**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 
| **(Mark One)**                                                                                                                                                                                                          |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **ý****Quarterly Report Pursuant to Section 13 or 15(d) of the  Securities Exchange Act of 1934**                                                                                                                  |
|                                                                                                                                                                                                                    |
| **for the quarterly period ended March 31,  2004.**                                                                                                                                                                     |
|                                                                                                                                                                                                                    |
| **Or**                                                                                                                                                                                                                  |
|                                                                                                                                                                                                                    |
| **o****Transition Report Pursuant to Section 13 or 15(d) of the  Securities Exchange Act of 1934**                                                                                                                      |
|                                                                                                                                                                                                                    |
| **for the transition  period from                                 to** |
|                                                                                                                                                                                                                    |
| **Commission File  Number 000-50266**                                                                                                                                                                                   |

 

| **TRINITY CAPITAL CORPORATION**                         |
|---------------------------------------------------------|
| (Exact name of registrant as  specified in its charter) |
|                                                    |   |   |
| **New Mexico**                                          |   | **85-0242376** |
| (State of incorporation)                                |   | (I.R.S. Employer Identification Number) |
|                                                    |
| **1200 Trinity Drive, Los Alamos, New Mexico  87544**   |
| (Address of principal executive offices)                |
|                                                    |
| **(505) 662-5171**                                 |
| Telephone number                                        |

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.  Yes ý No o

 

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

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

Indicate the number of shares outstanding of each of the issuer’sclasses of common stock, as of the latest practicable date: 6,727,924 shares ofcommon stock, no par value, outstanding as of March 31, 2004.

 

 

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**TRINITY CAPITAL CORPORATION AND SUBSIDIARIES**

 
| **PART I.  FINANCIAL INFORMATION** | 2                                                                                           |
|-----------------------------------------|---------------------------------------------------------------------------------------------|
|                                    |                                                                                        |
| Item 1.                                 | Financial Statements                                                                        | 2 |
|                                    |                                                                                        |   |
| Item  2.                                | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 10 |
|                                    |                                                                                        |   |
| Item  3.                                | Quantitative  and Qualitative Disclosures About Market Risk                                 | 21 |
|                                    |                                                                                        |   |
| Item 4.                                 | Controls and  Procedures                                                                    | 24 |
|                                    |                                                                                        |
| **PART II.  OTHER INFORMATION**    | 24                                                                                          |
|                                    |                                                                                        |
| Item 1.                                 | Legal Proceedings                                                                           | 24 |
|                                    |                                                                                        |   |
| Item 2.                                 | Changes in Securities,  Use of Proceeds and Issuer Purchases of Equity Securities           | 24 |
|                                    |                                                                                        |   |
| Item 3.                                 | Defaults Upon  Senior Securities                                                            | 24 |
|                                    |                                                                                        |   |
| Item  4.                                | Submission  of Matters to a Vote of Securities Holders                                      | 24 |
|                                    |                                                                                        |   |
| Item 5.                                 | Other Information                                                                           | 24 |
|                                    |                                                                                        |   |
| Item 6.                                 | Exhibits and  Reports on Form 8-K                                                           | 24 |
|                                    |                                                                                        |   |
|                                    | SIGNATURES                                                                                  | 25 |
|                                    |                                                                                        |   |
|                                    | CERTIFICATIONS                                                                              |   |

 

1

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**PART I – FINANCIAL INFORMATION**

 

**Item 1.  Financial Statements**

 

**TRINITY CAPITAL CORPORATION &SUBSIDIARIESCONSOLIDATED BALANCE SHEETSMarch 31, 2004 and December 31, 2003(Amounts in thousands, except share data)**

 
|                                                                                                                                                                                                                                                        |   | **March 31,  2004** |      | **December  31, 2003** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|-----------|------------------------|--------|
|                                                                                                                                                                                                                                                        |   | **(Unaudited)**     |      |                   |   |
| **ASSETS**                                                                                                                                                                                                                                                  |   |                |      |                   |   |
| Cash and due from banks                                                                                                                                                                                                                                     |   | $                   | 47,377    |                   | $      | 42,104 |   |
| Interest bearing deposits with banks                                                                                                                                                                                                                        |   | 6,281               |      | 967                    |   |
| Federal funds sold and securities purchased  under resell agreements                                                                                                                                                                                        |   | 40                  |      | 40                     |   |
| **Cash and cash equivalents**                                                                                                                                                                                                                               |   | 53,698              |      | 43,111                 |   |
| Investment securities available for sale                                                                                                                                                                                                                    |   | 54,499              |      | 100,753                |   |
| Investment securities held to maturity, at  amortized cost (fair value of $75,076 at March 31, 2004 and $75,179 at  December 31, 2003)                                                                                                            |   | 73,514              |      | 73,717                 |   |
| Loans (net of allowance for loan losses of  $7,734 at March 31, 2004 and $7,368 at December 31, 2003)                                                                                                                                             |   | 761,469             |      | 733,155                |   |
| Loans held for sale                                                                                                                                                                                                                                         |   | 16,415              |      | 9,511                  |   |
| Premises and equipment, net                                                                                                                                                                                                                                 |   | 20,940              |      | 18,939                 |   |
| Accrued interest receivable                                                                                                                                                                                                                                 |   | 6,382               |      | 6,485                  |   |
| Mortgage servicing rights, net                                                                                                                                                                                                                              |   | 7,416               |      | 7,792                  |   |
| Other real estate owned                                                                                                                                                                                                                                     |   | 6,843               |      | 7,383                  |   |
| Other assets                                                                                                                                                                                                                                                |   | 4,403               |      | 5,904                  |   |
| **Total assets**                                                                                                                                                                                                                                            |   | $                   | 1,005,579 |                   | $      | 1,006,750 |   |
|                                                                                                                                                                                                                                                        |   |                |      |                   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                                               |   |                |      |                   |   |
| Liabilities                                                                                                                                                                                                                                                 |   |                |      |                   |   |
| Deposits:                                                                                                                                                                                                                                                   |   |                |      |                   |   |
| Noninterest bearing                                                                                                                                                                                                                                         |   | $                   | 62,112    |                   | $      | 60,191 |   |
| Interest bearing                                                                                                                                                                                                                                            |   | 780,603             |      | 776,004                |   |
| **Total deposits**                                                                                                                                                                                                                                          |   | 842,715             |      | 836,195                |   |
| Short-term borrowings                                                                                                                                                                                                                                       |   | 5,004               |      | 9,402                  |   |
| Long-term borrowings                                                                                                                                                                                                                                        |   | 65,578              |      | 67,398                 |   |
| Junior subordinated debt owed to  unconsolidated trusts                                                                                                                                                                                                     |   | 16,496              |      | 16,496                 |   |
| Borrowings made by Employee Stock Ownership  Plan (ESOP) to outside parties                                                                                                                                                                                 |   | 1,686               |      | 2,157                  |   |
| Accrued interest payable                                                                                                                                                                                                                                    |   | 2,459               |      | 2,797                  |   |
| Other liabilities                                                                                                                                                                                                                                           |   | 2,534               |      | 6,247                  |   |
| **Total liabilities**                                                                                                                                                                                                                                       |   | 936,472             |      | 940,692                |   |
| Stock owned by Employee Stock Ownership  Plan (ESOP) participants; 653,381 shares at fair value; net of unearned  ESOP shares of 99,748 shares and 126,194 shares at March 31, 2004  and December 31, 2003, respectively, at historical cost |   | 18,694              |      | 18,256                 |   |
| Commitments, contingencies and credit risk  (note 7)                                                                                                                                                                                                        |   |                |      |                   |   |
| Stockholders’ Equity                                                                                                                                                                                                                                   |   |                |      |                   |   |
| Common stock, no par, authorized  20,000,000 shares; issued 6,856,800 shares, outstanding 6,727,924  and 6,701,478 at March 31, 2004 and December 31, 2003, respectively                                                                          |   | 6,836               |      | 6,836                  |   |
| Additional paid-in capital                                                                                                                                                                                                                                  |   | 694                 |      | 545                    |   |
| Retained earnings                                                                                                                                                                                                                                           |   | 43,295              |      | 40,845                 |   |
| Accumulated other comprehensive income                                                                                                                                                                                                                      |   | 147                 |      | 135                    |   |
| Total stockholders’ equity before treasury  stock                                                                                                                                                                                                      |   | 50,972              |      | 48,361                 |   |
| Treasury stock, at cost, 29,128 shares                                                                                                                                                                                                                 |   | (559                | )         | (559                   | )      |
| **Total stockholders’ equity**                                                                                                                                                                                                                         |   | 50,413              |      | 47,802                 |   |
| **Total liabilities and stockholders’ equity**                                                                                                                                                                                                         |   | $                   | 1,005,579 |                   | $      | 1,006,750 |   |

 

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

 

2

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**TRINITY CAPITAL CORPORATION &SUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOMEFor the Three Months Ended March 31, 2004 and 2003(Amounts in thousands except share and per share data)(Unaudited)**

 
|                                                     |   | **Three  Months Ended** |   |
|----------------------------------------------------------|--------|-------------------------|--------|
|                                                     |   | **March 31,  2004**     |   | **March 31,  2003** |   |
|                                                     |   |                    |   |   |   |
| Interest income:                                         |   |                    |   |   |   |
| Loans, including fees                                    |   | $                       | 11,938 |   | $ | 12,492 |   |
| Investment securities:                                   |   |                    |   |   |   |
| Taxable                                                  |   | 973                     |   | 884 |   |
| Nontaxable                                               |   | 158                     |   | 104 |   |
| Other interest bearing deposits                          |   | 6                       |   | 66 |   |
| Investment in unconsolidated trusts                      |   | 13                      |   | 17 |   |
| **Total interest income**                                |   | 13,088                  |   | 13,563 |   |
| Interest expense:                                        |   |                    |   |   |   |
| Deposits                                                 |   | 2,968                   |   | 4,253 |   |
| Short-term borrowings                                    |   | 67                      |   | — |   |
| Long-term borrowings                                     |   | 607                     |   | 388 |   |
| Junior subordinated debt owed to  unconsolidated trusts  |   | 439                     |   | 446 |   |
| **Total interest expense**                               |   | 4,081                   |   | 5,087 |   |
| **Net interest income**                                  |   | 9,007                   |   | 8,476 |   |
| Provision for loan losses                                |   | 600                     |   | 600 |   |
| **Net interest income after provision for  loan losses** |   | 8,407                   |   | 7,876 |   |
| Other income:                                            |   |                    |   |   |   |
| Mortgage loan servicing fees                             |   | 574                     |   | 481 |   |
| Loan and other fees                                      |   | 557                     |   | 387 |   |
| Service charges on deposits                              |   | 331                     |   | 299 |   |
| Gain on sale of loans                                    |   | 1,016                   |   | 3,225 |   |
| Gain on sale of securities                               |   | 272                     |   | — |   |
| Other operating income                                   |   | 267                     |   | 371 |   |
|                                                     |   | 3,017                   |   | 4,763 |   |
| Other expenses:                                          |   |                    |   |   |   |
| Salaries and employee benefits                           |   | 3,853                   |   | 3,563 |   |
| Occupancy                                                |   | 494                     |   | 462 |   |
| Data processing                                          |   | 435                     |   | 301 |   |
| Marketing                                                |   | 226                     |   | 288 |   |
| Amortization and valuation of mortgage  servicing rights |   | 987                     |   | 768 |   |
| Supplies                                                 |   | 172                     |   | 211 |   |
| Other                                                    |   | 1,362                   |   | 1,369 |   |
|                                                     |   | 7,529                   |   | 6,962 |   |
| **Income before income taxes**                           |   | 3,895                   |   | 5,677 |   |
| Income taxes                                             |   | 1,445                   |   | 2,160 |   |
| **Net income**                                           |   | $                       | 2,450  |   | $ | 3,517 |   |
| Basic earnings per common share                          |   | $                       | 0.36   |   | $ | 0.53 |   |
| Diluted earnings per common share                        |   | $                       | 0.36   |   | $ | 0.53 |   |

