**UNITED STATES****SECURITIES AND EXCHANGECOMMISSION****Washington,D.C. 20549**

**FORM 10-Q**
| **(Mark One)**                                               | ** **                                                                                                                                                                                                                                                                                                                                                                                                                  | ** ** |
|--------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| **x**                                                        | **Quarterly  Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934  for the quarterly period ended March 31, 2007.**                                                                                                                                                                                                                                                                                | ** ** |
| ** **                                                   | ** **                                                                                                                                                                                                                                                                                                                                                                                                                  | ** ** |
| **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 CAPITALCORPORATION**(Exact name of registrant asspecified in its charter)

 

| **New Mexico**            |   | **85-0242376**                           |
|---------------------------|--------|------------------------------------------|
| (State of  incorporation) |   | (I.R.S. Employer  Identification Number) |

 

| **1200 Trinity Drive, Los Alamos, New Mexico 87544** |
|------------------------------------------------------|
| (Address of  principal executive offices)            |

 
| **(505) 662-5171**                                    |
|------------------------------------------------------------|
| (Registrant’s  telephone number, including area code) |

 

Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90days.  Yes  x    No o

Indicate by check mark whether the registrant is alarge accelerated filed, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer” and “large accelerated filer” in Rule 12b-2of the Exchange Act. (Check one)
|  | Large Accelerated Filer  o | Accelerated Filer**  ****x** |   | Non-Accelerated Filer  o |
|--|--------------------------------------|----------------------------------------|--------|------------------------------------|

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Act).  o  Yes  x  No

APPLICABLE ONLY TO CORPORATEISSUERS:

Indicate the number of sharesoutstanding of each of the issuer’s classes of common stock, as of the latestpracticable date: 6,536,379 shares of common stock, no par value, outstandingas of May 7, 2007.

 

 

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**TRINITY CAPITALCORPORATION AND SUBSIDIARIES**

**PART I. FINANCIALINFORMATION**

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

 

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**PART I — FINANCIAL INFORMATION**

**Item 1. Financial Statements**

**TRINITY CAPITALCORPORATION & SUBSIDIARIES****CONSOLIDATED BALANCESHEETS****March 31, 2007 andDecember 31, 2006**** (Amounts inthousands, except share data)**
| ** **                                                                                                                                                                                                                                                                                      | ** ** | **March 31,  2007  (Unaudited)** | ** ** | **December 31,  2006** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                                                                                                                                                                                      |       |                                  |       |                        |       |
| Cash and due from banks                                                                                                                                                                                                                                                                         |       | $                                     | 19,242     |                        | $          | 23,292 |   |
| Interest bearing  deposits with banks                                                                                                                                                                                                                                                           |       | 21,820                                |       | 49,598                      |       |
| Federal funds sold and  securities purchased under resell agreements                                                                                                                                                                                                                            |       | 749                                   |       | 700                         |       |
| **Cash  and cash equivalents**                                                                                                                                                                                                                                                                  |       | 41,811                                |       | 73,590                      |       |
| Investment securities  available for sale                                                                                                                                                                                                                                                       |       | 88,889                                |       | 87,950                      |       |
| Investment securities  held to maturity, at amortized cost (fair value of $10,912 at March 31,  2007 and $10,961 at December 31, 2006)                                                                                                                                                |       | 10,916                                |       | 10,968                      |       |
| Other investments                                                                                                                                                                                                                                                                               |       | 7,579                                 |       | 7,936                       |       |
| Loans (net of allowance  for loan losses of $12,535 at March 31, 2007 and $12,167 at  December 31, 2006)                                                                                                                                                                              |       | 1,147,923                             |       | 1,119,557                   |       |
| Loans held for sale                                                                                                                                                                                                                                                                             |       | 9,843                                 |       | 10,349                      |       |
| Premises and equipment,  net                                                                                                                                                                                                                                                                    |       | 24,193                                |       | 24,255                      |       |
| Leased property under  capital leases, net                                                                                                                                                                                                                                                      |       | 2,211                                 |       | 2,211                       |       |
| Accrued interest  receivable                                                                                                                                                                                                                                                                    |       | 8,970                                 |       | 9,465                       |       |
| Mortgage servicing  rights, net                                                                                                                                                                                                                                                                 |       | 8,613                                 |       | 9,115                       |       |
| Other real estate owned                                                                                                                                                                                                                                                                         |       | 537                                   |       | 165                         |       |
| Other assets                                                                                                                                                                                                                                                                                    |       | 3,316                                 |       | 3,718                       |       |
| **Total  assets**                                                                                                                                                                                                                                                                               |       | $                                     | 1,354,801  |                        | $          | 1,359,279 |   |
|                                                                                                                                                                                                                                                                                            |       |                                  |       |                        |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                                                                                                                                                  |       |                                  |       |                        |       |
| Liabilities                                                                                                                                                                                                                                                                                     |       |                                  |       |                        |       |
| Deposits:                                                                                                                                                                                                                                                                                       |       |                                  |       |                        |       |
| Noninterest  bearing                                                                                                                                                                                                                                                                            |       | $                                     | 78,118     |                        | $          | 89,356 |   |
| Interest bearing                                                                                                                                                                                                                                                                                |       | 1,079,818                             |       | 1,073,385                   |       |
| **Total  deposits**                                                                                                                                                                                                                                                                             |       | 1,157,936                             |       | 1,162,741                   |       |
| Short-term borrowings                                                                                                                                                                                                                                                                           |       | —                                |       | 681                         |       |
| Long-term borrowings                                                                                                                                                                                                                                                                            |       | 63,595                                |       | 63,603                      |       |
| Long-term capital lease  obligations                                                                                                                                                                                                                                                            |       | 2,211                                 |       | 2,211                       |       |
| Junior subordinated  debt owed to unconsolidated trusts                                                                                                                                                                                                                                         |       | 37,116                                |       | 37,116                      |       |
| Borrowings made by  Employee Stock Ownership Plan (ESOP) to outside parties                                                                                                                                                                                                                     |       | 272                                   |       | 743                         |       |
| Accrued interest  payable                                                                                                                                                                                                                                                                       |       | 5,851                                 |       | 5,773                       |       |
| Other liabilities                                                                                                                                                                                                                                                                               |       | 4,089                                 |       | 5,733                       |       |
| **Total  liabilities**                                                                                                                                                                                                                                                                          |       | 1,271,070                             |       | 1,278,601                   |       |
| Stock owned by Employee  Stock Ownership Plan (ESOP) participants; 629,066 shares at March 31, 2007  and December 31, 2006, at fair value; net of unearned ESOP shares of  17,627 shares and 44,200 shares at March 31, 2007 and December 31,  2006, respectively, at historical cost |       | 17,376                                |       | 17,438                      |       |
| Commitments and  contingencies (Note 10)                                                                                                                                                                                                                                                        |       |                                  |       |                        |       |
| Stockholders’ equity                                                                                                                                                                                                                                                                       |       |                                  |       |                        |       |
| Common stock, no par,  authorized 20,000,000 shares; issued 6,856,800 shares, shares  outstanding 6,536,379 and 6,532,898 at March 31, 2007 and December 31, 2006,  respectively                                                                                                      |       | 6,836                                 |       | 6,836                       |       |
| Additional  paid-in capital                                                                                                                                                                                                                                                                     |       | 1,284                                 |       | 1,067                       |       |
| Retained  earnings                                                                                                                                                                                                                                                                              |       | 66,467                                |       | 62,939                      |       |
| Accumulated  other comprehensive loss                                                                                                                                                                                                                                                           |       | (141                                  | )          | (158                        | )          |
| Total  stockholders’ equity before treasury stock                                                                                                                                                                                                                                          |       | 74,446                                |       | 70,684                      |       |
| Treasury stock, at  cost, 302,794 shares and 279,702 shares at March 31, 2007 and December  31, 2006, respectively                                                                                                                                                                         |       | (8,091                                | )          | (7,444                      | )          |
| **Total  stockholders’ equity**                                                                                                                                                                                                                                                            |       | 66,355                                |       | 63,240                      |       |
| **Total liabilities and  stockholders’ equity**                                                                                                                                                                                                                                            |       | $                                     | 1,354,801  |                        | $          | 1,359,279 |   |

 

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

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**TRINITY CAPITALCORPORATION & SUBSIDIARIES****CONSOLIDATED STATEMENTSOF INCOME****For the Three MonthsEnded March 31, 2007 and 2006****(Amounts in thousandsexcept share and per share data)****(Unaudited)**
| ** **                                               | ** ** | **Three Months Ended**       | ** ** |
|----------------------------------------------------------|------------|------------------------------|------------|
| ** **                                               | ** ** | **March 31, 2007** | ** ** | **March 31, 2006** | ** ** |
|                                                     |       |                         |       |   |   |
| Interest income:                                         |       |                         |       |   |   |
| Loans, including fees                                    |       | $                            | 22,142     |   | $ | 17,903 |   |
| Investment securities:                                   |       |                         |       |   |   |
| Taxable                                                  |       | 935                          |       | 991 |   |
| Nontaxable                                               |       | 282                          |       | 203 |   |
| Federal funds sold and repurchase agreements             |       | 20                           |       | 3 |   |
| Other interest bearing deposits                          |       | 432                          |       | 132 |   |
| Investment in unconsolidated trusts                      |       | 23                           |       | 22 |   |
| **Total interest income**                                |       | 23,834                       |       | 19,254 |   |
| Interest  expense:                                       |       |                         |       |   |   |
| Deposits                                                 |       | 10,255                       |       | 6,542 |   |
| Short-term borrowings                                    |       | 13                           |       | 138 |   |
| Long-term borrowings                                     |       | 612                          |       | 680 |   |
| Junior subordinated debt owed to unconsolidated  trusts  |       | 762                          |       | 728 |   |
| **Total interest expense**                               |       | 11,642                       |       | 8,088 |   |
| **Net  interest income**                                 |       | 12,192                       |       | 11,166 |   |
| Provision for  loan losses                               |       | 1,050                        |       | 1,900 |   |
| **Net interest income after provision for loan  losses** |       | 11,142                       |       | 9,266 |   |
| Other income:                                            |       |                         |       |   |   |
| Mortgage loan servicing fees                             |       | 623                          |       | 640 |   |
| Loan and other fees                                      |       | 728                          |       | 709 |   |
| Service charges on deposits                              |       | 380                          |       | 381 |   |
| Gain on sale of loans                                    |       | 409                          |       | 300 |   |
| Other operating income                                   |       | 288                          |       | 366 |   |
|                                                     |       | 2,428                        |       | 2,396 |   |
| Other expenses:                                          |       |                         |       |   |   |
| Salaries and employee benefits                           |       | 4,645                        |       | 4,425 |   |
| Occupancy                                                |       | 982                          |       | 857 |   |
| Data processing                                          |       | 447                          |       | 468 |   |
| Marketing                                                |       | 486                          |       | 437 |   |
| Amortization and valuation of mortgage servicing  rights |       | 734                          |       | 551 |   |
| Supplies                                                 |       | 185                          |       | 201 |   |
| (Gain)/loss on sale of other real estate owned           |       | (22                          | )          | 198 |   |
| Postage                                                  |       | 175                          |       | 157 |   |
| Other                                                    |       | 1,104                        |       | 1,099 |   |
|                                                     |       | 8,736                        |       | 8,393 |   |
| **Income before income taxes**                           |       | 4,834                        |       | 3,269 |   |
| Income taxes                                             |       | 1,777                        |       | 1,168 |   |
| **Net income**                                           |       | $                            | 3,057      |   | $ | 2,101 |   |
| Basic earnings  per common share                         |       | $                            | 0.47       |   | $ | 0.32 |   |
| Diluted earnings per  common share                       |       | $                            | 0.46       |   | $ | 0.32 |   |

