets          |       | 19                              |       | 64                                 |       | 26                                    |       |
| Total adversely classified assets |       | $                               | 16,519     |                               | $          | 22,513                                |       | $ | 19,134 |   |
| Special mention loans             |       | $                               | 23,713     |                               | $          | 22,834                                |       | $ | 13,577 |   |

 

                Totaladversely classified assets decreased $2.6 million (13.6%) from March 31, 2004to March 31, 2005.  The main reason forthe decrease was a decrease of $3.3 million in other real estate owned.  Special mention loans increased $10.1 million(74.7%) between March 31, 2004 and March 31, 2005, primarily due to twocommercial loan relationships totaling $8.7 million and one commercial realestate development loan relationship for $1.6 million being placed on the watchlist.

 

                ***Deposits.***  Total deposits increased $81.5 million (9.3%)during the first quarter of 2005.  Thiswas partially due to a large increase in public funds of $30.9 million dueexpanded relationships with certain public entities.  The remainder of the increase was due to avariety of factors, including activity in the new office in Santa Fe and morecompetitive deposit rates combined with a strong marketing program of theserates.

 

19

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**                Sourcesof Funds**

 

***                                               ******Liquidity and Sources of Capital***

 

                TheCompany’s cash flows are comprised of three classifications: cash flows fromoperating activities, cash flows from investing activities and cash flows fromfinancing activities. Net cash provided by (used in) operating activities was $5.0million and $(2.5) million for the three months ended March 31, 2005 and 2004,respectively.  Net cash provided byoperating activities increased $7.5 million in the first three months of 2005compared to the first three months of 2004 largely due to an increase in the saleof loans held for sale, net of originations, by $6.9 million over the first threemonths of 2004.  Net cash (used in) providedby investing activities was $(26.0) million and $15.3 million for the threemonths ended March 31, 2005 and 2004, respectively.  The $41.3 million decrease in cash providedby investing activities was largely due to a drop in the sale of investmentsecurities of $28.4, as well as the decrease of cash provided by maturities andpaydowns of securities of $8.2 million.  Netcash provided by (used in) financing activities was $58.7 million and $(2.2)million for the three months ended March 31, 2005 and 2004, respectively.  The $60.9 million increase in cash providedby financing activities was mainly due to an increase in new deposit growth of$75.0 million from the first three months of 2005 compared to the first threemonths of 2004, which was partially offset by a decrease in cash provided byborrowings (net of repayments) of $10.1 million.

 

                The Company expects to haveavailable cash to meet its liquidity needs.  Liquidity management ismonitored by the Asset/Liability committee of the Bank, which takes into accountthe marketability of assets, the sources and stability of funding and the levelof unfunded commitments.  In the eventthat additional short-term liquidity is needed, the Company has establishedrelationships with several large regional banks to provide short-termborrowings in the form of federal funds purchases.  The Company has borrowed, and managementbelieves that the Company could again borrow, up to $84.0 million for ashort time from these banks on a collective basis.  Additionally, the Bank is a member of theFederal Home Loan Bank (“FHLB”) and has the ability to borrow from the FHLB.  The Company may also have up to 25% of itsTier 1 capital in the form of trust preferred securities.  As of March 31, 2005, the Company couldborrow an additional $2.0 million in trust preferred securities.  As a contingency plan for significant fundingneeds, the Asset/Liability committee may also consider the sale of investmentsecurities, selling securities under agreement to repurchase, sale of certainloans and/or the temporary curtailment of lending activities.

 

                At March31, 2005, the Company’s total risk-based capital ratio was 11.04%, the Tier 1capital to risk-weighted assets ratio was 10.11%, and the Tier 1 capital toaverage assets ratio was 8.53%.  The Bankwas categorized as “well-capitalized” under Federal Deposit InsuranceCorporation regulations at March 31, 2005 and December 31, 2004.  At December 31, 2004, the Company’s totalrisk-based capital ratio was 11.59%, the Tier 1 capital to risk-weighted assetsratio was 10.65%, and the Tier 1 capital to average assets ratio was 8.87%.