 

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

 

3

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**TRINITY CAPITAL CORPORATION &SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWSFor the Three Months Ended March 31, 2004 and 2003(Amounts in thousands)(Unaudited)**

 
|                                                                                         |   | **Three  Months Ended** |   |
|----------------------------------------------------------------------------------------------|--------|-------------------------|--------|
|                                                                                         |   | **March 31,  2004**     |   | **March 31,  2003** |   |
|                                                                                         |   |                    |   |   |   |
| Cash Flows From Operating Activities                                                         |   |                    |   |   |   |
| Net income                                                                                   |   | $                       | 2,450  |   | $ | 3,517 |   |
| Adjustments to reconcile net income to net  cash provided by (used in) operating activities: |   |                    |   |   |   |
| Depreciation and amortization                                                                |   | 527                     |   | 436 |   |
| Net amortization of:                                                                         |   |                    |   |   |   |
| Mortgage servicing rights                                                                    |   | 624                     |   | 500 |   |
| Premiums and discounts on investment  securities                                             |   | 387                     |   | 305 |   |
| Junior subordinated debt owed to  unconsolidated trusts issuance costs                       |   | 4                       |   | 5 |   |
| Provision for loan losses                                                                    |   | 600                     |   | 600 |   |
| Change in mortgage servicing rights  valuation allowance                                     |   | 364                     |   | 267 |   |
| Gain on sale of available for sale  securities                                               |   | (272                    | )      | — |   |
| Federal Home Loan Bank (FHLB) stock dividends  received                                      |   | (20                     | )      | (19 | ) |
| Gain on sale of loans                                                                        |   | (1,016                  | )      | (3,225 | ) |
| (Gain) loss on disposal of other real  estate owned                                          |   | 159                     |   | — |   |
| Write-down of value of other real estate  owned                                              |   | —                  |   | 280 |   |
| (Increase) in other assets                                                                   |   | 1,600                   |   | 428 |   |
| Increase (decrease) in other liabilities                                                     |   | (2,008                  | )      | 528 |   |
| Release of Employee Stock Ownership Plan  (ESOP) shares                                      |   | 587                     |   | 472 |   |
| **Net cash provided by operating activities  before originations and gross sales of loans**  |   | 3,986                   |   | 4,094 |   |
| Gross sales of loans held for sale                                                           |   | 61,980                  |   | 179,805 |   |
| Origination of loans held for sale                                                           |   | (68,480                 | )      | (155,842 | ) |
| **Net cash (used in) provided by operating  activities**                                     |   | (2,514                  | )      | 28,057 |   |
| Cash Flows From Investing Activities                                                         |   |                    |   |   |   |
| Proceeds from maturities and paydowns of  investment securities available for sale           |   | 19,585                  |   | 2,868 |   |
| Proceeds from maturities and paydowns of  investment securities held to maturity             |   | 26                      |   | 2,600 |   |
| Proceeds from sale of investment  securities, available for sale                             |   | 28,388                  |   | — |   |
| Purchase of investment securities available  for sale                                        |   | (1,620                  | )      | (18,543 | ) |
| Purchase of investment securities held to  maturity                                          |   | —                  |   | (946 | ) |
| Proceeds from sale of other real estate  owned                                               |   | 1,505                   |   | — |   |
| Loans funded, net of repayments                                                              |   | (30,038                 | )      | (19,307 | ) |
| Purchases of premises and equipment                                                          |   | (2,528                  | )      | (834 | ) |
| **Net cash provided by (used in) investing  activities**                                     |   | 15,318                  |   | (34,162 | ) |
| Cash Flows From Financing Activities                                                         |   |                    |   |   |   |
| Net increase in demand deposits, NOW  accounts and savings accounts                          |   | 9,673                   |   | (173 | ) |
| Net (decrease) increase in time deposits                                                     |   | (3,153                  | )      | 16,435 |   |
| Proceeds from issuances of borrowings                                                        |   | 83,600                  |   | — |   |
| Repayment of borrowings                                                                      |   | (89,818                 | )      | (1,747 | ) |
| Repayment of ESOP debt                                                                       |   | (471                    | )      | (472 | ) |
| Dividend payments                                                                            |   | (2,048                  | )      | (1,912 | ) |
| **Net cash (used in) provided by financing  activities**                                     |   | (2,217                  | )      | 12,131 |   |
| **Net increase in cash and cash equivalents**                                                |   | $                       | 10,587 |   | $ | 6,026 |   |
| Cash and cash equivalents:                                                                   |   |                    |   |   |   |
| Beginning of year                                                                            |   | 43,111                  |   | 40,979 |   |
| End of period                                                                                |   | $                       | 53,698 |   | $ | 47,005 |   |
|                                                                                         |   |                    |   |   |   |
| Supplemental Disclosures of Cash Flow  Information                                           |   |                    |   |   |   |
| Cash payments (receipts) for:                                                                |   |                    |   |   |   |
| Interest                                                                                     |   | $                       | 4,419  |   | $ | 4,849 |   |
| Income taxes                                                                                 |   | (230                    | )      | 1,187 |   |
| Non-cash investing and financing  activities:                                                |   |                    |   |   |   |
| Transfers from loans to other real estate  owned                                             |   | 1,124                   |   | 630 |   |
| Change in unrealized gain on investment  securities, net of taxes                            |   | 12                      |   | (114 | ) |

 

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

 

4

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**TRINITY CAPITAL CORPORATION &SUBSIDIARIESNOTES 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 (the“Title Company”), collectively referred to as the “Company.”  Trinity Capital Trust I(“Trust I”) and Trinity Capital Trust II (“Trust II” and,together with Trust I, the “Trusts”), which are also wholly owned subsidiariesof Trinity, are not consolidated in these financial statements.  The business activities of the Companyconsist solely of the operations of its wholly owned subsidiaries.  All significant intercompany balances andtransactions have been eliminated in consolidation.  In the opinion of management, all adjustments (consisting only ofnormal recurring adjustments) necessary for a fair presentation of the financialposition, results of operations and cash flows for the interim periods havebeen made.  The results of operationsfor the three months ended March 31, 2004 are not necessarily indicative of theresults to be expected for the entire fiscal year.

 

The unauditedinterim financial statements have been prepared in conformity with accountingprinciples generally accepted in the United States of America and industrypractice.  Certain information infootnote disclosure 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, 2003 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 gain oninvestment securities available for sale, net of tax.  Comprehensive income was $2.5 million and $3.4 million for thethree month periods ended March 31, 2004 and 2003, respectively.

 

**Note 3.  Earnings Per Share Data**

 

The followingtable sets forth the computation of basic and diluted earnings per share forthe periods indicated:

 
|                                                                               |   | **Three  Months Ended March 31,**                      |   |
|------------------------------------------------------------------------------------|--------|--------------------------------------------------------|--------|
|                                                                               |   | **2004**                                               |   | **2003** |   |
|                                                                               |   | **In  thousands except for share and  per share data** |   |
| Net income                                                                         |   | $                                                      | 2,450  |   | $ | 3,517 |   |
| Weighted average common shares issued                                              |   | 6,856,800                                              |   | 6,856,800 |   |
| LESS: Weighted average treasury stock  shares                                      |   | (29,128                                                | )      | (29,128 | ) |
| LESS: Weighted average unearned Employee  Stock Ownership Plan (ESOP) stock shares |   | (105,270                                               | )      | (177,541 | ) |
| Weighted average common shares outstanding,  net                                   |   | 6,722,402                                              |   | 6,650,131 |   |
| Basic earnings per common share                                                    |   | $                                                      | 0.36   |   | $ | 0.53 |   |
| Weighted average dilutive shares from stock  option plan                           |   | 117,782                                                |   | 31,134 |   |
| Weighted average common shares outstanding  including dilutive shares              |   | 6,840,184                                              |   | 6,681,265 |   |
| Diluted earnings per common share                                                  |   | $                                                      | 0.36   |   | $ | 0.53 |   |

 

5

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**Note 4.  Recent Accounting Pronouncements**

 

*Statement of Financial Accounting Standards (SFAS)No. 149, “Amendment of Statement 133 on Derivative Instruments and HedgingActivities.”* SFAS 149amends and clarifies financial accounting and reporting for derivativeinstruments, including certain derivative instruments embedded in othercontracts and for hedging activities under SFAS 133, “Accounting for DerivativeInstruments and Hedging Activities.”  The amendments (i) reflect decisions of the DerivativesImplementation Group (DIG), (ii) reflect decisions made by the FASB inconjunction with other projects dealing with financial instruments and (iii)address implementation issues related to the application of the definition of aderivative.  SFAS 149 also modifiesvarious other existing pronouncements to conform with the changes made to SFAS133.  SFAS 149 is effective for contractsentered into or modified after June 30, 2003, and for hedging relationshipsdesignated after June 30, 2003, with all provisions applied prospectively.Adoption of SFAS 149 on July 1, 2003 did not have a significant impact on theCompany’s financial statements.