 

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

 

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**TRINITY CAPITALCORPORATION & SUBSIDIARIES****CONSOLIDATED STATEMENTSOF CASH FLOWS****For the Three MonthsEnded March 31, 2007 and 2006****(Amounts in thousands)****(Unaudited)**

 
| ** **                                                                                   | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                   | ** ** | **March 31,**     | ** ** | **March 31,** | ** ** |
| ** **                                                                                   | ** ** | **2007**               | ** ** | **2006** | ** ** |
|                                                                                         |       |                   |       |   |   |
| Cash Flows From Operating  Activities                                                        |       |                   |       |   |   |
| Net income                                                                                   |       | $                      | 3,057      |   | $ | 2,101 |   |
| Adjustments to  reconcile net income to net cash provided by (used in) operating activities: |       |                   |       |   |   |
| Depreciation and  amortization                                                               |       | 569                    |       | 655 |   |
| Net amortization  of:                                                                        |       |                   |       |   |   |
| Mortgage  servicing rights                                                                   |       | 699                    |       | 674 |   |
| Premiums and  discounts on investment securities                                             |       | (156                   | )          | (40 | ) |
| Junior  subordinated debt owed to unconsolidated trusts issuance costs                       |       | 3                      |       | 5 |   |
| Provision for  loan losses                                                                   |       | 1,050                  |       | 1,900 |   |
| Change in  mortgage servicing rights valuation allowance                                     |       | 35                     |       | (123 | ) |
| Federal Home  Loan Bank (FHLB) stock dividends received                                      |       | (66                    | )          | (59 | ) |
| Gain on sale of  loans                                                                       |       | (409                   | )          | (300 | ) |
| (Gain) Loss on  disposal of other real estate owned                                          |       | —                 |       | (15 | ) |
| Write-down of  value of other real estate owned                                              |       | —                 |       | 40 |   |
| Decrease in  other assets                                                                    |       | 987                    |       | 726 |   |
| Increase in  other liabilities                                                               |       | 631                    |       | 341 |   |
| Release of  Employee Stock Ownership Plan (ESOP) shares                                      |       | 566                    |       | 573 |   |
| Stock options  and stock appreciation rights expensed                                        |       | 60                     |       | 73 |   |
| Tax benefit  recognized for exercise of stock options                                        |       | —                 |       | (114 | ) |
| **Net  cash provided by operating activities before originations and gross sales of  loans** |       | 7,026                  |       | 6,437 |   |
| Gross sales of loans  held for sale                                                          |       | 21,570                 |       | 29,950 |   |
| Origination of loans  held for sale                                                          |       | (20,887                | )          | (37,562 | ) |
| **Net  cash (used in) provided by operating activities**                                     |       | 7,709                  |       | (1,175 | ) |
| Cash Flows From  Investing Activities                                                        |       |                   |       |   |   |
| Proceeds from  maturities and paydowns of investment securities available for sale           |       | 19,810                 |       | 5,490 |   |
| Proceeds from  maturities and paydowns of investment securities held to maturity             |       | 51                     |       | 8,213 |   |
| Proceeds from  maturities and paydowns of investment securities, other                       |       | 626                    |       | — |   |
| Purchase of  investment securities, available for sale                                       |       | (20,563                | )          | — |   |
| Purchase of  investment securities, other                                                    |       | (203                   | )          | (246 | ) |
| Proceeds from  sale of other real estate owned                                               |       | —                 |       | 60 |   |
| Loans funded,  net of repayments                                                             |       | (29,788                | )          | (32,773 | ) |
| Purchases of  premises and equipment                                                         |       | (507                   | )          | (350 | ) |
| **Net cash used in investing  activities**                                                   |       | $                      | (30,574    | ) | $ | (19,606 | ) |

 

**(Continued on following page)**

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**TRINITY CAPITAL CORPORATION &SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWSFor the Three Months Ended March 31, 2007 and 2006(Amounts in thousands)(Unaudited)(Continued from prior page)**
| ** **                                                                     | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                     | ** ** | **March 31,**     | ** ** | **March 31,** | ** ** |
| ** **                                                                     | ** ** | **2007**               | ** ** | **2006** | ** ** |
|                                                                           |       |                   |       |   |   |
| Cash Flows From  Financing Activities                                          |       |                   |       |   |   |
| Net (decrease) increase in demand deposits, NOW  accounts and savings accounts |       | $                      | (3,529     | ) | $ | 8,451 |   |
| Net (decrease) increase in time deposits                                       |       | (1,276                 | )          | (11,852 | ) |
| Repayment of borrowings                                                        |       | (689                   | )          | (1,974 | ) |
| Repayment of ESOP debt                                                         |       | (471                   | )          | (471 | ) |
| Purchase of treasury stock                                                     |       | (647                   | )          | (285 | ) |
| Issuance of common stock for stock option plan                                 |       | —                 |       | 299 |   |
| Dividend payments                                                              |       | (2,302                 | )          | (2,256 | ) |
| Tax benefit recognized for exercise of stock options                           |       | —                 |       | 114 |   |
| **Net cash (used in) provided by financing  activities**                       |       | (8,914                 | )          | (7,974 | ) |
| **Net (decrease) increase in cash and cash  equivalents**                      |       | $                      | (31,779    | ) | $ | (28,755 | ) |
| Cash and cash  equivalents:                                                    |       |                   |       |   |   |
| Beginning of year                                                              |       | 73,590                 |       | 54,682 |   |
| End of period                                                                  |       | $                      | 41,881     |   | $ | 25,927 |   |
| Supplemental  Disclosures of Cash Flow Information                             |       |                   |       |   |   |
| Cash payments (receipts) for:                                                  |       |                   |       |   |   |
| Interest                                                                       |       | $                      | 11,564     |   | $ | 8,049 |   |
| Income taxes                                                                   |       | —                 |       | (155 | ) |
| Non-cash investing and financing activities:                                   |       |                   |       |   |   |
| Transfers from loans to other real estate owned                                |       | 372                    |       | — |   |
| Change in  unrealized (loss) gain on investment securities, net of taxes       |       | (76                    | )          | (48 | ) |

 

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

 

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**TRINITY CAPITALCORPORATION & SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)**

**Note 1. Basis of Presentation**

The accompanyingunaudited consolidated financial statements include the consolidated balancesand results of operations of Trinity Capital Corporation (“Trinity”) and itswholly owned subsidiaries: Los Alamos National Bank (the “Bank”), TitleGuaranty & Insurance Company (“Title Guaranty”), TCC Appraisal ServicesCorporation (“TCC Appraisals”), TCC Advisors Corporation (“TCC Advisors”) andTCC Funds, collectively referred to as the “Company.” Trinity Capital Trust I (“TrustI”), Trinity Capital Trust III (“Trust III”), Trinity Capital Trust IV (“TrustIV”) and Trinity Capital Trust V (“Trust V”), collectively referred to as the “Trusts,”are trust subsidiaries of Trinity but are not consolidated in these financialstatements (see “Consolidation” accounting policy below). Trinity Capital TrustII (“Trust II”) was terminated on December 12, 2006. The business activities ofthe Company consist solely of the operations of its wholly owned subsidiaries.All significant inter-company balances and transactions have been eliminated inconsolidation. In the opinion of management,all adjustments (consisting only of normal recurring adjustments) necessary fora fair presentation of the financial position, results of operations and cashflows for the interim periods have been made. The results of operations for thethree months ended March 31, 2007 are not necessarily indicative of the resultsto be expected for the entire fiscal year.

The unaudited consolidated interim financial statements have beenprepared in conformity with accounting principles generally accepted in theUnited States of America and industry practice. Certain information in footnotedisclosures normally included in financial statements prepared in accordancewith accounting principles generally accepted in the United States of Americaand industry practice has been condensed or omitted pursuant to rules andregulations of the Securities and Exchange Commission. These financialstatements should be read in conjunction with the consolidated financialstatements and notes thereto included in the Company’s December 31, 2006audited financial statements filed on Form 10-K.

The consolidatedfinancial statements include the accounts of the Company and its subsidiaries.The accounting and reporting policies of the Company conform to accountingprinciples generally accepted in the United States of America and generalpractices within the financial services industry. In preparing the financialstatements, management is required to make estimates and assumptions thataffect the reported amounts of assets and liabilities as of the date of thebalance sheet and revenues and expenses for the year. Actual results coulddiffer from those estimates. Areas involving the use of management’s estimatesand assumptions, and which are more susceptible to change in the near terminclude the allowance for loan losses and initial recording and subsequent valuationfor impairment of mortgage servicing rights.

Certain items havebeen reclassified from prior period presentations in conformity with thecurrent classification.

**Note 2. Comprehensive Income**

Comprehensive income includes net income, as well as the change in netunrealized (loss) gain on investment securities available for sale, net of tax.Comprehensive income was $3.1 million and $2.1 million for the three monthperiods ended March 31, 2007 and 2006, respectively.

**Note 3. Earnings Per Share Data**

The following table sets forth the computation of basic and dilutedearnings per share for the periods indicated:
| ** **                                                                         | ** ** | **Three Months Ended March 31,**                                                             | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2007**                                                                                                         | ** ** | **2006** | ** ** |
| ** **                                                                         | ** ** | **(Unaudited; In thousands except   for share and per share data)** | ** ** |
| Net income                                                                         |       | $                                                                                                                | 3,057      |   | $ | 2,101 |   |
| Weighted average common  shares issued                                             |       | 6,856,800                                                                                                        |       | 6,856,800 |   |
| LESS: Weighted average  treasury stock shares                                      |       | (288,571                                                                                                         | )          | (224,268 | ) |
| LESS: Weighted average  unearned Employee Stock Ownership Plan (ESOP) stock shares |       | (23,001                                                                                                          | )          | (51,122 | ) |
| Weighted average common  shares outstanding, net                                   |       | 6,545,228                                                                                                        |       | 6,581,410 |   |
| Basic earnings per  common share                                                   |       | $                                                                                                                | 0.47       |   | $ | 0.32 |   |
| Weighted average  dilutive shares from stock option plan                           |       | 44,243                                                                                                           |       | 39,289 |   |
| Weighted average common  shares outstanding including dilutive shares              |       | 6,589,471                                                                                                        |       | 6,620,699 |   |
| Diluted earnings per common share                                                  |       | $                                                                                                                | 0.46       |   | $ | 0.32 |   |

 

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**Note 4. Recent Accounting Pronouncements and RegulatoryDevelopments**

In February 2006, theFASB issued SFAS No. 155, *Accounting forCertain Hybrid Financial Instruments—an amendment of FASB Statements No. 133and 140*. This Statement resolves issues addressed in Statement 133Implementation Issue No. D1, “Application of Statement 133 to BeneficialInterests in Securitized Financial Assets.”******This Statement eliminates the exemption fromapplying Statement 133 to interests in securitized financial assets so thatsimilar instruments are accounted for similarly regardless of the form of theinstruments. This Statement also improves financial reporting by allowing apreparer to elect fair value measurement at acquisition, at issuance, or when apreviously recognized financial instrument is subject to a re-measurement (newbasis) event, on an instrument-by-instrument basis, in cases in which aderivative would otherwise have to be bifurcated. Providing a fair valuemeasurement election also results in more financial instruments being measuredat what the Board regards as the most relevant attribute for financialinstruments, fair value. This Statement is effective for all financialinstruments acquired or issued after the beginning of an entity’s first fiscalyear that begins after September 15, 2006. There was no material impact on theCompany’s financial statements when this standard was adopted on January 1,2007.