 

                At March31, 2005 and December 31, 2004, the Company’s book value per common share was $10.88and $10.84, respectively.

 

**Item 3****.  Quantitative andQualitative Disclosures About Market Risk**

 

**Asset Liability Management**

 

                Ournet interest income is subject to “interest rate risk” to the extent that itcan vary based on changes in the general level of interest rates. It is ourpolicy to maintain an acceptable level of interest rate risk over a range ofpossible changes in interest rates while remaining responsive to market demandfor loan and deposit products. The strategy we employ to manage our interestrate risk is to measure our risk using an asset/liability simulation model andadjust the maturity of securities in its investment portfolio to manage thatrisk.

 

                Interestrate risk can also be measured by analyzing the extent to which the repricingof assets and liabilities are mismatched to create an interest sensitivity “gap”.An asset or liability is said to be interest rate sensitive within a specifictime period if it will mature or reprice within that time period. The interestrate sensitivity gap is defined as the difference between the amount ofinterest earning assets maturing or repricing within a specific time period andthe amount of interest bearing liabilities maturing or repricing within thatsame time period. A gap is considered positive when the amount of interest ratesensitive assets exceeds the amount of interest rate sensitive liabilities. Agap is considered negative when the amount of interest rate sensitiveliabilities 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 interestincome.  Conversely, during a period offalling interest rates, a negative gap position would tend to result in anincrease in net interest income.

 

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                Thefollowing tables set forth the amounts of interest earning assets and interestbearing liabilities outstanding at March 31, 2005, which we anticipate, basedupon certain assumptions, to reprice or mature in each of the future timeperiods shown. Except as stated below, the amount of assets and liabilitiesshown which reprice or mature during a particular period were determined basedon the earlier of the term to repricing or the term to repayment of the assetor liability.  These tables are intendedto provide an approximation of the projected repricing of assets andliabilities at March 31, 2005 on the basis of contractual maturities andscheduled rate adjustments within a three-month period and subsequentselected time intervals.  The loanamounts in the table reflect principal balances expected to be reinvestedand/or repriced as a result of contractual amortization and rate adjustments onadjustable-rate loans.  The contractualmaturities and amortization of loans and investment securities reflect modestprepayment assumptions.  While NOW, moneymarket and savings deposit accounts have adjustable rates, it is assumed thatthe interest rates on these accounts will not adjust immediately to changes inother interest rates.  Therefore, thetable is calculated assuming that these accounts will reprice based upon anhistorical analysis of rate changes of these particular accounts, withrepricing assigned to these accounts from one to thirteen months.