 

*SFAS No. 150, “Accounting for Certain FinancialInstruments with Characteristics of both Liabilities and Equity.” *SFAS 150 establishes standards for how an issuer classifies, measuresand discloses in its financial statements certain financial instruments withcharacteristics of both liabilities and equity.  SFAS 150 requires that an issuer classify financial instrumentsthat are within its scope as liabilities, in most circumstances. Such financialinstruments include (i) financial instruments that are issued in the form ofshares that are mandatorily redeemable; (ii) financial instruments that embodyan obligation to repurchase the issuer’s equity shares, or are indexed to suchan obligation, and that require the issuer to settle the obligation bytransferring assets; (iii) financial instruments that embody an obligation thatthe issuer may settle by issuing a variable number of its equity shares if, atinception, the monetary value of the obligation is predominantly based on afixed amount, variations in something other than the fair value of the issuer’sequity shares or variations inversely related to changes in the fair value ofthe issuer’s equity shares; and (iv) certain freestanding financialinstruments.  SFAS 150 is effective forcontracts entered into or modified after May 31, 2003, and is otherwiseeffective at the beginning of the first interim period beginning after June 15,2003.  However, on November 7, 2003, theFASB issued FSP FAS 150-3, “Effective Date, Disclosures, and Transition forMandatorily Redeemable Financial Instruments of Certain Nonpublic Entities andCertain Mandatorily Redeemable Noncontrolling Interests under FASB StatementNo. 150”.  The effect of this FSP was todefer the effective date of SFAS 150 indefinitely.

 

In March, 2004 the SECissued *StaffAccounting Bulletin (SAB) 105, “Application of Accounting Principals to LoanCommitments.”*  This SABsummarizes the views of the SEC regarding the application of generally acceptedaccounting principals to loan commitments accounted for as derivativeinstruments.  Under this SAB, banks willno longer be able to record interest rate lock commitments (IRLCs) as assets,but only record any liabilities resulting from these IRLCs.  Currently, the Company follows industrypractice in recording these IRLCs as assets or liabilities, depending on thenet position the Company has on these IRLCs. As of April 1, 2004, the Company will adopt this SAB.  Management believes that this will not havea material effect on the Company’s financial statements.

 

*SFAS No. 132, “Employers’Disclosures about Pensions and Other Postretirement Benefits,”* was revised inDecember 2003.  The provisions of thisstatement do not change the measurement and recognition provisions of previousstatements, but adds disclosures about retirement plan assets, employerobligations, key assumptions in these measurements and the measurement date(s)used to determine pensions and other postretirement benefit measurements thatmake up at least the majority of plan assets and benefit obligations.  These provisions are effective for annualand interim financial statements for periods beginning after December 15,2003.  The adoption of this statement asof January 1, 2004 did not have a significant impact on the Company’s financialstatements.

 

**Note 5.  Long TermBorrowings**

 

TheCompany had Federal Home Loan Bank advances with maturity dates greater thanone year of $65.6 million and $37.7 million as of March 31, 2004 and March 31,2003, respectively.  As of March 31,2004, the advances have fixed interest rates ranging from 2.16% to 6.34%.

 

6

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**Note 6. Junior Subordinated Debt Owed to Unconsolidated Trusts**

 

In March 2000and November 2001, Trust I and Trust II, both Delaware statutory businesstrusts, issued $10 million and $6 million, respectively, of 10.875% and 9.95%,respectively, trust preferred securities (the “trust preferredsecurities”).  These securitiesrepresent preferred beneficial interests in the assets of the Trusts.  The trust preferred securities will matureon March 8, 2030 and December 8, 2031, respectively, and are redeemable inwhole or in part at the option of the Company at any time after March 8, 2010and December 8, 2006, with the approval of the Federal Reserve Board and inwhole at any time upon the occurrence of certain events affecting their tax orregulatory capital treatment.  TheTrusts also issued $310 thousand and $186 thousand of common equity securitiesto Trinity.  The Trusts used the proceedsof the offering of the trust preferred securities to purchase $10.3 million and$6.2 million of 10.875% and 9.95% junior subordinated deferrable interestdebentures (the debentures) issued by the Company, which have termssubstantially similar to the trust preferred securities.  The Company has the right to defer paymentsof interest on the debentures at any time or from time to time for a period ofup to ten consecutive semi-annual periods with respect to each interest paymentdeferred.  Under the terms of thedebentures, in the event that under certain circumstances there is an event ofdefault under the debentures or the Company has elected to defer interest onthe debentures, the Company may not, with certain exceptions, declare or payany dividends or distributions on its capital stock or purchase or acquire anyof its capital stock.  The Company usedthe majority of the proceeds from the sale of the debentures to support itsgrowth.

 

Trinity ownsall of the outstanding common stock of the Trusts.  The Trusts are considered variable interest entities (VIEs) under*FinancialAccounting Standards Board Interpretation (FIN) No. 46, “Consolidation ofVariable Interest Entities, an interpretation of Accounting Research BulletinNo. 51”*, as revised.  Priorto FIN 46, VIEs were generally consolidated by an enterprise when the enterprisehad a controlling financial interest through ownership of a majority of votinginterest in the entity.  Under FIN 46, aVIE should be consolidated by its primary beneficiary.  The Company implemented FIN 46 during thefourth quarter of 2003.  Because Trinityis not the primary beneficiary of the Trusts, the financial statements of theTrusts are no longer included in the consolidated financial statements of theCompany.  The Company’s prior financialstatements have been reclassified to de-consolidate the Company’s investment inthe Trusts.

 

The trustpreferred securities are currently included in the Tier 1 capital of Trinityfor regulatory capital purposes. However, because the Trusts are no longer a part of the Company’sfinancial statements, the Federal Reserve Board may in the future disallowinclusion of the trust preferred securities in Tier 1 capital for regulatorycapital purposes.  In July 2003, theFederal Reserve Board issued a supervisory letter instructing bank holdingcompanies to continue to include the trust preferred securities in their Tier 1capital for regulatory capital purposes until notice is given to thecontrary.  The Federal Reserve Boardintends to review the regulatory implications of the change in accountingtreatment of subsidiary trusts that issue trust preferred securities and, ifnecessary or warranted, provide further appropriate guidance.  There can be no assurance that the FederalReserve Board will continue to permit institutions to include trust preferredsecurities in Tier I capital for regulatory capital purposes.  As of March 31, 2004, assuming the Companywas not permitted to include the $16 million in trust preferred securitiesissued by the Trusts in its Tier 1 capital, the Company would still exceed theregulatory required minimums for capital adequacy purposes.  If the trust preferred securities were nolonger permitted to be included in Tier 1 capital, the Company would also bepermitted to redeem the capital securities without penalty.

 

Payments ofdistributions on the trust preferred securities and payments on redemption ofthe trust preferred securities are guaranteed by the Company on a limitedbasis.  The Company also entered into anagreement as to expenses and liabilities with the Trusts pursuant to which itagreed, on a subordinated basis, to pay any costs, expenses or liabilities ofthe Trusts other than those arising under the trust preferred securities.  The obligations of the Company under thejunior subordinated debentures, the related indenture, the trust agreementestablishing the Trusts, the guarantee and the agreement as to expenses andliabilities, in the aggregate, constitute a full and unconditional guarantee bythe Company of the Trusts’ obligations under the trust preferred securities.

 

Issuance costsof $537 thousand related to the trust preferred securities were deferred andare being amortized over the period until mandatory redemption of thesecurities in March 2030 and December 2031, respectively.  During the three months ended March 31,2004 and 2003, respectively, $4 thousand and $5 thousand of these issuancecosts were amortized.  Unamortizedissuance costs were $476 thousand and $494 thousand at March 31, 2004 and 2003,respectively.

 

Dividendsaccrued and unpaid to securities holders totaled $265 thousand onMarch 31, 2004 and 2003.

 

7

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**Note 7. Commitments, Contingencies and Off-Balance Sheet Activities**

 

*Credit-related financial instruments:*  The Company is a party to credit-relatedfinancial instruments with off-balance-sheet risk in the normal course ofbusiness to meet the financing needs of its customers.  These financial instruments includecommitments to extend credit, standby letters of credit and commercial lettersof credit.  Such commitments involve, tovarying degrees, elements of credit and interest rate risk in excess of theamount recognized in the consolidated balance sheets.

 

The Company’sexposure to credit loss is represented by the contractual amount of thesecommitments.  The Company follows thesame credit policies in making commitments as it does for on-balance-sheetinstruments.

 

At March 31,2004 and December 31, 2003, the following financial instruments wereoutstanding whose contract amounts represent credit risk:

 
|                                       |   | **Contract  Amount** |    |
|--------------------------------------------|--------|----------------------|---------|
|                                       |   | **March 31,  2004**  |    | **December  31, 2003** |   |
|                                       |   | **(In  thousands)**  |    |
| Mortgage loans sold with recourse          |   | —               |    | $ | 17 |   |
| Unfunded commitments under lines of credit |   | $                    | 129,749 |   | 130,868 |   |
| Commercial and standby letters of credit   |   | 22,894               |    | 27,522 |   |
|                                            |        |                      |         |  |  |  |  |

 

Mortgage loanssold with recourse are loans sold to outside investors, with the Companyretaining servicing and responsibility for collection in the event of adefault.  For 2004 and 2003, no suchdefaults occurred or were expected to occur.

 

Commitments toextend 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.

 

Unfundedcommitments under commercial lines-of-credit, revolving credit lines andoverdraft protection agreements are commitments for possible future extensionsof credit to existing customers.  Theselines-of-credit are uncollateralized and usually do not contain a specifiedmaturity date and may not necessarily be drawn upon to the total extent towhich the Company is committed.

 

Commercial andstandby letters of credit are conditional commitments issued by the Company toguarantee the performance of a customer to a third party.  Those letters-of-credit are primarily issuedto support public and private borrowing arrangements.  Essentially all letters of credit issued have expiration dateswithin one year. The credit risk involved in issuing letters-of-credit is thesame as that involved in extending loans to customers.  The Company generally holds collateralsupporting those commitments, if deemed necessary. In the event the customerdoes not perform in accordance with the terms of the agreement with the thirdparty, the Company would be required to fund the commitment.  The maximum potential amount of futurepayments the Company could be required to make is represented by thecontractual amount shown in the summary above. If the commitment is funded, the Company would be entitled to seekrecovery from the customer.  At March31, 2004 and December 31, 2003, no amounts have been recorded asliabilities for the Company’s potential obligations under these guarantees.  The fair value of these commitments isapproximately equal to the fees collected when granting these letters ofcredit.  These fees collected were $20thousand as of March 31, 2004, and are included in “other liabilities” on theCompany’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 and surrounding communities. Although the Company has a diversified loan portfolio, a substantialportion of its loans are made to businesses and individuals associated with, oremployed by, Los Alamos National Laboratory (“the Laboratory”).  The ability of such borrowers to honor theircontracts is predominately dependent upon the continued operation and fundingof the Laboratory.  Investments insecurities issued by states and political subdivisions involve governmentalentities within the state of New Mexico. The distribution of commitments to extend credit approximates thedistribution of loans outstanding. Standby letters of credit were granted primarily to commercialborrowers.