 

In March 2006, the FASBissued SFAS No. 156, *Accounting forServicing of Financial Assets*. The new Standard, which is anamendment to SFAS No. 140, *Accounting for Transfersand Servicing of Financial Assets and Extinguishments of Liabilities-areplacement of FASB Statement No. 125*, will simplify the accountingfor servicing assets and liabilities, such as those common with mortgagesecuritization activities. Specifically, the new Standard addresses therecognition and measurement of separately recognized servicing assets andliabilities and provides an approach to simplify efforts to obtain hedge-like(offset) accounting. The standard also: (1) clarifies when an obligation to servicefinancial assets should be separately recognized as a servicing asset or aservicing liability; (2) requires that a separately recognized servicing assetor servicing liability be initially measured at fair value, if practicable; (3)permits an entity with a separately recognized servicing asset or servicingliability to choose either the amortization method or the fair value method forsubsequent measurement. SFAS No. 156 permits a servicer that usesderivative financial instruments to offset risks on servicing to report boththe derivative financial instrument and related servicing asset or liability byusing a consistent measurement attribute — fair value. This Statement iseffective for all financial instruments acquired or issued after the beginningof an entity’s first fiscal year that begins after September 15, 2006. Managementhas determined that the Company will not adopt the fair value method forsubsequent measurement under this standard, and there was no material impact onthe Company’s financial statements when this standard went into effect onJanuary 1, 2007.

 

In June 2005, theFASB issued Interpretation 48, *Accounting for Uncertaintyin Income Taxes—an interpretation of FASB Statement No. 109.* ThisInterpretation clarifies the accounting for uncertainty in income taxesrecognized in an enterprise’s financial statements in accordance with FASBStatement No. 109, *Accounting for IncomeTaxes.* This Interpretation prescribes a recognition threshold andmeasurement attribute for the financial statement recognition and measurementof a tax position taken or expected to be taken in a tax return. This Interpretationalso provides guidance on derecognition, classification, interest andpenalties, accounting in interim periods, disclosure, and transition. ThisInterpretation is effective for fiscal years beginning after December 15, 2006.Earlier application of the provisions of this Interpretation is encouraged ifthe enterprise has not yet issued financial statements, including interimfinancial statements, in the period this Interpretation is adopted. There wasno material impact on the Company’s financial statements when this standard wasadopted on January 1, 2007.

In September 2006,the FASB issued SFAS No. 157, *Fair Value Measurements*.This Statement defines fair value, establishes a framework for measuring fairvalue in generally accepted accounting principles (GAAP), and expandsdisclosures about fair value measurements. This Statement applies under otheraccounting pronouncements that require or permit fair value measurements, theBoard having previously concluded in those accounting pronouncements that fairvalue is the relevant measurement attribute. Accordingly, this Statement doesnot require any new fair value measurements. However, for some entities, theapplication of this Statement will change current practice. This Statement iseffective for financial statements issued for fiscal years beginning afterNovember 15, 2007, and interim periods within those fiscal years. Earlierapplication is encouraged, provided that the reporting entity has not yetissued financial statements for that fiscal year, including financialstatements for an interim period within that fiscal year. Management does notbelieve that this statement will have a material impact on the Company’sfinancial statements.

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In February 2007,the FASB issued SFAS No. 159, *The Fair Value Option forFinancial Assets and Financial Liabilities*, which provides companieswith an option to report selected financial assets and liabilities at fairvalue. The Standard’s objective is to reduce both complexity in accounting forfinancial instruments and the volatility in earnings caused by measuringrelated assets and liabilities differently. The standard requires companies toprovide additional information that will help investors and other users offinancial statements to more easily understand the effect of the company’schoice to use fair value on its earnings. It also requires entities to displaythe fair value of those assets and liabilities for which the company has chosento use fair value on the face of the balance sheet. The new Statement does noteliminate disclosure requirements included in other accounting standards,including requirements for disclosures about fair value measurements includedin FASB Statements No. 157, *Fair ValueMeasurements,* and No. 107, *Disclosuresabout Fair Value of Financial Instruments.*This Statement iseffective as of the beginning of an entity’s first fiscal year beginning afterNovember 15, 2007. Early adoption is permitted as of the beginning of theprevious fiscal year provided that the entity makes that choice in the first120 days of that fiscal year and also elects to apply the provisions ofStatement 157. Management does not believe that this statement will have amaterial impact on the Company’s financial statements.

**Note 5. Stock Option Plan**

The Company has the1998 Stock Option Plan and the 2005 Stock Incentive Plan created for thebenefit of key management and select employees. Under the 1998 Stock OptionPlan, 400,000 shares (as adjusted for the stock split of December 19, 2002)from shares held in treasury or authorized but unissued common stock arereserved for granting options. Under the 2005 Stock Incentive Plan, 500,000shares from shares held in treasury or authorized but unissued common stock arereserved for granting stock-based incentive awards. Both of these plans wereapproved by the Company’s shareholders. The Board of Directors determinesvesting and pricing of the awards. All stock options granted through December 31,2005,vest over three years and must be exercised within ten years of the dateof grant. Stock appreciation rights granted after December 31, 2005 vest overfive years and must be exercised within five years of the date of grant.

Trinity’s stock incentive awards have been priced ator above the market value of the stock based on the last reported sale price asof the date of grant which is also the date of approval, with the exception ofthe July 1998 stock option grant which was granted at $0.25 below the lastreported sale price and the January 1, 2006 stock appreciation right grantwhich was approved on December 15, 2005 and granted at the closing market priceas of December 31, 2005. Trinity set the SARs grant date for 2005 on a dateother than the approval date due to accounting rule changes that took affect onJanuary 1, 2006 that were advantageous to Trinity. Trinity has awarded allstock option and SARs based on the last reported market price of Trinity’sstock on the option grant date, with the exception of the July 1998 and January2006 grants as described above.

Effective January1, 2006, the Company adopted SFAS No. 123(R), *Share-BasedPayment*, which is an Amendment of FASB Statement Nos. 123 and 95. TheCompany adopted this standard using the modified prospective transactionmethod. Prior to the adoption of SFAS 123(R), the Company measured stock-basedcompensation cost in accordance with the methods prescribed in AccountingPrinciples Board (APB) Opinion No. 25, *Accounting for StockIssued to Employees*. Accordingly, no compensation cost wasrecognized for options granted and vested before January 1, 2006.

Under theprovisions of SFAS 123(R), the Company is required to recognize compensationexpense for share-based compensation that vest after adoption of the newstandard. The Company uses a Black-Sholes model to value the stock options onthe date of the grant, and recognizes this expense over the remaining vestingterm for the stock options or stock appreciation rights. Key assumptions usedin this valuation method (detailed below) are the volatility of the Company’sstock price, a risk-free rate of return (using the U.S. Treasury yield curve)based on the expected term from grant date to exercise date and an annualdividend rate based upon the current market price. Expected term from grantdate is based upon the historical time from grant to exercise experienced bythe Company.

The followingtable details the assumptions used in by the Black-Sholes model for valuingshare-based compensation granted:
| ** **                | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------|------------|------------------------------------------------------|------------|
| ** **                | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| Stock price  volatility   |       | 12.82                                                | %          | 14.12 | % |
| Risk-free rate            |       | 4.70                                                 | %          | 4.35 | % |
| Expected  dividends       |       | 2.40                                                 | %          | 2.29 | % |
| Expected term (in  years) |       | 5                                                    |       | 5 |   |

 

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A summary of stockoption and stock appreciation right activity under the plans as of March 31,2007, and changes during the first three months of the year is presented below:
| ** **                      | ** ** | **Shares** | ** ** | **Weighted-Average  Exercise Price** | ** ** | **Weighted-Average  Remaining  Contractual Term,  in years** | ** ** | **Aggregate  Intrinsic Value  (in thousands)** | ** ** |
|---------------------------------|------------|------------|------------|-------------------------------------------|------------|------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| Outstanding at  January 1, 2007 |       | 357,408    |       | $                                         | 25.92      |                                                                   |       |                                                     |       |   |
| Granted                         |       | 51,000     |       | 28.75                                     |       |                                                                   |       |                                                     |       |
| Exercised                       |       | —     |       | —                                    |       |                                                                   |       |                                                     |       |
| Forfeited or  expired           |       | —     |       | —                                    |       |                                                                   |       |                                                     |       |
| Outstanding at  March 31, 2007  |       | 408,408    |       | $                                         | 26.27      |                                                                   | 5.32       |                                                     | $          | 1,794 |   |
| Exerciseable at March  31, 2007 |       | 253,575    |       | $                                         | 24.84      |                                                                   | 5.66       |                                                     | $          | 1,100 |   |

 

Theweighted-average grant-date fair value of options granted during the threemonths ending March 31, 2007 and 2006 was $4.32 and $4.33, respectively. Therewere no options exercised during the three months ended March 31, 2007.

As of March 31,2007, there was $598 thousand of total unrecognized compensation cost relatedto nonvested share-based compensation granted under the plans. That cost isexpected to be recognized over a weighted-average vesting period of 3.7 years. Therewere no shares vested during the three months ending March 31, 2007. However,shares that will vest in August and December 2007 have been ratably expensed inthe amount of $31 thousand in the first three months of 2007. In addition, weexpensed $29 thousand for stock appreciation rights that will vest in 2011 and2012.

**Note 6. ShortTerm Borrowings**

The Company had noborrowings with maturities of less than one year as of March 31, 2007. As ofDecember 31, 2006, the Company had Federal Home Loan Bank advances withmaturities of less than one year of $681 thousand.

**Note 7. LongTerm Borrowings**

The Company had Federal Home Loan Bank advances with maturity datesgreater than one year of $63.6 million as of both March 31, 2007 and December31, 2006. As of March 31, 2007, the advances have fixed interest rates rangingfrom 3.22% to 6.34%.

**Note 8.Long-term Capital Lease Obligations**

The Company isleasing land in Santa Fe with the intention of building a future branch on thesite. The lease, which expires in 2014, contains an option to purchase the landat a set price at the termination of the initial term of the lease. This leaseis classified as a capital lease. Lease payments for the three months endedMarch 31, 2007 was $48 thousand. There were no lease payments in the firstthree months of 2006, as the lease was entered into in December 2006.