 
| ** **                                             | ** ** | **Time to Maturity or Repricing** | ** ** |
|--------------------------------------------------------|------------|-----------------------------------|------------|
| **As of  March 31, 2005:**                             | ** ** | **0-90 Days**                     | ** ** | **91-365 Days** | ** ** | **1-5 Years** | ** ** | **Over 5 Years** | ** ** | **Total** | ** ** |
| ** **                                             | ** ** | **(In thousands)**                | ** ** |
| **Interest Earning Assets:**                           |       |                              |       |   |   |   |   |   |   |   |   |
| Loans                                                  |       | $                                 | 429,905    |   | $ | 417,676 |   | $ | 60,156 |   | $ | 25,990 |   | $ | 933,727 |   |
| Loans held for sale                                    |       | 8,319                             |       | — |   | — |   | — |   | 8,319 |   |
| Investment securities                                  |       | 17,447                            |       | 39,991 |   | 36,114 |   | 7,932 |   | 101,484 |   |
| Securities purchased under agreements to resell        |       | 301                               |       | — |   | — |   | — |   | 301 |   |
| Interest bearing deposits with banks                   |       | 23,208                            |       | — |   | — |   | — |   | 23,208 |   |
| Investment in unconsolidated trusts                    |       | 186                               |       | — |   | — |   | 310 |   | 496 |   |
| Total interest earning assets                          |       | $                                 | 479,366    |   | $ | 457,667 |   | $ | 96,270 |   | $ | 34,232 |   | $ | 1,067,535 |   |
| **Interest Bearing Liabilities:**                      |       |                              |       |   |   |   |   |   |   |   |   |
| NOW and money market deposit accounts                  |       | $                                 | 131,091    |   | $ | 105,683 |   | — |   | — |   | $ | 236,774 |   |
| Savings deposits                                       |       | 97,695                            |       | 160,131 |   | 7,276 |   | — |   | 265,102 |   |
| Time deposits                                          |       | 92,021                            |       | 213,987 |   | 72,641 |   | 8,635 |   | 387,284 |   |
| Short- and long-term borrowings                        |       | 1,915                             |       | 5,865 |   | 15,038 |   | 55,293 |   | 78,111 |   |
| Borrowings made by ESOP to outside parties             |       | 1,214                             |       | — |   | — |   | — |   | 1,214 |   |
| Junior subordinated debt owed to unconsolidated trusts |       | 6,186                             |       | — |   | — |   | 16,496 |   | 22,682 |   |
| Total interest bearing liabilities                     |       | $                                 | 330,122    |   | $ | 485,666 |   | $ | 94,955 |   | $ | 80,424 |   | $ | 991,167 |   |
| Rate sensitive assets (RSA)                            |       | $                                 | 479,366    |   | $ | 937,033 |   | $ | 1,033,303 |   | $ | 1,067,535 |   | $ | 1,067,535 |   |
| Rate sensitive liabilities (RSL)                       |       | 330,122                           |       | 815,788 |   | 910,743 |   | 991,167 |   | 991,167 |   |
| Cumulative GAP (GAP=RSA-RSL)                           |       | 149,244                           |       | 121,245 |   | 122,560 |   | 76,368 |   | 76,368 |   |
| RSA/Total assets                                       |       | 41.94                             | %          | 81.99 | % | 90.41 | % | 93.41 | % | 93.41 | % |
| RSL/Total assets                                       |       | 28.88                             | %          | 71.38 | % | 79.69 | % | 86.72 | % | 86.72 | % |
| GAP/Total assets                                       |       | 13.06                             | %          | 10.61 | % | 10.72 | % | 6.69 | % | 6.69 | % |
| GAP/RSA                                                |       | 31.13                             | %          | 12.94 | % | 11.86 | % | 7.15 | % | 7.15 | % |
|                                                        |            |                                   |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

                Certainshortcomings are inherent in the method of analysis presented in the foregoingtable. For example, although certain assets and liabilities may have similarmaturities or periods to repricing, they may react in different degrees tochanges in market interest rates. Also, the interest rates on certain types ofassets and liabilities may fluctuate in advance of changes in market interestrates, while interest rates on other types of assets may lag behind changes inmarket rates. Additionally, in the event of a change in interest rates,prepayment and early withdrawal levels would likely deviate significantly fromthose assumed in calculating the table. Therefore, we do not rely solely on agap analysis to manage our interest rate risk, but rather we use what webelieve to be the more reliable simulation model relating to changes in netinterest income.

 

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                Basedon simulation modeling at March 31, 2005 and December 31, 2004, our netinterest income would change over a one-year time period due to changes ininterest rates as follows:

 

**Change in Net Interest Income Over One Year Horizon**

** **
| **Changes in Levels of  Interest Rates** | ** **        | **At March 31, 2005**      | ** **            | **At December 31, 2004** | ** **        |
|------------------------------------------|-------------------|----------------------------|-----------------------|--------------------------|-------------------|
| ** **                               | **Dollar Change** | ** **                 | **Percentage Change** | ** **               | **Dollar Change** | ** ** | **Percentage Change** | ** ** |
| ** **                               | ** **        | **(Dollars in thousands)** | ** **            |
| + 2.00                                   | %                 | $                          | (4,948                | )                        | (12.06            | )% | $ | (5,183 | ) | (13.25 | )% |
| + 1.00                                   |              | (2,310                     | )                     | (5.63                    | )                 | (2,030 | ) | (5.19 | ) |
| (1.00                                    | )                 | 1,005                      |                  | 2.45                     |              | 595 |   | 1.52 |   |
| (2.00                                    | )                 | (1,937                     | )                     | (4.72                    | )                 | 78 |   | 0.20 |   |
|                                          |                   |                            |                       |                          |                   |  |  |  |  |  |  |

 

                Oursimulations 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 raterise or fall be limited to 15% of our annual net interest income, as forecastedby the simulation model. As demonstrated by the table above, our interest raterisk exposure was within this policy at March 31, 2005.