 

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

 

8

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**Note 8.  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,**            |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------|--------|
|                                                                                                                                          |   | **2004**                                      |   | **2003** |   |
|                                                                                                                                          |   | **(In thousands, except  per share amounts)** |   |
| Net income as reported                                                                                                                        |   | $                                             | 2,450  |   | $ | 3,517 |   |
| Deduct: Total stock-based employee  compensation expense determined under fair value based method for all awards,  net of related tax effects |   | 28                                            |   | 17 |   |
| Pro forma net income                                                                                                                          |   | $                                             | 2,422  |   | $ | 3,500 |   |
|                                                                                                                                          |   |                                          |   |   |   |
| Earnings per share:                                                                                                                           |   |                                          |   |   |   |
| Basic – as reported                                                                                                                      |   | $                                             | 0.36   |   | $ | 0.53 |   |
| Basic – pro forma                                                                                                                        |   | $                                             | 0.36   |   | $ | 0.53 |   |
|                                                                                                                                          |   |                                          |   |   |   |
| Diluted – as reported                                                                                                                    |   | $                                             | 0.36   |   | $ | 0.53 |   |
| Diluted – pro forma                                                                                                                      |   | $                                             | 0.35   |   | $ | 0.52 |   |

 

9

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**Item 2.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

*This discussion is intended to focus oncertain financial information regarding the Company and the Bank and is writtento provide the reader with a more thorough understanding of its financialstatements. The following discussion and analysis of the Company’s financialposition and results of operations should be read in conjunction with theinformation set forth in Item 3, Quantitative and Qualitative Disclosuresabout Market Risk and the annual audited consolidated financial statementsfiled on Form 10-K.*

 

**Special Note Concerning Forward-LookingStatements**

 

ThisForm 10-Q (including information incorporated by reference) contains, andfuture oral and written statements of the Company may contain, forward-lookingstatements, within the meaning of such term in the Private SecuritiesLitigation Reform Act of 1995, with respect to the financial condition, resultsof operations, plans, objectives, future performance and business of theCompany. Forward-looking statements, which may be based upon beliefs,expectations and assumptions of our management and on information currentlyavailable to management, are generally identifiable by the use of words such as“believe,” “expect,” “anticipate,” “plan,” “intend,” “estimate,” “may,” “will,”“would,” “could,” “should” or other similar expressions.  Additionally, all statements in thisdocument, including forward-looking statements, speak only as of the date theyare made, and we undertake no obligation to update any statement in light ofnew information or future events.

 

Our ability topredict results or the actual effect of future plans or strategies isinherently uncertain.  Factors whichcould have a material adverse effect on our operations and future prospectsinclude, but are not limited to, the following:

 

•                                          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 the Company’s assets) and the policies of the Board ofGovernors of the Federal Reserve System.

 

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

 

•                                          Ourinability 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 the Internet.

 

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

 

10

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

 

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

 

These risksand uncertainties should be considered in evaluating forward-looking statementsand undue reliance should not be placed on such statements.  Additional information concerning theCompany and our business, including other factors that could materially affectour financial results, will be included in our filings with the Securities andExchange Commission.

 

**Critical Accounting Policies**

 

***Allowancefor Loan Losses:*** Management believes the allowance for loan losses accounting policy iscritical to the portrayal and understanding of our financial condition andresults of operations.  As such,selection and application of this “critical accounting policy” involves judgments,estimates, and uncertainties that are susceptible to change.  In the event that different assumptions orconditions were to prevail, and depending upon the severity of such changes,the possibility of materially different financial condition or results ofoperations is a reasonable likelihood.

 

The allowancefor loan losses is maintained at an amount that management believes will beadequate to absorb probable losses on existing loans, based on an evaluation ofthe collectibility of loans and prior loss experience.  This evaluation also takes intoconsideration such factors as changes in the nature and volume of the loanportfolio, the value of underlying collateral, overall portfolio quality,review of specific problem loans, and current economic conditions that mayaffect the borrower’s ability to pay. While management uses the best information available to make itsevaluation, future adjustments to the allowance may be necessary if there aresignificant changes in economic conditions. In addition, as an integral part of their examination process regulatoryagencies periodically review our allowance for loan losses and may require usto make additions to the allowance based on their evaluation of informationavailable at the time of their examinations.

 

We maintainour allowance for loan losses at a level that management believes will beadequate to absorb probable losses on existing loans based on an evaluation ofthe 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.

 

***Mortgage ServicingRight (MSR) Assets:***  Servicing residential mortgage loans for third-party investorsrepresents a significant business activity of the Bank.  As of March 31, 2004, mortgage loansserviced for others totaled $887.1 million. The MSRs on these loans totaled $7.4 million as of March 31, 2004.  The expected and actual rates of mortgageloan prepayments are the most significant factors driving the value ofMSRs.  Increases in mortgage loanprepayments reduce estimated future net servicing cash flows because the lifeof the underlying loan is reduced.  Indetermining the fair value of the MSRs, mortgage interest rates, which are usedto determine prepayment rates and discount rates, are held constant over theestimated life of the portfolio.  Fairvalues of the MSRs are provided by an independent third-party broker of MSRs ona monthly basis.  The values given bythe broker are based upon current market conditions and assumptions, whichincorporate the expected life of the loans, estimated costs to service theloans, servicing fees to be received and other factors.  MSRs are carried at the lower of the initialcapitalized amount, net of accumulated amortization, or fair value.

 

The fair valueof the MSRs is driven primarily by the effect current mortgage interest rateshave on the likelihood borrowers will prepay the underlying mortgages byrefinancing 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 likelihoodof repayment, contracting the life of the MSRs and decreasing the value ofthese assets.  This can have asignificant impact on our income.  Inthe first three months of 2004, we recognized an expense of $364 thousand dueto the lower values of these MSRs; in 2003, we recognized an expense of $754thousand for these assets.  We can haveno certainty on the direction and amount of interest rate changes lookingforward, and therefore, we can have no certainty on the amount or direction ofthe change in valuation.

 

11

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**Income Statement Analysis**

 

***Net Income-General.***  Net income for the three months ended March31, 2004 was $2.5 million, compared to $3.5 million for the same period of2003.  Diluted earnings per sharedecreased by $0.17 to $0.36 for the three months ended March 31, 2004 from$0.53 for the same period of 2003.  Thisrepresented a decrease in earnings per share of 32.1%.  Thisdecrease was primarily due to a decline in gains on loans sold of $2.2 milliondue to the decline in mortgage loan refinancing activity.  This was partially offset by an increase innet interest income of $531 thousand. The effect of these items, net of taxes, was a decline in unaudited netincome of approximately $1.0 million for the first quarter of 2004 compared tothe first quarter of 2003.

 

Theprofitability of the Company’s operations depends primarily on its net interestincome, which is the difference between total interest earned on interest earningassets 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.

 

The amount ofnet interest income is affected by changes in the volume and mix of interestearning assets, the level of interest rates earned on those assets, the volumeand mix of interest bearing liabilities, and the level of interest rates paidon those interest bearing liabilities. The provision for loan losses is dependent on changes in the loanportfolio and management’s assessment of the collectibility of the loanportfolio, as well as economic and market conditions.  Other income and other expenses are impacted by growth ofoperations and growth in the number of accounts through both acquisitions andcore banking business growth.  Growth inoperations affects other expenses as a result of additional employees, branchfacilities and promotional marketing expense. Growth in the number of accounts affects other income including servicefees as well as other expenses such as computer services, supplies, postage,telecommunications and other miscellaneous expenses.

 

12

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***Net Interest Income.***  The following tables present, for theperiods indicated, the total dollar amount of interest income from averageinterest earning assets and the resultant yields, as well as the interestexpense on average interest bearing liabilities, and the resultant costs, expressedboth in dollars and rates. Borrowings made by the Company’s Employee StockOwnership Plan (“ESOP”) from outside parties are not included in this analysis,as the interest expense on this borrowing is born by the ESOP. Funding for theESOP is recognized as part of compensation expense:

 
|                                                       |   | **Three  Months Ended March 31,** |      |
|------------------------------------------------------------|--------|-----------------------------------|-----------|
|                                                       |   | **2004**                          |      | **2003** |   |
|                                                       |   | **Average  Balance**              |      | **Interest** |   | **Yield/Rate** |   | **Average  Balance** |   | **Interest** |   | **Yield/Rate** |   |
|                                                       |   | **(Dollars in  thousands)**       |      |
| **Interest Earning Assets:**                               |   |                              |      |   |   |   |   |   |   |   |   |   |   |
| Loans(1)(2)                                                |   | $                                 | 763,041   |   | $ | 11,938 |   | 6.29 | % | $ | 718,368 |   | $ | 12,492 |   | 7.05 | % |
| Taxable investment securities                              |   | 137,337                           |      | 973 |   | 2.85 |   | 99,110 |   | 884 |   | 3.62 |   |
| Investment securities exempt from federal  income taxes(3) |   | 20,434                            |      | 243 |   | 4.78 |   | 10,802 |   | 162 |   | 6.08 |   |
| Federal funds sold                                         |   | 40                                |      | — |   | 0.54 |   | 56 |   | — |   | 1.15 |   |
| Other interest bearing deposits                            |   | 2,607                             |      | 6 |   | 0.93 |   | 22,974 |   | 66 |   | 1.17 |   |
| Investment in unconsolidated trust  subsidiaries           |   | 496                               |      | 13 |   | 10.54 |   | 496 |   | 17 |   | 13.90 |   |
| Total interest earning assets                              |   | 923,955                           |      | 13,173 |   | 5.73 |   | 851,806 |   | 13,621 |   | 6.49 |   |
| Non-interest earning assets                                |   | 78,662                            |      |   |   |   |   | 69,154 |   |   |   |   |   |
| Total assets                                               |   | $                                 | 1,002,617 |   |   |   |   |   | $ | 920,960 |   |   |   |   |   |
|                                                       |   |                              |      |   |   |   |   |   |   |   |   |   |   |
| **Interest Bearing Liabilities:**                          |   |                              |      |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                                  |   |                              |      |   |   |   |   |   |   |   |   |   |   |
| NOW and money market deposits                              |   | $                                 | 205,885   |   | $ | 394 |   | 0.77 | % | $ | 193,522 |   | $ | 700 |   | 1.47 | % |
| Savings deposits                                           |   | 211,278                           |      | 549 |   | 1.05 |   | 209,450 |   | 889 |   | 1.72 |   |
| Time deposits                                              |   | 334,540                           |      | 2,025 |   | 2.43 |   | 341,679 |   | 2,664 |   | 3.16 |   |
| Short-term borrowings                                      |   | 17,839                            |      | 67 |   | 1.51 |   | — |   | — |   | — |   |
| Long-term borrowings                                       |   | 66,346                            |      | 607 |   | 3.68 |   | 38,393 |   | 388 |   | 4.10 |   |
| Junior subordinated debt owed to  unconsolidated trusts    |   | 16,496                            |      | 439 |   | 10.70 |   | 16,496 |   | 446 |   | 10.96 |   |
| Total interest bearing liabilities                         |   | 852,384                           |      | 4,081 |   | 1.93 |   | 799,540 |   | 5,087 |   | 2.58 |   |
| Demand deposits—non-interest bearing                  |   | 57,982                            |      |   |   |   |   | 55,771 |   |   |   |   |   |
| Other non-interest bearing liabilities                     |   | 24,131                            |      |   |   |   |   | 5,442 |   |   |   |   |   |
| Stockholders’ equity, including stock owned  by ESOP  |   | 68,120                            |      |   |   |   |   | 60,207 |   |   |   |   |   |
| Total liabilities and stockholders equity                  |   | $                                 | 1,002,617 |   |   |   |   |   | $ | 920,960 |   |   |   |   |   |
|                                                       |   |                              |      |   |   |   |   |   |   |   |   |   |   |
| Net interest income/interest rate                          |   |                              |      |   |   |   |   |   |   |   |   |   |   |
| Spread(4)                                                  |   |                              |      | $ | 9,092 |   | 3.80 | % |   |   | $ | 8,534 |   | 3.91 | % |
|                                                       |   |                              |      |   |   |   |   |   |   |   |   |   |   |
| Net interest margin on a fully tax  equivalent basis(5)    |   |                              |      |   |   | 3.96 | % |   |   |   |   | 4.06 | % |
|                                                       |   |                              |      |   |   |   |   |   |   |   |   |   |   |
| Net interest margin(5)                                     |   |                              |      |   |   | 3.92 | % |   |   |   |   | 4.04 | % |

 

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(1)                                  Non-accrual loans andheld for sale loans are included in average loans.

 

(2)                                  Interest incomeincludes loan origination fees of $730 thousand and $952 thousand for the threemonths ended March 31, 2004 and 2003, respectively.

 

(3)                                  Non-taxableinvestment income is presented on a fully tax equivalent basis, adjusting forfederal and state exemption of interest income and associated disallowedinterest expense. The effective tax rate was 37% and 38% for the three monthsended March 31, 2004 and 2003, respectively. Disallowed expense was $85thousand and $57 thousand for the three months ended March 31, 2004 and 2003,respectively.

 

(4)                                  Interest rate spreadrepresents the difference between the average yield on interest earning assetsand the average cost of interest bearing liabilities and is presented on afully tax equivalent basis.

 

(5)                                  Net interest marginrepresents net interest income as a percentage of average interest earning assets.

 

13

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For the firstquarter of 2004, net interest income on a fully tax equivalent basis increased$558 thousand to $9.1 million from $8.5 million for the first quarter of2003.  The increase in net interestincome resulted from a decrease in interest expense of $1.0 million (19.8%),while interest income on a fully tax equivalent basis decreased $448 thousand(3.3%).  Interest expense decreased dueto a decrease in the average rate on interest bearing liabilities of 65 basispoints, which accounted for a decrease in interest expense of $1.3million.  This was partially offset byan increase in average interest-bearing liabilities of $52.8 million, whichaccounted for an increase in interest expense of $321 thousand.  Interest income on a fully tax equivalentbasis decreased due to a decrease in the average rate on interest earningassets of 76 basis points, which accounted for a decrease in interest income ona fully tax equivalent basis of $1.6 million.  This was partially offset by an increase in the average volume ofinterest earning assets of $60.2 million (7.1%), which accounted for anincrease of $1.1 million in interest income on a fully tax equivalent basis.  The net interest margin expressed in a fullytax equivalent basis decreased 10 basis points to 3.96% for 2004 from 4.06% for2003.

 

***Volume, Mix and RateAnalysis of Net Interest Income.***  The following tables present the extent towhich changes in volume, changes in interest rates, and changes in the interestrates times the changes in volume of interest earning assets and interestbearing liabilities have affected our interest income and interest expenseduring the periods indicated. Information is provided on changes in each category due to: (i) changesattributable to changes in volume (change in volume times the prior periodinterest rate); (ii) changes attributable to changes in interest rate(changes in rate times the prior period volume); and (iii) changesattributable to changes in rate/volume (changes in interest rate times changesin volume).  Changes attributable to thecombined impact of volume and rate have been allocated proportionally to thechanges due to volume and the changes due to rate:

 
|                                                       |   | **Three  Months Ended March 31,** |   |
|------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                       |   | **2004 Compared  to 2003**        |   |
|                                                       |   | **Change Due  to Volume**    |   | **Change Due  to Rate** |   | **Total  Change** |   |
|                                                       |   | **(In thousands)**                |   |
| **Interest Earning Assets:**                               |   |                              |   |   |   |   |   |
| Loans                                                      |   | $                                 | 747    |   | $ | (1,301 | ) | $ | (554 | ) |
| Taxable investment securities                              |   | 295                               |   | (206 | ) | 89 |   |
| Investment securities exempt from federal  income taxes(1) |   | 121                               |   | (40 | ) | 81 |   |
| Federal funds sold                                         |   | —                            |   | — |   | — |   |
| Other interest bearing deposits                            |   | (49                               | )      | (11 | ) | (60 | ) |
| Investment in unconsolidated trust  subsidiaries           |   | —                            |   | (4 | ) | (4 | ) |
| Total increase (decrease) in interest  income              |   | 1,114                             |   | (1,562 | ) | (448 | ) |
| **Interest Bearing Liabilities:**                          |   |                              |   |   |   |   |   |
| NOW and money market deposit accounts                      |   | 42                                |   | (348 | ) | (306 | ) |
| Savings deposits                                           |   | 8                                 |   | (348 | ) | (340 | ) |
| Time deposits                                              |   | (55                               | )      | (584 | ) | (639 | ) |
| Short-term borrowings                                      |   | 67                                |   | — |   | 67 |   |
| Long-term borrowings                                       |   | 259                               |   | (40 | ) | 219 |   |
| Junior subordinated debt owed to  unconsolidated trusts    |   | —                            |   | (7 | ) | (7 | ) |
| Total increase (decrease) in interest  expense             |   | 321                               |   | (1,327 | ) | (1,006 | ) |
| Increase (decrease) in net interest income                 |   | $                                 | 793    |   | $ | (235 | ) | $ | 558 |   |

 

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(1)                                  Non-taxableinvestment income is presented on a fully tax equivalent basis, adjusting forfederal and state exemption of interest income and associated disallowedinterest expense.  The effective taxrate for the three months ended March 31 was 37% and 38% for 2004 and 2003,respectively.  Disallowed expense forthe three months ended March 31 was $85 thousand and $57 thousand for 2004 and2003, respectively.

 

14

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***Other Income.***  Changes in other income between the threemonths ended March 31, 2004 and 2003 are as follows:

 
|                         |   | **Three  Months Ended** |   |                |   |
|------------------------------|--------|-------------------------|--------|---------------------|--------|
|                         |   | **March 31,  2004**     |   | **March 31,  2003** |   | **Net  difference** |   |
|                         |   | **(In thousands)**      |   |
| Other income:                |   |                    |   |                |   |   |   |
| Mortgage loan servicing fees |   | $                       | 574    |                | $      | 481 |   | $ | 93 |   |
| Loan and other fees          |   | 557                     |   | 387                 |   | 170 |   |
| Service charges on deposits  |   | 331                     |   | 299                 |   | 32 |   |
| Gain on sale of loans        |   | 1,016                   |   | 3,225               |   | (2,209 | ) |
| Gain on sale of securities   |   | 272                     |   | —              |   | 272 |   |
| Other operating income       |   | 267                     |   | 371                 |   | (104 | ) |
|                         |   | $                       | 3,017  |                | $      | 4,763 |   | $ | (1,746 | ) |

 

In the first quarter of 2004, other income decreased by $1.8 million(37.5%) to $3.0 million from $4.8 million for the first quarter of 2003.  Gain on loans sold decreased $2.2 milliondue to a drop in mortgage loan refinance activity from historically high activityin the first quarter of 2003. This drop in refinancing was expected and was experienced generally inthe financial services industry. In the first quarter of2004, other income also included a gain of $272 thousand on the sale ofsecurities.  Loan and other feesincreased $170 thousand (43.9%) from 2003 to 2004, mainly due to an increase intrust fees related to the generation of more trust business.

 

***Other Expenses.***  Changes in other expenses between the threemonths ended March 31, 2004 and 2003 are as follows:

 
|                                                     |   | **Three  Months Ended** |   |                |   |
|----------------------------------------------------------|--------|-------------------------|--------|---------------------|--------|
|                                                     |   | **March 31,  2004**     |   | **March 31,  2003** |   | **Net  difference** |   |
|                                                     |   | **(In thousands)**      |   |
| Other expenses:                                          |   |                    |   |                |   |   |   |
| Salaries and employee benefits                           |   | $                       | 3,853  |                | $      | 3,563 |   | $ | 290 |   |
| Occupancy                                                |   | 494                     |   | 462                 |   | 32 |   |
| Data processing                                          |   | 435                     |   | 301                 |   | 134 |   |
| Marketing                                                |   | 226                     |   | 288                 |   | (62 | ) |
| Amortization and valuation of mortgage  servicing rights |   | 987                     |   | 768                 |   | 219 |   |
| Supplies                                                 |   | 172                     |   | 211                 |   | (39 | ) |
| Other                                                    |   | 1,362                   |   | 1,369               |   | (7 | ) |
|                                                     |   | $                       | 7,529  |                | $      | 6,962 |   | $ | 567 |   |

 

For the first quarter of 2004, other expenses increased $567 thousand(8.1%) to $7.5 million in 2004 from $7.0 million in the first quarter of2003.  Salaries and employee benefits,the largest component of other expenses, increased by $290 thousand (8.1%), dueto an increase in staff over the past 12 months of 20 full-time equivalentemployees (7.4%), most of whom were officer and supervisor level employees inthe loan department.  The increase instaff was necessary because of the extremely high mortgage loan refinancingvolume during the year.  Amortizationand valuation of mortgage servicing rights increased $219 thousand (28.5%), dueto both an increase in volume of mortgage servicing rights resulting in higheramortization and a decline in interest rates resulting in higher impairment ofthese mortgage servicing rights.  Dataprocessing expenses increased $134 thousand (44.5%), mainly due to theadditional software depreciation expense related to the Bank’s new onlinebanking system and other new software systems.