**Note 9. Junior Subordinated Debt Owed to UnconsolidatedTrusts**

The followingtable presents details on the junior subordinated debt owed to unconsolidatedtrusts as of March 31, 2007:
| ** **                                                  | ** ** | **Trust I**                     | ** ** | **Trust III**                 | ** ** | **Trust IV** | ** ** | **Trust V**                   | ** ** |
|-------------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|-------------------|------------|------------------------------------|------------|
| ** **                                                  | ** ** | **(Dollars in thousands)** | ** ** |
| Date of issue                                               |       | March 23, 2000                       |       | May 11, 2004                       |       | June 29, 2005     |       | September 21, 2006                 |       |
| Amount of trust  preferred securities issued                |       | $10,000                              |       | $  6,000                 |       | $10,000           |       | $10,000                            |       |
| Rate on trust  preferred securities                         |       | 10.875                               | %          | 8.06% (variable)                   |       | 6.88              | %          | 6.83                               | %          |
| Maturity                                                    |       | March 8, 2030                        |       | September 8, 2034                  |       | November 23, 2035 |       | December 15, 2036                  |       |
| Date of first  redemption                                   |       | March 8, 2010                        |       | September 8, 2009                  |       | August 23, 2010   |       | September 15, 2011                 |       |
| Common equity  securities issued                            |       | $     310   |       | $     186 |       | $310              |       | $     310 |       |
| Junior  subordinated deferrable interest debentures owed    |       | $10,310                              |       | $  6,186                 |       | $10,310           |       | $10,310                            |       |
| Rate on junior  subordinated deferrable interest debentures |       | 10.875                               | %          | 8.06% (variable)                   |       | 6.88              | %          | 6.83                               | %          |

 

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On the dates ofissue indicated above, the Trusts, being Delaware statutory business trusts,issued trust preferred securities (the “trust preferred securities”) in theamount and at the rate indicated above. These securities represent preferredbeneficial interests in the assets of the Trusts. The trust preferredsecurities will mature on the dates indicated, and are redeemable in whole orin part at the option of the Company at any time after the date of firstredemption indicated above, with the approval of the Federal Reserve Board andin whole at any time upon the occurrence of certain events affecting their taxor regulatory capital treatment. The Trusts also issued common equitysecurities to Trinity in the amounts indicated above. The Trusts used theproceeds of the offering of the trust preferred securities to purchase juniorsubordinated deferrable interest debentures (the “debentures”) issued by theCompany, which have terms substantially similar to the trust preferredsecurities. The Company has the right to defer payments of interest on thedebentures at any time or from time to time for a period of up to tenconsecutive semi-annual periods with respect to each interest payment deferred.Under the terms of the debentures, under certain circumstances of default or ifthe Company has elected to defer interest on the debentures, the Company maynot, with certain exceptions, declare or pay any dividends or distributions onits capital stock or purchase or acquire any of its capital stock. The Companyused the majority of the proceeds from the sale of the debentures to add toTier 1 or Tier 2 capital in order to support its growth and to purchasetreasury stock.

Trinity owns allof the outstanding common securities of the Trusts. The Trusts are consideredvariable interest entities (VIEs) under *FinancialAccounting Standards Board Interpretation (FIN) No. 46, “Consolidation ofVariable Interest Entities, an interpretation of Accounting Research BulletinNo. 51”*, as revised. Prior to FIN 46, VIEs were generallyconsolidated by an enterprise when the enterprise had a controlling financialinterest through ownership of a majority of voting interest in the entity. UnderFIN 46, a VIE should be consolidated by its primary beneficiary. The Companyimplemented FIN 46 during the fourth quarter of 2003. Because Trinity is notthe primary beneficiary of the Trusts, the financial statements of the Trustsare no longer included in the consolidated financial statements of the Company.The Company’s prior financial statements have been reclassified tode-consolidate the Company’s investment in the Trusts.

InMarch 2005, the Board of Governors of the Federal Reserve System issued a finalrule allowing bank holding companies to continue to include qualifying trustpreferred securities in their Tier 1 Capital for regulatory capital purposes,subject to a 25% limitation to all core (Tier I) capital elements, net ofgoodwill less any associated deferred tax liability. The final rule provides afive-year transition period, ending March 31, 2009, for application of theaforementioned quantitative limitation. As of March 31, 2007, 77.5% of thetrust preferred securities noted in the table above qualified as Tier I capitaland 22.5% qualified as Tier 2 capital under the final rule adopted in March 2005.

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 an agreement as to expenses andliabilities with the Trusts pursuant to which it agreed, on a subordinatedbasis, to pay any costs, expenses or liabilities of the Trusts other than thosearising under the trust preferred securities. The obligations of the Companyunder the junior subordinated debentures, the related indenture, the trustagreement establishing the Trusts, the guarantee and the agreement as toexpenses and liabilities, in the aggregate, constitute a full and unconditionalguarantee by the Company of the Trusts’ obligations under the trust preferredsecurities.

Issuance costs of$406 thousand related to Trust I and Trust III were deferred and are beingamortized over the period until mandatory redemption of the securities in March2030 and September 2034, respectively. During the first three months of 2007and 2006, respectively, $3 thousand and $5 thousand of these issuance costswere amortized. Unamortized issuance costs were $321 thousand and $325 thousandat March 31, 2007 and December 31, 2006, respectively. There were no issuancecosts associated with the other trust preferred security issues.

Dividendsaccrued and unpaid to securities holders totaled $208 thousand and $488thousand on March 31, 2007 and December 31, 2006, respectively.

**Note 10. Commitments, Contingencies and Off-Balance SheetActivities**

*Credit-related financial instruments:* The Company is a party to credit-relatedcommitments with off-balance-sheet risk in the normal course of business tomeet the financing needs of its customers. These credit-related commitmentsinclude commitments to extend credit, standby letters of credit and commercial lettersof credit. Such credit-related commitments involve, to varying degrees,elements of credit and interest rate risk in excess of the amount recognized inthe consolidated balance sheets.

The Company’s exposure to credit loss is represented by the contractualamount of these credit-related commitments. The Company follows the same creditpolicies in making credit-related commitments as it does for on-balance-sheetinstruments.

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At March 31, 2007 and December 31, 2006, the following credit-relatedcommitments were outstanding whose contract amounts represent credit risk:
| ** **                                  | ** ** | **Contract Amount** | ** ** |
|---------------------------------------------|------------|--------------------------|------------|
| ** **                                  | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** |
| ** **                                  | ** ** | **(In thousands)**  | ** ** |
| Unfunded  commitments under lines of credit |       | $                        | 209,089    |   | $ | 192,252 |   |
| Commercial and standby  letters of credit   |       | 27,175                   |       | 31,100 |   |
|                                             |            |                          |            |  |  |  |  |

 

Commitments toextend credit under lines of credit are agreements to lend to a customer aslong as there is no violation of any condition established in the contract.Commitments generally have fixed expiration dates or other termination clausesand may require a payment of a fee. The commitments for lines of credit mayexpire without being drawn upon. Therefore, the total commitment amounts do notnecessarily represent future cash requirements. The amount of collateralobtained, if it is deemed necessary by the Company, is based on management’scredit evaluation of the customer. Unfunded commitments under commercial linesof credit, revolving credit lines and overdraft protection agreements arecommitments for possible future extensions of credit to existing customers.Overdraft protection agreements are uncollateralized, but most other unfundedcommitments under lines of credit have collateral. These unfunded lines ofcredit usually do not contain a specified maturity date and may not necessarilybe drawn upon to the total extent to which the Company is committed.

Commercial andstandby letters of credit are conditional credit-related commitments issued bythe Company to guarantee the performance of a customer to a third party.Letters of credit are primarily issued to support public and private borrowingarrangements. 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 holdscollateral supporting those credit-related commitments, if deemed necessary. Inthe event the customer does not perform in accordance with the terms of theagreement with the third party, the Company would be required to fund thecredit-related commitment. The maximum potential amount of future payments theCompany could be required to make is represented by the contractual amountshown in the summary above. If the credit-related commitment is funded, theCompany would be entitled to seek recovery from the customer. At March 31, 2007and December 31, 2006, no amounts have been recorded as liabilities for theCompany’s potential obligations under these credit-related commitments. Thefair value of these credit-related commitments is approximately equal to thefees collected when granting these letters of credit. These fees collected were$50 thousand and $66 thousand as of March 31, 2007 and December 31, 2006,respectively, and are included in “other liabilities” on the Company’s balancesheet.

*Concentrationsof credit risk:* The majority of the loans, commitments toextend credit, and standby letters of credit have been granted to customers inLos Alamos, Santa Fe and surrounding communities. Although the Company has adiversified loan portfolio, a substantial portion of its loans are made tobusinesses and individuals associated with, or employed by, Los Alamos NationalLaboratory (“the Laboratory”). The ability of such borrowers to honor theircontracts is predominately dependent upon the continued operation and fundingof the Laboratory. Investments in securities issued by states and politicalsubdivisions involve governmental entities within the state of New Mexico. Thedistribution of commitments to extend credit approximates the distribution ofloans outstanding. Standby letters of credit were granted primarily tocommercial borrowers.

**Note 11. Litigation**

Neither Trinity,the Bank, Title Guaranty, TCC Appraisals, TCC Advisors or TCC Funds areinvolved in any pending legal proceedings, other than routine legal proceedingsoccurring in the normal course of business and those otherwise specificallystated herein, which, in the opinion of management, in the aggregate, are notmaterial to our consolidated financial condition.

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

*This discussion is intended to focus on certainfinancial information regarding the Company and its subsidiaries 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 Disclosures aboutMarket Risk and the annual audited consolidated financial statements filed onForm 10-K.*

This reportcontains certain financial information determined by methods other than inaccordance with accounting principles generally accepted in the United Statesof America (GAAP). These measures include net interest margin on a fully taxequivalent basis and net interest income on a fully tax equivalent basis. Ourmanagement uses these non-GAAP measures in its analysis of our performance. Thetax equivalent adjustment to net interest margin and net interest incomerecognizes the income tax savings when comparing taxable and tax-exempt assetsand adjusting for federal and state exemption of interest income and certainother permanent income tax differences. Management believes that it is astandard practice in the banking industry to present net interest income andnet interest margin on a fully tax equivalent basis, and accordingly believesthe presentation of the financial measures may be useful for peer comparisonpurposes. This disclosure should not be viewed as a substitute for the resultsdetermined to be in accordance with GAAP, nor is it necessarily comparable tonon-GAAP performance measures that may be presented by other companies.Reconciliations of net interest income on a fully tax equivalent basis to netinterest income and net interest margin on a fully tax equivalent basis to netinterest margin are contained in tables under “Net Interest Income.”

**SpecialNote Concerning Forward-Looking Statements**

Thisdocument (including information incorporated by reference) contains, and futureoral and written statements of the Company and its management may contain,forward-looking statements, within the meaning of such term in the PrivateSecurities Litigation Reform Act of 1995, with respect to the financialcondition, results of operations, plans, objectives, future performance andbusiness of the Company. Forward-looking statements, which may be based uponbeliefs, expectations and assumptions of the Company’s management and oninformation currently available to management, are generally identifiable bythe use of words such as “believe,” “expect,” “anticipate,” “plan,” “intend,” “estimate,”“may,” “will,” “would,” “could,” “should” or other similar expressions.Additionally, all statements in this document, including forward-lookingstatements, speak only as of the date they are made, and the Company undertakesno obligation to update any statement in light of new information or futureevents.