 

                Changesin net interest income between the periods above reflect changes in thecomposition of interest earning assets and interest bearing liabilities,related interest rates, repricing frequencies, and the fixed or variablecharacteristics of the interest earning assets and interest bearing liabilities.  Projections of income given by the model arenot actual predictions, but rather show our relative interest rate risk.  Actual interest income may vary from modelprojections.

 

**Item4****. Controls and Procedures.**

 

**Evaluation of Disclosure Controls and Procedures**

 

We have establisheddisclosure controls and procedures to ensure that material information relatingto the Company, including its consolidated subsidiaries, is made known to theofficers who certify our financial reports and to other members of seniormanagement and the board of directors.  Areview and evaluation was performed by our management, including the Company’sChief Executive Officer (the “CEO”) and Chief Financial Officer (the “CFO”), ofthe  effectiveness of the design andoperation of our disclosure controls and procedures as of March 31, 2005pursuant to Rule 13a-15(e) under the Securities Exchange Act of 1934.  Based upon and as of the date of that reviewand evaluation, the CEO and CFO have concluded that our current disclosurecontrols and procedures, as designed and implemented, were effective in allmaterial respects to provide reasonable assurance that information required tobe disclosed in the reports we file and submit under the Securities ExchangeAct of 1934 are recorded, processed, summarized and reported as and whenrequired.   There have been no changes in the Company’s disclosurecontrols or internal controls over financial reporting during the quarter endedMarch 31, 2005 that have materially affected, or are reasonable likely tomaterially affect, the Company’s disclosure controls or internal controls overfinancial reporting.

 

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**PART II****— OTHER INFORMATION**

 

**Item 1****.   Legal Proceedings**

 

                Neither Trinity, the Bank orTitle Guaranty are involved in any pending legal proceedings other than routinelegal proceedings occurring in the normal course of business, which, in theopinion of management, in the aggregate, are material to our consolidatedfinancial condition.

 

**Item 2****.  Unregistered Salesof Equity Securities and Use of Proceeds**

 

**               **On February 17, 2005, theCompany repurchased 153,846 shares of stock at $26.00 per share for a total of$4.0 million.  These shares were placedin treasury.

 

**Item 3****.  Defaults Upon SeniorSecurities**

 

                None

 

**Item 4****.  Submission ofMatters to a Vote of Security Holders**

 

                None

 

**Item 5****.  Other Information**

 

                None

 

**Item 6****.  Exhibits**

 

31.1                           Certification of Chief Executive OfficerPursuant to Rule 13a-14(a)/15d-14(a)

31.2                           Certification of Chief Financial OfficerPursuant to Rule 13a-14(a)/15d-14(a)

32.1                           Certification of Chief Executive OfficerPursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of theSarbanes-Oxley Act of 2002.

32.2                         Certification of Chief Financial OfficerPursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of theSarbanes-Oxley Act of 2002.

 

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**SIGNATURES**

 

                Pursuantto the requirements of Section 12 of the Securities Exchange Act of 1934,the registrant has duly caused this registration statement to be signed on itsbehalf by the undersigned, thereunto duly authorized.

 
| ** **        | **TRINITY CAPITAL CORPORATION** |
|-------------------|---------------------------------|
| ** **        | ** **                      |
| ** **        | ** **                      |
| Date: May 6, 2005 | By:                        | /s/ WILLIAM C. ENLOE |
|              |                            | William C. Enloe |
|              |                            | President and Chief Executive Officer |
|              |                            |   |
| Date: May 6, 2005 | By:                        | /s/ DANIEL  R. BARTHOLOMEW |
|              |                            | Daniel R. Bartholomew |
|              |                            | Chief Financial Officer |

 

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