 

***Income Taxes.***  In the first quarter of 2004, income taxexpense decreased $715 thousand (32.5%) over the first quarter of 2003 to atotal of $1.4 million compared to $2.2 million.  The effective tax rate decreased to 37.1% in the first quarter of2004, compared to 38.0% in the first quarter of 2003.

 

***BalanceSheet—General.*** Total assets at March 31, 2004 remained at $1.0 billion, following aslight decrease of $1.2 million (0.1%) from December 31, 2003.  During the same period, total liabilitiesdecreased $4.2 million (0.4%) to a total of $936.5 million on March 31, 2004from $940.7 on December 31, 2003.  Thedecline in total liabilities was primarily due to a decline in short-termborrowings of $4.4 million.  Stockholders’ equity (including stock owned by the Employee StockOwnership Plan) increased $3.0 million (4.5%) to $69.1 million on March 31,2004 compared to $66.1 million on December 31, 2003.

 

15

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***InvestmentSecurities.*** The primary purposes of the investment portfolio are to provide a sourceof earnings, for liquidity management, to provide collateral to pledge againstpublic deposits and to control interest rate risk.  In managing the portfolio, the Company seeks to obtain theobjectives of safety of principal, liquidity, diversification and maximizedreturn on funds.  For an additionaldiscussion with respect to these matters, see “Liquidity” and “CapitalResources” under Item 2 and “Asset Liability Management” under Item 3below.

 

The followingtables set forth the amortized cost and fair value of securities by accountingclassification category and by type of security as indicated:

 
|                                |   | **At March  31, 2004** |   | **At  December 31, 2003** |   | **At March  31, 2003** |   |
|-------------------------------------|--------|------------------------|--------|--------------------------------|--------|------------------------|--------|
|                                |   | **Amortized  Cost**    |   | **Fair Value**                 |   | **Amortized  Cost**    |   | **Fair Value** |   | **Amortized  Cost** |   | **Fair Value** |   |
|                                |   | **(In  thousands)**    |   |
| Securities Available for Sale:      |   |                   |   |                           |   |                   |   |   |   |   |   |   |   |
| U.S. Government agencies            |   | $                      | 47,956 |                           | $      | 48,187                 |   | $ | 94,868 |   | $ | 95,081 |   | $ | 46,970 |   | $ | 47,486 |   |
| Equity securities                   |   | 6,306                  |   | 6,312                          |   | 5,666                  |   | 5,672 |   | 3,782 |   | 3,788 |   |
| Total securities available for sale |   | $                      | 54,262 |                           | $      | 54,499                 |   | $ | 100,534 |   | $ | 100,753 |   | $ | 50,752 |   | $ | 51,274 |   |
|                                |   |                   |   |                           |   |                   |   |   |   |   |   |   |   |
| Securities Held to Maturity:        |   |                   |   |                           |   |                   |   |   |   |   |   |   |   |
| U.S. Government agencies            |   | $                      | 53,072 |                           | $      | 54,438                 |   | $ | 53,246 |   | $ | 54,541 |   | $ | 56,769 |   | $ | 58,333 |   |
| States and political subdivisions   |   | 20,442                 |   | 20,638                         |   | 20,471                 |   | 20,638 |   | 11,324 |   | 11,553 |   |
| Total securities held to maturity   |   | $                      | 73,514 |                           | $      | 75,076                 |   | $ | 73,717 |   | $ | 75,179 |   | $ | 68,093 |   | $ | 69,886 |   |

 

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

 
|                      |   | **At March  31, 2004**      |    | **At  December 31, 2003** |   | **At March  31, 2003** |   |
|---------------------------|--------|-----------------------------|---------|---------------------------|--------|------------------------|--------|
|                      |   | **Amount**                  |    | **Percent**               |   | **Amount**             |   | **Percent** |   | **Amount** |   | **Percent** |   |
|                      |   | **(Dollars in  thousands)** |    |
| Commercial                |   | $                           | 75,548  |                      | 9.80   | %                      | $      | 71,299 |   | 9.61 | % | $ | 68,113 |   | 10.02 | % |
| Commercial real estate    |   | 294,266                     |    | 38.18                     |   | 286,551                |   | 38.61 |   | 261,796 |   | 38.51 |   |
| Residential real estate   |   | 232,995                     |    | 30.22                     |   | 222,282                |   | 29.95 |   | 202,477 |   | 29.79 |   |
| Construction real estate  |   | 118,679                     |    | 15.39                     |   | 112,616                |   | 15.18 |   | 101,275 |   | 14.90 |   |
| Installment and other     |   | 49,416                      |    | 6.41                      |   | 49,349                 |   | 6.65 |   | 46,071 |   | 6.78 |   |
| Total loans               |   | 770,904                     |    | 100.00                    |   | 742,097                |   | 100.00 |   | 679,732 |   | 100.00 |   |
| Unearned income           |   | 1,701                       |    |                      |   | 1,574                  |   |   |   | 1,228 |   |   |   |
| Gross loans               |   | 769,203                     |    |                      |   | 740,523                |   |   |   | 678,504 |   |   |   |
| Allowance for loan losses |   | 7,734                       |    |                      |   | 7,368                  |   |   |   | 6,560 |   |   |   |
| Net loans                 |   | $                           | 761,469 |                      |   |                   | $      | 733,155 |   |   |   | $ | 671,944 |   |   |   |

 

Net loansincreased $89.6 million (13.3%) to $761.5 million at March 31, 2004 from$671.9 million at March 31, 2003. The increase was due primarily to growth in the Company’s commercialreal estate, construction and residential real estate loan portfolios.

 

16

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***Asset Quality.***  The following table sets forth the amountsof non-performing loans and non-performing assets at the dates indicated:

 
|                                                          |   | **At March  31, 2004**     |   | **At  December 31,  2003** |   | **At March  31, 2003** |   |
|---------------------------------------------------------------|--------|----------------------------|--------|----------------------------|--------|------------------------|--------|
|                                                          |   | **(Dollars in thousands)** |   |
| Non-accruing loans                                            |   | $                          | 3,275  |                       | $      | 3,112                  |   | $ | 2,457 |   |
| Loans 90 days or more past due, still  accruing interest |   | 11                         |   | 80                         |   | 54                     |   |
| Total non-performing loans                                    |   | 3,286                      |   | 3,192                      |   | 2,511                  |   |
| Other real estate owned                                       |   | 6,843                      |   | 7,383                      |   | 4,057                  |   |
| Other repossessed assets                                      |   | 26                         |   | 353                        |   | 32                     |   |
| Total non-performing assets                                   |   | $                          | 10,155 |                       | $      | 10,928                 |   | $ | 6,600 |   |
|                                                          |   |                       |   |                       |   |                   |   |
| Total non-performing loans to total loans                     |   | 0.43                       | %      | 0.43                       | %      | 0.37                   | %      |
| Allowance for loan losses to non-performing  loans            |   | 235.36                     | %      | 230.83                     | %      | 261.25                 | %      |
| Total non-performing assets to total assets                   |   | 1.01                       | %      | 1.09                       | %      | 0.71                   | %      |

 

At March 31,2004, total non-performing assets increased $3.6 million (54.5%) to $10.2million from $6.6 million at March 31, 2003 due to increases in other realestate owned of $2.8 million and increases in non-performing loans of $775thousand.  The increases in other realestate owned was primarily due to two large construction loans placed intoother real estate owned totaling $6.3 million. This was partially offset by the sale of a commercial property and aconstruction loan totaling $3.1 million. Non-performing loans increased primarily due to two loans to a singlecustomer totaling $927 thousand that were classified as non-accrual in 2004.

 

At March 31,2004, total non-performing assets decreased $773 thousand (7.1%) to $10.2million from $10.9 million at December 31, 2003, primarily due to decreases inother real estate owned of $540 thousand. The decreases in other real estate owned was primarily due to the saleof a commercial real estate property valued at $1.3 million in 2004, which waspartially offset by the acquisition of other real estate owned.

 

*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“critical accounting policy” involves judgments, estimates, and uncertaintiesthat are susceptible to change.  In theevent that different assumptions or conditions were to prevail, and dependingupon the severity of such changes, the possibility of materially differentfinancial condition or results of operations is a reasonable likelihood.

 

The allowancefor loan losses is maintained at an amount that management believes will beadequate to absorb probable losses on existing loans, based on an evaluation ofthe collectibility of loans and prior loss experience.  This evaluation also takes intoconsideration such factors as changes in the nature and volume of the loanportfolio, the value of underlying collateral, overall portfolio quality,review of specific problem loans, and current economic conditions that mayaffect the borrower’s ability to pay. While management uses the best information available to make itsevaluation, future adjustments to the allowance may be necessary if there aresignificant changes in economic conditions. In addition, as an integral part oftheir examination process regulatory agencies periodically review the Company’sallowance for loan losses and may require the Company to make additions to theallowance based on their evaluation of information available at the time oftheir examinations.

 

17

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The followingtable presents an analysis of the allowance for loan losses for the periodspresented:

 
|                                           |   | **Three  Months Ended**    |    |
|------------------------------------------------|--------|----------------------------|---------|
|                                           |   | **March 31,  2004**        |    | **March 31,  2003** |   |
|                                           |   | **(Dollars in thousands)** |    |
| Balance at beginning of period                 |   | $                          | 7,368   |   | $ | 6,581 |   |
| Provision for loan losses                      |   | 600                        |    | 600 |   |
| Charge-offs                                    |   | (238                       | )       | (650 | ) |
| Recoveries                                     |   | 4                          |    | 29 |   |
| Net charge-offs                                |   | (234                       | )       | (621 | ) |
| Balance at end of period                       |   | $                          | 7,734   |   | $ | 6,560 |   |
|                                           |   |                       |    |   |   |
| Gross loans at end of period                   |   | $                          | 769,203 |   | $ | 678,504 |   |
| Ratio of allowance to total loans              |   | 1.01                       | %       | 0.97 | % |
| Ratio of net charge-offs to average loans  (1) |   | 0.13                       | %       | 0.35 | % |

 

----

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

 

Netcharge-offs for the three months ended March 31 totaled $234 thousand, adecrease of $387 thousand (62.3%) from $621 thousand from the three monthsended March 31, 2003.  The majority ofthe charge-offs were residential real estate and personal loans.  The provision for loan losses remained thesame for the three months ended March 31, 2004 and 2003, due to management’sanalysis of current non-performing loans and other factors.