The Company’sability to predict results or the actual effect of future plans or strategiesis inherently uncertain. The factors, which could have a material adverseeffect on the operations and future prospects of the Company and itssubsidiaries are detailed in the “Risk Factors” section included under Item 1Aof Part I of the Company’s Form 10-K for the year ended December 31, 2006. Inaddition to the risk factors described in that section, there are other factorsthat may impact any public company, including ours, which could have a materialadverse effect on the operations and future prospects of the Company and itssubsidiaries. These additional factors include, but are not limited to, thefollowing:

·                  The economicimpact of past and any future terrorist attacks, acts of war or threats thereofand the response of the United States to any such threats and attacks.

·                  The costs,effects and outcomes of existing or future litigation.

·                  Consumerspending and savings habits which may change in a manner that affects ourbusiness adversely.

·                  Changes inaccounting policies and practices, as may be adopted by state and federalregulatory agencies, the Financial Accounting Standards Board, the Securitiesand Exchange Commission and the Public Company Accounting Oversight Board.

·                  The ability ofthe Company to manage the risks associated with the foregoing as well asanticipated.

These risks anduncertainties should be considered in evaluating forward-looking statements andundue reliance should not be placed on such statements.

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**CriticalAccounting Policies**

***Allowance for Loan Losses:***   Theallowance for loan losses is that amount which, in management’s judgment, isconsidered appropriate to provide for potential losses in the loan portfolio.In analyzing the adequacy of the allowance for loan losses, management uses acomprehensive loan grading system to determine risk potential in the portfolio,and considers the results of periodic internal and external loan reviews.Historical loss experience factors and specific reserves for impaired loans,combined with other considerations, such as delinquency, non-accrual, trends oncriticized and classified loans, economic conditions, concentrations of creditrisk, and experience and abilities of lending personnel, are also considered inanalyzing the adequacy of the allowance. Management uses a systematicmethodology, which is applied at least quarterly, to determine the amount ofallowance for loan losses and the resultant provisions for loan losses itconsiders adequate to provide for anticipated loan losses. This methodologyincludes a periodic detailed analysis of the loan portfolio, a systematic loangrading system and a periodic review of the summary of the allowance for loanand lease loss balance. In the event that different assumptions or conditionswere to prevail, and depending upon the severity of such changes, thepossibility of materially different financial condition or results ofoperations is a reasonable likelihood.

Managementreviewed the methodology used in the allowance for loan losses adequacyanalysis in 2006. After a thorough examination, management refined the processused in two ways: (1) we moved from a pure historical loss to a migrationanalysis for determining inherent loss in the current loan portfolio and (2) wequantified the qualitative adjustments used to reflect the risks associatedwith certain risk factors that are not reflected in the migration analysis orspecific identification of impaired loans.

Accordingly, threemethods are used to evaluate the adequacy of the allowance for loan losses: (1)specific identification, based on management’s assessment of loans in ourportfolio and the probability that a charge-off will occur in the upcomingquarter, per SFAS 114; (2) losses inherent in the loan portfolio besides thosespecifically identified, based upon a migration analysis of the percentage ofloans currently performing that have inherent losses, as set forth in SFAS 5;and (3) qualitative adjustments based on management’s assessment of certainrisks such as delinquency trends, watch-list and classified trends, changes inconcentrations, economic trends, industry trends, non-accrual trends,exceptions and loan-to-value guidelines, management and staff changes andpolicy or procedure changes (as set forth in SFAS 5).

While managementuses the best information available to make its evaluation, future adjustmentsto the allowance may be necessary if there are significant changes in economicconditions. In addition, as an integral part of their examination processregulatory agencies periodically review our allowance for loan losses and mayrequire us to make additions to the allowance based on their evaluation ofinformation available at the time of their examinations.

***Mortgage Servicing Right (MSR) Assets:***   Servicingresidential mortgage loans for third-party investors represents a significantbusiness activity of the Bank. As of March 31, 2007, mortgage loans servicedfor others totaled $939.1 million. The MSRs on these loans total $8.6 millionas of March 31, 2007. The expected and actual rates of mortgage loanprepayments are the most significant factors driving the value of MSRs.Increases in mortgage loan prepayments reduce estimated future net servicingcash flows because the life of the underlying loan is reduced. In determiningthe fair value of the MSRs, mortgage interest rates, which are used todetermine prepayment rates and discount rates are held constant over theestimated life of the portfolio. Fair values of the MSRs are provided by anindependent third-party broker of MSRs on a 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 thelower of the initial capitalized amount, net of accumulated amortization, orfair value.

The fair value ofthe MSRs is driven primarily by the effect current mortgage interest rates haveon the likelihood borrowers will prepay the underlying mortgages by refinancingat a lower rate. Accordingly, higher interest rates decrease the likelihood ofprepayment, extending the life of the MSRs and increasing the value of theseassets. Lower interest rates increase the likelihood of prepayment, contractingthe life of the MSRs and decreasing the value of these assets. This can have asignificant impact on our income. There is no certainty on the direction andamount of interest rate changes looking forward, and therefore, there is nocertainty on the amount or direction of the change in valuation.

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An analysis of changes inmortgage servicing rights asset follows:
| ** **                                   | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|
| ** **                                   | ** ** | **March 31,  2007**         | ** ** | **March 31,  2006** | ** ** |
| ** **                                   | ** ** | **(In thousands)**          | ** ** |
| Balance at  beginning of period              |       | $                                | 9,867      |   | $ | 11,009 |   |
| Servicing rights  originated and capitalized |       | 232                              |       | 317 |   |
| Amortization                                 |       | (699                             | )          | (674 | ) |
|                                         |       | $                                | 9,400      |   | $ | 10,652 |   |

 

Below is an analysis of changes in the mortgage servicing right assetvaluation allowance:
| ** **                                   | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|
| ** **                                   | ** ** | **March 31,  2007**         | ** ** | **March 31,  2006** | ** ** |
| ** **                                   | ** ** | **(In thousands)**          | ** ** |
| Balance at  beginning of period              |       | $                                | (752       | ) | $ | (1,230 | ) |
| Aggregate  reductions credited to operations |       | 99                               |       | 123 |   |
| Aggregate  additions charged to operations   |       | (134                             | )          | — |   |
|                                         |       | $                                | (787       | ) | $ | (1,107 | ) |

 

The fair values of the MSRs were $9.1 million and $9.5 million on March31, 2007 and December 31, 2006, respectively.

The primary riskcharacteristics of the underlying loans used to stratify the servicing assetsfor the purposes of measuring impairment are interest rate and original term.

Our valuationallowance is used to recognize impairments of our MSRs. An MSR is consideredimpaired when the market value of the MSR is below the amortized book value ofthe MSR. The MSRs are accounted by risk tranche, with the interest rate andterm of the underlying loan being the primary strata used in distinguishing thetranches. Each tranche is evaluated separately for impairment.

We have anindependent third party analyze our MSRs for impairment on a monthly basis.This independent third party analyzes the underlying loans on all servicedloans and, based upon their knowledge of the value of MSRs that are traded onthe open market, they assign a current market value for each risk tranche inour portfolio. We then compare that market value to the current amortized bookvalue for each tranche. The change in market value (up to the amortized valueof the MSR) is recorded as an adjustment to the MSR valuation allowance, withthe offset being recorded as an addition or a reduction to income.

The independent third party used the following assumptions to calculatethe market value of the MSRs as of March 31, 2007 and December 31, 2006:
| ** **                                  | ** ** | **At March 31, 2007** | ** ** | **At December 31, 2006** | ** ** |
|---------------------------------------------|------------|--------------------------------------|------------|-----------------------------------------|------------|
| Prepayment  Standard Assumption (PSA) speed |       | 205.00                               | %          | 193.00                                  | %          |
| Discount rate                               |       | 10.00                                |       | 10.00                                   |       |
| Earnings rate                               |       | 5.00                                 |       | 5.00                                    |       |
|                                        |       |                                 |       |                                    |       |

 

**Overview**

The Company’s net income for the first three months of 2007 was $3.1million, an increase of $956 thousand (45.5%) over the same period in 2006.This was primarily due to an increase net interest income of $1.0million and a decrease in the provision for loan losses expense of $850thousand. Total assets decreased slightly by$4.5 million (0.3%) from December 31, 2006 to March 31, 2007, with cashdecreasing and loans slightly increasing. Total deposits decreased $4.8 million(0.4%) during the same period.

13

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**Results of Operations-Income Statement Analysis**

***Net Income-General.***   Net income for the three months ended March31, 2007 was $3.1 million, compared to $2.1 million for the same period of2006. Diluted earnings per share increased by $0.14 to $0.46 for the threemonths ended March 31, 2007 from $0.32 for the same period of 2006. Thisrepresented an increase in earnings per share of 43.8%. This increasewas primarily due to an increase net interest income of $1.0 million and adecrease in the provision for loan losses expense of $850 thousand. Theincrease in net interest income was due to an increase in both the yield andthe volume of the interest-earning assets of Los Alamos National Bank, whichwas partially offset by increases in the cost and volume of interest-bearingliabilities. The decrease in the provision for loan losses expense resultedfrom management’s assessment of the adequacy of the reserve for loan loss inrelation to the improved asset quality of our loans. In addition, non-interestexpenses increased $343 thousand and non-interest income increased $32 thousand.The increase in non-interest expense was mainly due to an increase in salariesand employee benefits expense. Income tax expenses increased $609 thousand dueto higher pre-tax income. The effect of those items, net of taxes, was anincrease in net income of $956 thousand for the first quarter of 2007 comparedto the same period in 2006.

The profitability of the Company’s operations depends primarily on itsnet interest income, which is the difference between total interest earned oninterest earning assets and total interest paid on interest bearingliabilities. The Company’s net income is affected by its provision for loanlosses as well as other income and other expenses. The provision for loanlosses reflects the amount management believes to be adequate to cover probablecredit losses in the loan portfolio. Non-interest income or other incomeconsists of mortgage loan servicing fees, loan and other fees, service chargeson deposits, gain on sale of loans, gain on sale of securities and other operatingincome. Other expenses include salaries and employee benefits, occupancyexpenses, data processing expenses, marketing, amortization and valuation ofmortgage servicing rights, supplies expense, loss on other real estate owned,postage and other expenses.

The amount of net interest income is affected by changes in the volumeand mix of interest earning assets, the level of interest rates earned on thoseassets, the volume and mix of interest bearing liabilities, and the level ofinterest rates paid on those interest bearing liabilities. The provision forloan losses is dependent on changes in the loan portfolio and management’sassessment of the collectibility of the loan portfolio, as well as economic andmarket 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 in operations affects other expenses as aresult of additional employees, branch facilities and promotional marketingexpenses. Growth in the number of accounts affects other income includingservice fees as well as other expenses such as computer services, supplies,postage, telecommunications and other miscellaneous expenses.

14

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***Net InterestIncome.***The following tables present, for the periodsindicated, the total dollar amount of interest income from average interestearning assets and the resultant yields, as well as the interest expense onaverage interest bearing liabilities, and the resultant costs, expressed bothin dollars and rates:
| ** **                                                                   | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                   | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| ** **                                                                   | ** ** | **Average**                                          | ** ** | ** ** | ** ** | ** ** | ** ** | **Average** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                   | ** ** | **Balance**                                          | ** ** | **Interest** | ** ** | **Yield/Rate** | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Yield/Rate** | ** ** |
| ** **                                                                   | ** ** | **(Dollars in thousands)**                           | ** ** |
| **Interest Earning Assets:**                                                 |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Loans(1)(2)                                                                  |       | $                                                    | 1,158,093  |   | $ | 22,142 |   | 7.75 | % | $ | 1,037,684 |   | $ | 17,903 |   | 7.00 | % |
| Taxable investment  securities                                               |       | 79,383                                               |       | 935 |   | 4.78 |   | 100,363 |   | 991 |   | 4.00 |   |
| Investment securities  exempt from federal income taxes(3)                   |       | 24,846                                               |       | 439 |   | 7.17 |   | 18,889 |   | 324 |   | 6.96 |   |
| Federal funds sold                                                           |       | 1,877                                                |       | 20 |   | 4.32 |   | 334 |   | 3 |   | 3.17 |   |
| Other interest bearing  deposits                                             |       | 33,216                                               |       | 432 |   | 5.27 |   | 12,499 |   | 132 |   | 4.28 |   |
| Investment in  unconsolidated trust subsidiaries                             |       | 1,116                                                |       | 23 |   | 8.36 |   | 992 |   | 22 |   | 8.99 |   |
| Total  interest earning assets                                               |       | 1,298,531                                            |       | 23,991 |   | 7.49 |   | 1,170,811 |   | 19,375 |   | 6.71 |   |
| Non-interest  earning assets                                                 |       | 59,938                                               |       |   |   |   |   | 59,778 |   |   |   |   |   |
| Total  assets                                                                |       | $                                                    | 1,358,469  |   |   |   |   |   | $ | 1,230,589 |   |   |   |   |   |
| **Interest Bearing Liabilities:**                                            |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                                                    |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |
| NOW  deposits                                                                |       | $                                                    | 92,641     |   | $ | 583 |   | 2.55 | % | $ | 84,772 |   | $ | 362 |   | 1.73 | % |
| Money  market deposits                                                       |       | 192,258                                              |       | 1,107 |   | 2.34 |   | 149,048 |   | 565 |   | 1.54 |   |
| Savings  deposits                                                            |       | 236,017                                              |       | 1,505 |   | 2.59 |   | 258,359 |   | 1,175 |   | 1.84 |   |
| Time  deposits over $100,000                                                 |       | 345,918                                              |       | 4,443 |   | 5.21 |   | 284,611 |   | 2,847 |   | 4.06 |   |
| Time  deposits under $100,000                                                |       | 213,895                                              |       | 2,617 |   | 4.96 |   | 170,429 |   | 1,593 |   | 3.79 |   |
| Short-term borrowings,  including ESOP borrowings under 1 year               |       | 931                                                  |       | 13 |   | 5.66 |   | 13,761 |   | 138 |   | 4.07 |   |
| Long-term borrowings,  including ESOP borrowings over 1 year                 |       | 63,599                                               |       | 612 |   | 3.90 |   | 69,539 |   | 680 |   | 3.97 |   |
| Junior subordinated debt  owed to unconsolidated trusts                      |       | 37,116                                               |       | 762 |   | 8.33 |   | 32,992 |   | 728 |   | 8.95 |   |
| Total  interest bearing liabilities                                          |       | 1,182,375                                            |       | 11,642 |   | 3.99 |   | 1,063,511 |   | 8,088 |   | 3.08 |   |
| Demand  deposits—non-interest bearing                                   |       | 36,551                                               |       |   |   |   |   | 39,811 |   |   |   |   |   |
| Other non-interest  bearing liabilities                                      |       | 56,691                                               |       |   |   |   |   | 49,477 |   |   |   |   |   |
| Stockholders’ equity,  including stock owned by ESOP                    |       | 82,852                                               |       |   |   |   |   | 77,790 |   |   |   |   |   |
| Total  liabilities and stockholders equity                                   |       | $                                                    | 1,358,469  |   |   |   |   |   | $ | 1,230,589 |   |   |   |   |   |
| Net  interest income on a fully tax equivalent basis/interest rate Spread(4) |       |                                                 |       | $ | 12,349 |   | 3.50 | % |   |   | $ | 11,287 |   | 3.63 | % |
| Net  interest margin on a fully tax equivalent basis(5)                      |       |                                                 |       |   |   | 3.86 | % |   |   |   |   | 3.91 | % |
| Net interest margin(5)                                                       |       |                                                 |       |   |   | 3.81 | % |   |   |   |   | 3.87 | % |

----

(1)             Includes non-accrualloans of $7.9 million and $8.1 million for March 31, 2007 and 2006,respectively.

(2)             Interest income includes loanorigination fees of $854 thousand and $737 thousand for the three months endedMarch 31, 2007 and 2006, respectively.

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

(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)             Netinterest margin represents net interest income as a percentage of averageinterest earning assets.

15

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The following table reconciles net interest income ona fully tax-equivalent basis for the periods presented:

|                                                   | ** ** | **Three Months Ending March 31,** | ** ** |
|---------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                        | ** ** | **2007**                                              | ** ** | **2006** | ** ** |
| Net interest  income                              |       | $                                                     | 12,192     |   | $ | 11,166 |   |
| Tax-equivalent  adjustment to net interest income |       | 157                                                   |       | 121 |   |
|                                              |       |                                                  |       |   |   |
| Net interest income,  fully tax-equivalent basis  |       | $                                                     | 12,349     |   | $ | 11,287 |   |

 

For the first quarter of 2007 netinterest income on a fully tax equivalent basis increased $1.0 million to $12.3million from $11.3 million for the first quarter of 2006.  The increase innet interest income resulted from an increase in interest income on a fully taxequivalent basis of $4.6 million (23.8%), while interest expense increased $3.6million (43.9%).  Interest income on a fully tax equivalent basisincreased due in part to an increase in average earning assets of $127.7 million(10.9%), which accounted for $2.3 million of the increase.  In addition, theyield on earning assets on a fully tax equivalent basis increased 78 basispoints, which accounted for another $2.3 million of the increase.  Interest expense increased primarily due toan increase on the cost of interest-bearing liabilities of 91 basis points,which accounted for $2.4 million of the increase. Average interest-bearingliabilities increased $118.9 million (11.2%), accounting for $1.2 million ofthe increase in interest expense. The net interest margin expressed in a fullytax equivalent basis decreased 5 basis points to 3.86% for the first threemonths of 2007 from 3.91% during the same period in 2006.

***Volume,Mix and Rate Analysis 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 eachcategory due to: (i) changes attributable to changes in volume (change involume times the prior period interest rate); (ii) changes attributable tochanges in interest rate (changes in rate times the prior period volume); and(iii) changes attributable to changes in rate/volume (changes in interestrate times changes in volume).  Changes attributable to the combinedimpact of volume and rate have been allocated proportionally to the changes dueto volume and the changes due to rate:
| ** **                                                 | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                 | ** ** | **2007 Compared to 2006**             | ** ** |
| ** **                                                 | ** ** | **Change Due**                                  | ** ** | **Change Due** | ** ** | **Total** | ** ** |
| ** **                                                 | ** ** | **to Volume**                                   | ** ** | **to Rate** | ** ** | **Change** | ** ** |
| ** **                                                 | ** ** | **(In thousands)**                              | ** ** |
| **Interest  Earning Assets:**                              |       |                                                 |       |   |   |   |   |
| Loans                                                      |       | $                                                    | 2,193      |   | $ | 2,046 |   | $ | 4,239 |   |
| Taxable  investment securities                             |       | (229                                                 | )          | 171 |   | (56 | ) |
| Investment  securities exempt from federal income taxes(1) |       | 105                                                  |       | 10 |   | 115 |   |
| Federal funds  sold                                        |       | 16                                                   |       | 1 |   | 17 |   |
| Other interest  bearing deposits                           |       | 263                                                  |       | 37 |   | 300 |   |
| Investment in  unconsolidated trust subsidiaries           |       | 3                                                    |       | (2 | ) | 1 |   |
| Total increase (decrease) in interest income               |       | 2,351                                                |       | 2,263 |   | 4,616 |   |
| **Interest  Bearing Liabilities:**                         |       |                                                 |       |   |   |   |   |
| NOW deposits                                               |       | 37                                                   |       | 184 |   | 221 |   |
| Money market  deposits                                     |       | 195                                                  |       | 347 |   | 542 |   |
| Savings deposits                                           |       | (109                                                 | )          | 437 |   | 330 |   |
| Time deposits  over $100,000                               |       | 688                                                  |       | 908 |   | 1,596 |   |
| Time deposits  under $100,00                               |       | 463                                                  |       | 561 |   | 1,024 |   |
| Short-term  borrowings                                     |       | (164                                                 | )          | 39 |   | (125 | ) |
| Long-term  borrowings                                      |       | (57                                                  | )          | (11 | ) | (68 | ) |
| Junior  subordinated debt owed to unconsolidated trusts    |       | 87                                                   |       | (53 | ) | 34 |   |
| Total increase (decrease) in interest expense              |       | 1,140                                                |       | 2,412 |   | 3,554 |   |
| Increase  (decrease) in net interest income                |       | $                                                    | 1,211      |   | $ | (149 | ) | $ | 1,062 |   |

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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 certain other permanent taxdifferences.

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***OtherIncome.***  Changesin other income between the three months ended March 31, 2007 and 2006 were asfollows:
| ** **                   | ** ** | **Three Months Ended** | ** ** | ** **                   | ** ** |
|------------------------------|------------|----------------------------------|------------|------------------------------|------------|
| ** **                   | ** ** | **March 31, 2007**     | ** ** | **March 31, 2006** | ** ** | **Net difference** | ** ** |
| ** **                   | ** ** | **(In thousands)**          | ** ** |
| Other income:                |       |                             |       |                         |       |   |   |
| Mortgage loan servicing fees |       | $                                | 623        |                         | $          | 640 |   | $ | (17 | ) |
| Loan and other fees          |       | 728                              |       | 709                          |       | 19 |   |
| Service charges on deposits  |       | 380                              |       | 381                          |       | (1 | ) |
| Gain on sale of loans        |       | 409                              |       | 300                          |       | 109 |   |
| Other operating income       |       | 288                              |       | 366                          |       | (78 | ) |
|                         |       | $                                | 2,428      |                         | $          | 2,396 |   | $ | 32 |   |

 

In the first quarter of 2007,other income was relatively unchanged from the first quarter of 2006 at $2.4million, an increase of $32 thousand (1.3%) over the same period in 2006.  Gain on sale of loans increased $109 thousand(36.3%) from the first quarter of 2006 due to recoveries on interest ratecontracts settled in the first quarter of 2007. Other operating income decreased $78 thousand (21.3%), primarily due toa decrease in title insurance premium income ($72 thousand).  Title insurance premiums decreased due to adecreased volume of title insurance business in both the Los Alamos and SantaFe operations of Title Guaranty.  Thiswas due to a general slow down of the real estate market experienced nationwideand in our markets.