 

The followingtable sets forth the allocation of the allowance for loan losses for theperiods presented and the percentage of loans in each category to total loans.An allocation for a loan classification is only for internal analysis of theadequacy of the allowance and is not an indication of expected or anticipatedlosses:

 
|                                   |   | **At March  31, 2004**      |   | **At  December 31, 2003** |   | **At March  31, 2003** |   |
|----------------------------------------|--------|-----------------------------|--------|---------------------------|--------|------------------------|--------|
|                                   |   | **Amount**                  |   | **Percent**               |   | **Amount**             |   | **Percent** |   | **Amount** |   | **Percent** |   |
|                                   |   | **(Dollars in  thousands)** |   |
| Commercial                             |   | $                           | 1,968  |                      | 9.80   | %                      | $      | 2,509 |   | 9.61 | % | $ | 1,920 |   | 10.02 | % |
| Commercial and residential real estate |   | 3,432                       |   | 68.40                     |   | 3,192                  |   | 68.56 |   | 1,806 |   | 68.30 |   |
| Construction real estate               |   | 1,338                       |   | 15.39                     |   | 844                    |   | 15.18 |   | 1,809 |   | 14.90 |   |
| Installment and other                  |   | 949                         |   | 6.41                      |   | 799                    |   | 6.65 |   | 565 |   | 6.78 |   |
| Unallocated                            |   | 47                          |   | N/A                       |   | 24                     |   | N/A |   | 460 |   | N/A |   |
| Total                                  |   | $                           | 7,734  |                      | 100.00 | %                      | $      | 7,368 |   | 100.00 | % | $ | 6,560 |   | 100.00 | % |

 

----

N/A—not applicable

 

The portion ofthe allocation that was based upon historical loss experience increased by $235in 2004, from $2.3 million in 2003 to $2.5 million in 2004.  This was largely due to an increase in theallocation for construction real estate loans which increased by $701 thousandand the allocation for installment and other loans which increased $148thousand.  This was partially offset bya decrease in the allocation for commercial loans of $569 thousand.  Concentration allocation increased slightly,from $4.7 million in 2003 to $4.8 million in 2004.  This was due to an increase in the allocation for mortgages of$191 thousand, which was partially offset by a lower allocation in constructionloans (a decline of $132 thousand).  Theallocation for specifically identified loans increased slightly, from $325thousand to $345 thousand.

 

18

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Managementanticipates continued growth in the loan portfolio due to a strengthened localeconomy, a stabilized Los Alamos National Laboratory budget of over $2 billionand the expectation of a slight increase in interest rates.  The volume of commercial real estate andconstruction loans is also anticipated to increase as the industry continues tostrengthen and the recovery in capital spending boosts production and profitsinto 2004.  Although record mortgagefinancing peaked in 2003, the housing market for new construction and resalehomes is expected to remain strong, especially in the under $500 thousandmarket, which should remain constant. Residential real estate for property worth greater than $1.5 million isexpected to be as “soft” as during the last several years.  Losses in the first quarter of 2004 wereless than expected due to the absence of any commercial charge-offs.  Management believes losses will remain closeto the last three years averages or trend slightly downward in 2004.

 

Additions tothe 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 managementbelieves the allowance for loan losses is sufficient to cover probable lossesinherent in the loan portfolio, there can be no assurance that the allowancewill 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“Special Mention” is also presented.  Anasset is classified Substandard if it is inadequately protected by the currentnet worth and 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 addedcharacteristic that the weaknesses present make collection or liquidation infull, on the basis of currently existing facts, conditions and values, highlyquestionable and improbable.  Assetsclassified as Loss are those considered uncollectible and viewed asnon-bankable assets, worthy of charge-off. Assets that do not currently expose the Company to sufficient risk towarrant classification in one of the aforementioned categories, but possessweaknesses that may or may not be within the control of the customer are deemedto be Special Mention.

 

The Company’sdetermination as to the classification of its assets and the amount of itsvaluation allowances is subject to review by the Bank’s primary regulators,which can order the establishment of additional general or specific loss allowances.  The Comptroller of the Currency, inconjunction with the other federal banking agencies, has adopted an interagencypolicy statement on the allowance for loan losses.  The policy statement provides guidance for financial institutionson both the responsibilities of management for the assessment and establishmentof adequate allowances and guidance for banking agency examiners to use indetermining the adequacy of general valuation guidelines.  Generally, the policy statement recommendsthat (i) institutions have effective systems and controls to identify,monitor and address asset quality problems; (ii) management has analyzedall significant factors that affect the collectibility of the portfolio in areasonable manner; and (iii) management has established acceptableallowance evaluation processes that meet the objectives set forth in the policystatement.  Management believes it hasestablished an adequate allowance for probable loan losses.  The Company analyzes its process regularly,with modifications made if needed, and reports those results quarterly at Boardof Directors meetings.  However, therecan be no assurance that regulators, in reviewing the Company’s loan portfolio,will not request the Company to materially increase its allowance for loanlosses at a future time.  Althoughmanagement believes that adequate specific and general loan loss allowanceshave been established, actual losses are dependent upon future events and, assuch, further additions to the level of specific and general loan lossallowances may become necessary.

 

The followingtable shows the amounts of adversely classified assets and special mentionloans as of the periods indicated:

 
|                              |   | **At March  31, 2004**     |   | **At  December  31, 2003** |   | **At March  31, 2003** |   |
|-----------------------------------|--------|----------------------------|--------|----------------------------|--------|------------------------|--------|
|                              |   | **(Dollars in thousands)** |   |
| Loans classified as:              |   |                       |   |                       |   |                   |   |
| Substandard                       |   | $                          | 12,170 |                       | $      | 9,815                  |   | $ | 6,749 |   |
| Doubtful                          |   | 95                         |   | 180                        |   | —                 |   |
| Total adversely classified loans  |   | 12,265                     |   | 9,995                      |   | 6,749                  |   |
| Other real estate owned           |   | 6,843                      |   | 7,383                      |   | 4,057                  |   |
| Other repossessed assets          |   | 26                         |   | 353                        |   | 32                     |   |
| Total adversely classified assets |   | $                          | 19,134 |                       | $      | 17,731                 |   | $ | 10,838 |   |
|                              |   |                       |   |                       |   |                   |   |
| Special mention loans             |   | $                          | 13,577 |                       | $      | 17,507                 |   | $ | 13,157 |   |

 

19

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Totaladversely classified assets increased $8.3 million (76.9%) from March 31, 2003to March 31, 2004.  The main reason forthe increase was an increase of $5.4 million in loans classified as substandardand an increase of $2.8 million in other real estate owned.  The increase in loans classified assubstandard (and offsetting decrease in special mention loans) was due to there-classification of one large borrower relationship of $5.7 million consistingof commercial, commercial real estate, consumer and residential mortgages fromspecial mention to substandard.

 

**Sources of Funds**

 

***Liquidity andSources of Capital***

 

The Company’scash flows are comprised of three classifications: cash flows from operatingactivities, cash flows from investing activities and cash flows from financingactivities. Net cash (used in) provided by operating activities was $(2.5)million and $28.1 million for the three months ended March 31, 2004 and 2003,respectively.  Net cash used inoperating activities increased $30.6 million in the first three months of 2004compared to the first three months of 2003 largely due to a decline in the saleof loans held for sale by $117.8 million over the first three months of 2003,which was partially offset by the origination of loans held for sale thatdecreased $87.4 million in the same period. Net cash provided by (used in) investing activities was $15.3 millionand $(34.2) million for the three months ended March 31, 2004 and 2003,respectively.  The $49.5 millionincrease in cash provided by investing activities was largely due to the saleof $28.4 million in investment securities, as well as the increase of cashprovided by maturities and paydowns of securities of $14.1 million.  Net cash (used in) provided by financingactivities was $(2.2) million and $12.1 million for the three months endedMarch 31, 2004 and 2003, respectively. The $14.3 million decrease in cash provided by financing activities wasmainly due to a decrease in new deposit growth of $9.7 million from the firstthree months of 2003 compared to the first three months of 2004.

 

The Company expects to haveavailable cash to meet its liquidity needs.  Liquidity management ismonitored by the Asset/Liability committee of the Bank, which takes intoaccount the marketability of assets, the sources and stability of funding andthe level of unfunded commitments.  Inthe event that additional short-term liquidity is needed, the Company hasestablished relationships with several large regional banks to provideshort-term borrowings 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 the Federal Home Loan Bank(“FHLB”) and has the ability to borrow from the FHLB.  The Company may also have up to 25% of its Tier 1 capital in theform of trust preferred securities.  Asof March 31, 2004, the Company could borrow an additional $6 million in trustpreferred securities.  Subsequently, inApril of 2004, the Company issued an additional $6.0 million in trust preferredsecurities, generating additional liquidity and increasing Tier 1 capital.  These trust preferred securities were issuedprimarily to help support the continued growth of the Company and insure thatit has sufficient Tier I capital to remain “well-capitalized.”  As a contingency plan for significantfunding needs, the Asset/Liability committee may also consider the sale ofinvestment securities, selling securities under agreement to repurchase, saleof certain loans and/or the temporary curtailment of lending activities.

 

At March 31, 2004, theCompany’s total risk-based capital ratio was 11.74%, the Tier 1 capital torisk-weighted assets ratio was 10.76%, and the Tier 1 capital to average assetsratio was 8.42%.  The Bank wascategorized as “well-capitalized” under Federal Deposit Insurance Corporationregulations at March 31, 2004 and December 31, 2003.  At December 31, 2003, the Company’s total risk-based capitalratio was 11.61%, the Tier 1 capital to risk-weighted assets ratio was 10.64%,and the Tier 1 capital to average assets ratio was 8.05%.

 

At March 31, 2004 andDecember 31, 2003, the Company’s book value per common share was $10.27 and$9.86, respectively.