***OtherExpenses.***  Changesin other expenses between the three months ended March 31, 2007 and 2006 wereas follows:
|                                                          | ** ** | **Three Months Ended** | ** ** | ** **                   | ** ** |
|----------------------------------------------------------|------------|----------------------------------|------------|------------------------------|------------|
| ** **                                               | ** ** | **March 31, 2007**     | ** ** | **March 31, 2006** | ** ** | **Net difference** | ** ** |
| ** **                                               | ** ** | **(In thousands)**          | ** ** |
| Other expenses:                                          |       |                             |       |                         |       |   |   |
| Salaries and employee benefits                           |       | $                                | 4,645      |                         | $          | 4,425 |   | $ | 220 |   |
| Occupancy                                                |       | 982                              |       | 857                          |       | 125 |   |
| Data processing                                          |       | 447                              |       | 468                          |       | (21 | ) |
| Marketing                                                |       | 486                              |       | 437                          |       | 49 |   |
| Amortization and valuation of mortgage servicing  rights |       | 734                              |       | 551                          |       | 183 |   |
| Supplies                                                 |       | 185                              |       | 201                          |       | (16 | ) |
| Loss on sale of other real estate owned                  |       | (22                              | )          | 198                          |       | (220 | ) |
| Postage                                                  |       | 175                              |       | 157                          |       | 18 |   |
| Other                                                    |       | 1,104                            |       | 1,099                        |       | 5 |   |
|                                                     |       | $                                | 8,736      |                         | $          | 8,393 |   | $ | 343 |   |

 

For the first quarter of 2007,other expenses increased $343 thousand (4.1%) to $8.7 million in 2007 from $8.4million in the first quarter of 2006.  Salaries and employee benefitsincreased $220 thousand (5.0%) due to normal merit increases in salaries and anincrease in staff (from 278 full-time equivalent employees on March 31, 2006 to286 full-time equivalent employees on March 31, 2007) to support our growth intotal assets from the first quarter 2006 (total assets grew 9.4% from March 31,2006 to March 31, 2007).  Loss on sale ofother real estate owned decreased by $220 thousand (111.1%) due to losses in 2006that were not repeated in 2007, due to a lower amount of other real estateowned sale activity.  Amortization andvaluation of mortgage servicing rights increased $183 thousand (33.2%) due toan increase in the valuation allowance associated with the mortgage servicingright assets.  The increase in thevaluation allowance was due to a decrease in interest rates between 2006 and2007.  Occupancy expenses increased $125thousand (14.6%) mainly due to the lease expense on the land leased in Santa Fefor the construction of a third office in Santa Fe.  This expense is offset by interest income ona mortgage loan that we have on the property.

***IncomeTaxes.***  Inthe first three months of 2007, income tax expense increased by $609 thousand(52.1%) from the previous year to a total of $1.8 million from $1.2million.  This was due in part to highertaxable income in 2007 compared to 2006, as well as a higher effective tax rate(36.8% compared to 35.7%).  The effectivetax rate was lower in 2006 compared to 2007 due to the exercise of stockoptions in the first three months 2006, which lowered taxable income.  There were no stock options exercised in thefirst three months of 2007.

17

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**Financial Condition-Balance SheetAnalysis**

***General.***  Total assets at March 31, 2007 were$1.4 billion, a decrease of $4.5 million (0.3%) from December 31, 2006. Netloans increased $28.4 million (2.5%) during 2007 and cash and cash equivalentsdecreased $31.8 million (43.2%). During the same period, total liabilitiesdecreased slightly by $7.5 million (0.6%) remaining at $1.3 billion at March31, 2007. The decrease in total liabilities was primarily due to a decrease intotal deposits of $4.8 million (0.4%) and a decrease in borrowings (includingborrowings made by the Employee Stock Ownership Plan) of $1.2 million (1.8%).Stockholders’ equity (including stock owned by the Employee Stock OwnershipPlan) increased $3.0 million (3.8%) to $83.7 million on March 31, 2007 comparedto $80.7 million on December 31, 2006.

***InvestmentSecurities. ***The primary purposes ofthe investment portfolio are to provide a source of earnings, for liquiditymanagement, to provide collateral to pledge against public deposits and tocontrol interest rate risk.  In managing the portfolio, the Company seeksto obtain the objectives of safety of principal, liquidity, diversification andmaximized return on funds.  For an additional discussion with respect tothese matters, see “Liquidity and Sources of Capital” under Item 2 and “AssetLiability Management” under Item 3 below.

The following tables set forththe amortized cost and fair value of securities by accounting classificationcategory and by type of security as indicated:

 
| ** **                                                       | ** ** | **At March 31, 2007** | ** ** | **At December 31,  2006** | ** ** | **At March 31, 2006** | ** ** |
|------------------------------------------------------------------|------------|-----------------------|------------|--------------------------------|------------|-----------------------|------------|
| ** **                                                       | ** ** | **Amortized**         | ** ** | ** **                     | ** ** | **Amortized**         | ** ** | ** ** | ** ** | **Amortized** | ** ** | ** ** | ** ** |
| ** **                                                       | ** ** | **Cost**              | ** ** | **Fair Value**            | ** ** | **Cost**              | ** ** | **Fair Value** | ** ** | **Cost** | ** ** | **Fair Value** | ** ** |
| ** **                                                       | ** ** | **(In thousands)**    | ** ** |
| Investment securities  Available for Sale:                       |       |                  |       |                           |       |                  |       |   |   |   |   |   |   |
| Government  sponsored agencies                                   |       | $                     | 73,943     |                           | $          | 73,772                |       | $ | 73,025 |   | $ | 72,787 |   | $ | 80,290 |   | $ | 79,793 |   |
| States and  political subdivisions                               |       | 15,183                |       | 15,112                         |       | 15,190                |       | 15,157 |   | 5,973 |   | 5,931 |   |
| Equity  securities                                               |       | 1                     |       | 5                              |       | 1                     |       | 6 |   | 1 |   | 5 |   |
| Total investment  securities available for sale                  |       | $                     | 89,127     |                           | $          | 88,889                |       | $ | 88,216 |   | $ | 87,950 |   | $ | 86,264 |   | $ | 85,729 |   |
| Investment securities  Held to Maturity:                         |       |                  |       |                           |       |                  |       |   |   |   |   |   |   |
| Government  sponsored agencies                                   |       | $                     | —     |                           | $          | —                |       | $ | — |   | $ | — |   | $ | 5,521 |   | $ | 5,504 |   |
| States and  political subdivisions                               |       | 10,916                |       | 10,912                         |       | 10,968                |       | 10,961 |   | 12,836 |   | 12,827 |   |
| Total investment  securities held to maturity                    |       | $                     | 10,916     |                           | $          | 10,912                |       | $ | 10,968 |   | $ | 10,961 |   | $ | 18,357 |   | $ | 18,331 |   |
| Other investments:                                               |       |                  |       |                           |       |                  |       |   |   |   |   |   |   |
| Non-marketable  equity securities (including FRB and FHLB stock) |       | $                     | 6,463      |                           | $          | 6,463                 |       | $ | 6,820 |   | $ | 6,820 |   | $ | 7,278 |   | $ | 7,278 |   |
| Investment in  unconsolidated trusts                             |       | 1,116                 |       | 1,116                          |       | 1,116                 |       | 1,116 |   | 992 |   | 992 |   |
| Total other investments                                          |       | $                     | 7,579      |                           | $          | 7,579                 |       | $ | 7,936 |   | $ | 7,936 |   | $ | 8,270 |   | $ | 8,270 |   |

 

***Loan Portfolio.***  The following tables set forththe composition of the loan portfolio:
| ** **                 | ** ** | **At March 31, 2007**      | ** ** | **At December 31, 2006** | ** ** | **At March 31, 2006** | ** ** |
|----------------------------|------------|----------------------------|------------|--------------------------|------------|-----------------------|------------|
| ** **                 | ** ** | **Amount**                 | ** ** | **Percent**              | ** ** | **Amount**            | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| ** **                 | ** ** | **(Dollars in thousands)** | ** ** |
| Commercial                 |       | $                          | 122,580    |                     | 10.54      | %                     | $          | 127,950 |   | 11.29 | % | $ | 96,298 |   | 9.15 | % |
| Commercial real  estate    |       | 401,984                    |       | 34.58                    |       | 388,149               |       | 34.23 |   | 387,940 |   | 36.84 |   |
| Residential real  estate   |       | 339,762                    |       | 29.22                    |       | 324,051               |       | 28.58 |   | 317,210 |   | 30.12 |   |
| Construction  real estate  |       | 241,224                    |       | 20.75                    |       | 235,534               |       | 20.78 |   | 197,307 |   | 18.74 |   |
| Installment and  other     |       | 57,107                     |       | 4.91                     |       | 58,045                |       | 5.12 |   | 54,238 |   | 5.15 |   |
| Total loans                |       | 1,162,657                  |       | 100.00                   |       | 1,133,729             |       | 100.00 |   | 1,052,993 |   | 100.00 |   |
| Unearned income            |       | (2,199                     | )          |                     |       | (2,005                | )          |   |   | (2,326 | ) |   |   |
| Gross loans                |       | 1,160,458                  |       |                     |       | 1,131,724             |       |   |   | 1,050,667 |   |   |   |
| Allowance for  loan losses |       | (12,535                    | )          |                     |       | (12,167               | )          |   |   | (9,256 | ) |   |   |
| Net loans                  |       | $                          | 1,147,923  |                     |       |                  | $          | 1,119,557 |   |   |   | $ | 1,041,411 |   |   |   |

 

Net loans increased $28.4 million (2.5%) to $1.1billion at March 31, 2007 from $1.1 billion at December 31, 2006.  Theincrease was due primarily to growth in the Company’s residential real estateand commercial real estate loan portfolios.  This growth has been due to acombination of more activity generated from our newest Santa Fe office andincreased marketing of our loan products.

18

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***AssetQuality.***  Thefollowing table sets forth the amounts of non-performing loans andnon-performing assets at the dates indicated
| ** **                                                    | ** ** | **At  March 31,  2007** | ** ** | **At   December 31,  2006** | ** ** | **At  March 31,  2006** | ** ** |
|---------------------------------------------------------------|------------|------------------------------|------------|---------------------------------------|------------|------------------------------|------------|
| ** **                                                    | ** ** | **(Dollars in thousands)**   | ** ** |
| Non-accruing  loans                                           |       | $                            | 9,424      |                                  | $          | 8,767                        |       | $ | 8,468 |   |
| Loans  90 days or more past due, still accruing interest |       | —                       |       | 1                                     |       | —                       |       |
| Total  non-performing loans                                   |       | 9,424                        |       | 8,768                                 |       | 8,468                        |       |
| Other real  estate owned                                      |       | 537                          |       | 165                                   |       | 290                          |       |
| Other  repossessed assets                                     |       | 10                           |       | 60                                    |       | 79                           |       |
| Total  non-performing assets                                  |       | $                            | 9,971      |                                  | $          | 8,993                        |       | $ | 8,837 |   |
| Total  non-performing loans to total loans                    |       | 0.81                         | %          | 0.77                                  | %          | 0.80                         | %          |
| Allowance for  loan losses to non-performing loans            |       | 133.01                       | %          | 138.77                                | %          | 109.31                       | %          |
| Total non-performing  assets to total assets                  |       | 0.74                         | %          | 0.66                                  | %          | 0.71                         | %          |

 

At March 31, 2007, total non-performing assetsincreased $1.2 million (12.8%) to $10.0 million from $8.8 million at March 31,2006 due to an increase in non-performing loans of $956 thousand. Non-performing loans increased primarily due to two large commercial loansbeing placed on non-accrual status between the two periods.