 

20

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**Item 3.  Quantitative and Qualitative DisclosuresAbout Market Risk**

 

**Asset Liability Management**

 

The Company’snet 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 theCompany’s policy to maintain an acceptable level of interest rate risk over arange of possible changes in interest rates while remaining responsive tomarket demand for loan and deposit products. The strategy employed by the Company to manage its interest rate risk isto measure its risk using an asset/liability simulation model and adjust thematurity of securities in its investment portfolio to manage that risk.

 

Interest raterisk can also be measured by analyzing the extent to which the repricing ofassets and liabilities are mismatched to create an interest sensitivity“gap”.  An asset or liability is said tobe interest rate sensitive within a specific time period if it will mature orreprice within that time period.  Theinterest rate sensitivity gap is defined as the difference between the amountof interest earning assets maturing or repricing within a specific time periodand the amount of interest bearing liabilities maturing or repricing withinthat same time period.  A gap isconsidered positive when the amount of interest rate sensitive assets exceedsthe amount of interest rate sensitive liabilities.  A gap is considered negative when the amount of interest ratesensitive liabilities exceeds the amount of interest rate sensitiveassets.  During a period of risinginterest rates, therefore, a negative gap would tend to adversely affect netinterest income.  Conversely, during aperiod of falling interest rates, a negative gap position would tend to resultin an increase in net interest income.

 

The followingtable sets forth the amounts of interest earning assets and interest bearingliabilities outstanding at March 31, 2004, which are anticipated by theCompany, based upon certain assumptions, to reprice or mature in each of thefuture time periods shown. Except as stated below, the amount of assets andliabilities shown which reprice or mature during a particular period weredetermined based on the earlier of the term to repricing or the term torepayment of the asset or liability. The table is intended to provide an approximation of the projectedrepricing of assets and liabilities at March 31, 2004 on the basis ofcontractual maturities and scheduled rate adjustments within a three-monthperiod and subsequent selected time intervals. The loan amounts in the table reflect principal balances expected to bereinvested and/or repriced as a result of contractual amortization and rateadjustments on adjustable-rate loans. Loan and investment securitiescontractual maturities and amortization reflect modest prepaymentassumptions.  While NOW, money marketand savings deposit accounts have adjustable rates, it is assumed that theinterest 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 six to fourteen months.

 

Borrowingsmade by the Employee Stock Ownership Plan (ESOP) are not included below, as theCompany does not recognize interest expense on these borrowings.  The Company makes discretionarycontributions to the ESOP to service this debt, and these contributions arerecognized as compensation expense.

 

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|                                                    |   | **Time to  Maturity or Repricing** |    |
|---------------------------------------------------------|--------|------------------------------------|---------|
| **As of March 31, 2004:**                               |   | **0-90 Days**                      |    | **91-365  Days** |   | **1-5 Years** |   | **Over 5  Years** |   | **Total** |   |
|                                                    |   | **(In  thousands)**                |    |
| **Interest Earning Assets:**                            |   |                               |    |   |   |   |   |   |   |   |   |
| Loans                                                   |   | $                                  | 404,151 |   | $ | 338,241 |   | $ | 23,900 |   | $ | 1,911 |   | $ | 769,203 |   |
| Loans held for sale                                     |   | 16,415                             |    | — |   | — |   | — |   | 16,415 |   |
| Investment securities                                   |   | 15,663                             |    | 41,325 |   | 71,025 |   | — |   | 128,013 |   |
| Securities purchased under agreements to  resell        |   | 40                                 |    | — |   | — |   | — |   | 40 |   |
| Interest bearing deposits with banks                    |   | 6,281                              |    | — |   | — |   | — |   | 6,281 |   |
| Investment in unconsolidated trusts                     |   | —                             |    | — |   | — |   | 496 |   | 496 |   |
| Total interest earning assets                           |   | $                                  | 442,550 |   | $ | 379,566 |   | $ | 94,925 |   | $ | 2,407 |   | $ | 920,448 |   |
|                                                    |   |                               |    |   |   |   |   |   |   |   |   |
| **Interest Bearing Liabilities:**                       |   |                               |    |   |   |   |   |   |   |   |   |
| NOW and money market deposit accounts                   |   | $                                  | 104,999 |   | $ | 112,686 |   | $ | 2,465 |   | — |   | $ | 220,150 |   |
| Savings deposits                                        |   | 71,100                             |    | 155,120 |   | — |   | — |   | 226,220 |   |
| Time deposits                                           |   | 84,995                             |    | 150,987 |   | 96,752 |   | $ | 1,499 |   | 334,233 |   |
| Short- and long-term borrowings                         |   | 1,842                              |    | 10,629 |   | 14,578 |   | 43,533 |   | 70,582 |   |
| Junior subordinated debt owed to  unconsolidated trusts |   | —                             |    | — |   | — |   | 16,496 |   | 16,496 |   |
| Total interest bearing liabilities                      |   | $                                  | 262,936 |   | $ | 429,422 |   | $ | 113,795 |   | $ | 61,528 |   | $ | 867,681 |   |
|                                                    |   |                               |    |   |   |   |   |   |   |   |   |
| Rate sensitive assets (RSA)                             |   | $                                  | 442,550 |   | $ | 822,116 |   | $ | 917,041 |   | $ | 920,448 |   | $ | 920,448 |   |
| Rate sensitive liabilities (RSL)                        |   | 262,936                            |    | 692,358 |   | 806,153 |   | 867,681 |   | 867,681 |   |
| Cumulative GAP (GAP=RSA-RSL)                            |   | 179,614                            |    | 129,758 |   | 110,888 |   | 52,767 |   | 52,767 |   |
| RSA/Total assets                                        |   | 44.01                              | %       | 81.76 | % | 91.20 | % | 91.53 | % | 91.53 | % |
| RSL/Total assets                                        |   | 26.15                              | %       | 68.85 | % | 80.17 | % | 86.29 | % | 86.29 | % |
| GAP/Total assets                                        |   | 17.86                              | %       | 12.90 | % | 11.03 | % | 5.25 | % | 5.25 | % |
| GAP/RSA                                                 |   | 40.59                              | %       | 15.78 | % | 12.09 | % | 5.73 | % | 5.73 | % |

 

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 eventof a change in interest rates, prepayment and early withdrawal levels wouldlikely deviate significantly from those assumed in calculating the table.  Therefore, the Company does not rely solelyon a gap analysis to manage its interest rate risk, but rather it uses what itbelieves to be the more reliable simulation model relating to changes in netinterest income.

 

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Based onsimulation modeling at March 31, 2004 and December 31, 2003, the Company’s netinterest income would change over a one-year time period due to changes ininterest rates as follows:

 

**Change in Net Interest Income Over One YearHorizon**

 
| **Changes in  Levels of** |   | **At March  31, 2004**      |   | **At  December 31, 2003** |   |
|---------------------------|--------|-----------------------------|--------|---------------------------|--------|
| **Interest  Rates**       |   | **Dollar  Change**          |   | **Percentage  Change**    |   | **Dollar  Change** |   | **Percentage  Change** |   |
|                      |   | **(Dollars  in thousands)** |   |
| + 2.00                    | %      | $                           | (1,420 | )                         | (3.86  | )% | $ | (4,461 | ) | (12.17 | )% |
| + 1.00                    |   | (1,265                      | )      | (3.44                     | )      | (2,207 | ) | (6.02 | ) |
| (1.00                     | )      | 1,751                       |   | 4.76                      |   | (1,671 | ) | (4.56 | ) |
| (2.00                     | )      | (3,049                      | )      | (8.29                     | )      | (3,566 | ) | (9.73 | ) |
|                           |        |                             |        |                           |        |  |  |  |  |  |  |

 

Simulationsused by the Company assume the following:

 

1.                                       Changes ininterest rates are immediate.

 

2.                                       It is theCompany’s policy that interest rate exposure due to a 2.00% interest rate riseor fall be limited to 15.0% of the Company’s annual net interest income, asforecasted by the simulation model. As demonstrated by the table above, theCompany’s interest rate risk exposure was within this policy at March 31, 2004.

 

Changes in netinterest income between the periods above reflect changes in the composition ofinterest earning assets and interest bearing liabilities, related interestrates, repricing frequencies, and the fixed or variable characteristics of theinterest 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.

 

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**Item 4. Controls and Procedures.**

 

An evaluation was performedunder the supervision and with the participation of the Company’s management,including the Chief Executive Officer and Chief Financial Officer, of theeffectiveness of the design and operation of the Company’s disclosure controlsand procedures (as defined in Rule 13a-15(e) promulgated under theSecurities and Exchange Act of 1934, as amended) as of March 31, 2004. Based onthat evaluation, the Company’s management, including the Chief ExecutiveOfficer and Chief Financial Officer, concluded that the Company’s disclosurecontrols and procedures were effective. There have been no significant changesin the Company’s internal controls or in other factors that could significantlyaffect internal controls.

 

**PART II – OTHERINFORMATION**

 

**Item1.   Legal Proceedings**

 

Themajority of lawsuits the Company and the Bank are involved in are foreclosureand collection proceedings due to loan default which arise in the normal courseof business. However, because the Bank acts as a depository of funds, from timeto time it is named as a defendant in lawsuits (such as garnishmentproceedings) involving claims to the ownership of funds in particular accountsand in other actions arising in the normal course of business. Management doesnot believe that there is currently any pending or threatened proceeding againsteither the Company or the Bank which, if determined adversely, would have amaterial effect on its business, financial condition or results of operations.

 

**Item2.  Changes in Securities****, Use of Proceeds and Issuer Purchases of EquitySecurities**

 

None

 

**Item3.  Defaults Upon Senior Securities**

 

None

 

**Item4.  Submission of Matters to a Vote ofSecurity Holders**

 

None

 

**Item5.  Other Information**

 

None

 

**Item6.  Exhibits and Reports on Form 8-K**

 

(a)                                  Exhibits

 

3.1                               Articles of Incorporation

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.

 

(b)                                 Reports on Form 8-K

 

Areport on Form 8-K was filed on April 12, 2004, pursuant to Item 12, whichreported, in the form of a press release, the Company’s financial results forthe quarter ended March 31, 2004.

 

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**SIGNATURES**

 

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

 
|                 | **TRINITY CAPITAL CORPORATION** |
|----------------------|---------------------------------|
|                 |                            |
|                 |                            |
| Date: April 30, 2004 | By:                             | /s/ WILLIAM C. ENLOE |   |
|                 |                            | William C. Enloe |   |
|                 |                            | President and Chief Executive Officer |   |
|                 |                            | /s/ DANIEL R. BARTHOLOMEW |   |
|                 |                            | Daniel R. Bartholomew |   |
| Date: April 30, 2004 | By:                             | Chief Financial Officer |   |

 

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