At March 31, 2007, total non-performing assetsincreased $978 thousand (10.9%) to $10.0 million from $9.0 million at December31, 2006, primarily due to increases in non-performing loans of $656 thousandand an increase in other real estate owned of $372 thousand.  Non-performing loans increased mainly due toa large commercial loan and a large residential real estate loan being placedon non-accrual status in 2007.

***Allowance for LoanLosses.*** 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 andapplication of this “critical accounting policy” involves judgments, estimates,and uncertainties that are susceptible to change. In the event that differentassumptions or conditions were to prevail, and depending upon the severity ofsuch changes, the possibility of materially different financial condition orresults of operations is a reasonable likelihood.

The allowance for loan losses is maintained at anamount that management believes will be appropriate to absorb probable losseson existing loans, based on an evaluation of the collectibility of loans andprior loss experience. This evaluation also takes into consideration suchfactors as changes in the nature and volume of the loan portfolio, the value ofunderlying collateral, overall portfolio quality, review of specific problemloans and current economic conditions that may affect the borrower’s ability topay. While management uses the best information available to make its evaluation,future adjustments to the allowance may be necessary if there are significantchanges in economic conditions. In addition, as an integral part of theirexamination 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.

The following table presents an analysis of theallowance for loan losses for the periods presented:

 
| ** **                                    | ** ** | **Three Months Ended**     | ** ** |
|-----------------------------------------------|------------|----------------------------|------------|
| ** **                                    | ** ** | **March 31,**         | ** ** | **March 31,** | ** ** |
| ** **                                    | ** ** | **2007**                   | ** ** | **2006** | ** ** |
| ** **                                    | ** ** | **(Dollars in thousands)** | ** ** |
| Balance at  beginning of period               |       | $                          | 12,167     |   | $ | 8,842 |   |
| Provision for  loan losses                    |       | 1,050                      |       | 1,900 |   |
| Charge-offs                                   |       | (836                       | )          | (1,569 | ) |
| Recoveries                                    |       | 154                        |       | 83 |   |
| Net charge-offs                               |       | (682                       | )          | (1,486 | ) |
| Balance at end  of period                     |       | $                          | 12,535     |   | $ | 9,256 |   |
| Gross loans at  end of period                 |       | $                          | 1,160,458  |   | $ | 1,050,667 |   |
| Ratio of  allowance to total loans            |       | 1.08                       | %          | 0.88 | % |
| Ratio of net  charge-offs to average loans(1) |       | 0.24                       | %          | 0.58 | % |

----

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

19

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Net charge-offs for the three months ended March 31,2007 totaled $682 thousand, a decrease of $804 thousand (54.1%) from $1.5million for the three months ended March 31, 2006.  The majority of thecharge-offs were installment, commercial and commercial real estateloans.  Additionally the provision for loan losses decreased for the threemonths ended March 31, 2007 from the three months ended March 31, 2006, due tomanagement’s analysis of current non-performing loans.

The following table sets forth the allocation of theallowance for loan losses in each loan category for the periods presented andthe percentage of loans in each category to total loans. An allocation for aloan classification is only for internal analysis of the adequacy of theallowance and is not an indication of expected or anticipated losses:

 
| ** **                              | ** ** | **At March 31, 2007**      | ** ** | **At December 31, 2006** | ** ** | **At March 31, 2006** | ** ** |
|-----------------------------------------|------------|----------------------------|------------|--------------------------|------------|-----------------------|------------|
| ** **                              | ** ** | **Amount**                 | ** ** | **Percent**              | ** ** | **Amount**            | ** ** | **Percent** | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| ** **                              | ** ** | **(Dollars in thousands)** | ** ** |
| ** **                              | ** ** | ** **                 | ** ** | ** **               | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Commercial                              |       | $                          | 4,577      |                     | 10.54      | %                     | $          | 4,188 |   | 11.29 | % | $ | 3,266 |   | 9.15 | % |
| Commercial and  residential real estate |       | 5,044                      |       | 63.80                    |       | 4,681                 |       | 62.81 |   | 2,581 |   | 66.96 |   |
| Construction  real estate               |       | 2,227                      |       | 20.75                    |       | 2,362                 |       | 20.78 |   | 2,381 |   | 18.74 |   |
| Installment and  other                  |       | 856                        |       | 4.91                     |       | 928                   |       | 5.12 |   | 1,001 |   | 5.15 |   |
| Unallocated                             |       | (169                       | )          | N/A                      |       | 8                     |       | N/A |   | 27 |   | N/A |   |
| Total                                   |       | $                          | 12,535     |                     | 100.00     | %                     | $          | 12,167 |   | 100.00 | % | $ | 9,256 |   | 100.00 | % |

----

N/A—not applicable

The allowance for loan lossesincreased $3.3 million (35.4%) from March 31, 2006 to March 31, 2007.  This was mainly due to an increase in theallowance allocated to commercial and residential real estate loans andcommercial non-real estate loans.  Theallocation for commercial and residential real estate loans increased $2.5million (95.4%) from March 31, 2006 to March 31, 2007, due to an increase inthe historical loss experience (based upon regression analysis) of $3.9 millionand an increase in specifically identified loans of $28 thousand, which waspartially offset by a decrease in the allocation based upon qualitativeadjustments of $1.5 million.  Theallocation for commercial loans increased $1.3 million (40.1%) from March 31,2006 to March 31, 2007, due to an increase in the historical loss experience(based upon regression analysis) of $2.2 million and an increase inspecifically identified loans of $395 thousand, which was partially offset by adecrease in the allocation based upon qualitative adjustments of $1.3million.  The adjustments relating to thehistorical loss experience were partially due to moving from a pure historicalloss analysis to a regression analysis, and the adjustments relating to thequalitative factors were partially due to a quantification of these qualitativefactors.  For further information, pleasesee discussion in “Critical Accounting Policies—Allowance for Loan Losses”above.

We expect somewhat slower growth in our loan portfolioas the pace of economic expansion in the New Mexico economy has moderatedduring the past year along with continued increases in interest rates. Weanticipate the volume of commercial real estate and construction loans to slowas the construction industry’s home building boom appears to be slowing andreturning to a normal volume.  Commercialreal estate has strengthened over the past several years due to vacancy ratesreturning to their historical averages and demand continuing to see newbusiness looking to expand within the state. Although evidence indicates thatthe construction boom is slowing, the sector for homes below $500 thousandremains strong with sales declining slightly but median prices rising. Weexpect residential real estate for property worth greater than $1.5 million tocontinue to be soft.  Total netcharge-offs were substantially less in the first quarter of 2007 than in the sameperiod in 2006 due to commercial charge offs returning to more normal levels.

Additions to the allowance for loan losses, which arecharged to earnings through the provision for loan losses, are determined basedon a variety of factors, as indicated above. Although we believe the allowancefor loan losses is sufficient to cover probable losses inherent in the loanportfolio, there can be no assurance that the allowance will prove sufficientto cover actual loan losses.

20

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***Potential Problem Loans.*****The Company utilizes an internal assetclassification system as a means of reporting problem and potential problemassets. At scheduled Board of Directors meetings every quarter, a list of totaladversely classified assets is presented, showing OREO, other repossessedassets, and all loans listed as “Substandard,” “Doubtful” and “Loss.”  Allnon-accrual loans are classed either as “Substandard” or “Doubtful” and arethus included in total adversely classified assets. A separate watch list ofloans classified as “Special Mention” is also presented. An asset is classifiedSubstandard if it is inadequately protected by the current net worth and payingcapacity of the obligor or by the collateral pledged, if any. Substandardassets include those characterized by the distinct possibility that the Companywill sustain some loss if the deficiencies are not corrected. Assets classifiedas Doubtful have all the weaknesses inherent in those classified Substandardwith the added characteristic that the weaknesses present make collection orliquidation in full, on the basis of currently existing facts, conditions andvalues, highly questionable and improbable. Assets classified as Loss are thoseconsidered uncollectible and viewed as non-bankable assets worthy ofcharge-off. Assets that do not currently expose the Company to sufficient riskto warrant classification in one of the aforementioned categories, but possessweaknesses that may or may not be within the control of the customer, aredeemed to be Special Mention.

The Company’s determinations as to the classificationof its assets and the amount of its valuation allowances are subject to reviewby the Bank’s primary regulators, which can order the establishment ofadditional general or specific loss allowances. The OCC, in conjunction withthe other federal banking agencies, has adopted an interagency policy statementon the allowance for loan losses. The policy statement provides guidance forfinancial institutions on both the responsibilities of management for theassessment and establishment of adequate allowances and guidance for bankingagency examiners to use in determining the adequacy of general valuationguidelines. Generally, the policy statement recommends that(i) institutions have effective systems and controls to identify, monitorand address asset quality problems; (ii) management analyze allsignificant factors that affect the collectibility of the portfolio in areasonable manner; and (iii) management establish acceptable allowanceevaluation processes that meet the objectives set forth in the policystatement. Management believes it establish an adequate allowance for probableloan losses. The Company analyzes its process regularly with modifications madeas necessary, and reports those results quarterly at Board of Directorsmeetings. However, there can be no assurance that regulators, in reviewing theCompany’s loan portfolio, will not request the Company to materially increaseits allowance for loan losses. Although management believes that adequatespecific and general loan loss allowances have been established, actual lossesare dependent upon future events and, as such, further additions to the levelof specific and general loan loss allowances may become necessary.

The following table shows the amounts of adverselyclassified assets and special mention loans as of the periods indicated:
| ** **                         | ** ** | **At  March 31,  2007** | ** ** | **At  December 31,  2006** | ** ** | **At  March 31,  2006** | ** ** |
|------------------------------------|------------|------------------------------|------------|---------------------------------|------------|------------------------------|------------|
| ** **                         | ** ** | **(Dollars in thousands)**   | ** ** |
| Loans classified  as:              |       |                         |       |                            |       |                         |       |
| Substandard                        |       | $                            | 21,973     |                            | $          | 12,924                       |       | $ | 14,352 |   |
| Doubtful                           |       | 1,625                        |       | 2,177                           |       | 1,248                        |       |
| Total adversely  classified loans  |       | 23,598                       |       | 15,101                          |       | 15,600                       |       |
| Other real  estate owned           |       | 537                          |       | 165                             |       | 290                          |       |
| Other  repossessed assets          |       | 10                           |       | 60                              |       | 79                           |       |
| Total adversely  classified assets |       | $                            | 24,145     |                            | $          | 15,326                       |       | $ | 15,969 |   |
| Special mention loans              |       | $                            | 3,092      |                            | $          | 9,044                        |       | $ | 11,383 |   |

 

              Total adversely classified assets increased $8.2 million (53.3%) from March 31,2006 to March 31, 2007.  The main reason for the increase was an increaseof $7.60 million in substandard loans. This was primarily due to the downgrading of two larger commercialrelationships in the first quarter. Special mention loans decreased $8.3 million (72.8%) between March 31,2005 and March 31, 2006, primarily due to a combination of upgrades to the passcategory and downgrades to the substandard risk rating.

 

21

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**Sources of Funds**

***Liquidityand Sources of Capital***

The Company’s cash flows are comprised of threeclassifications: cash flows from operating activities, cash flows frominvesting activities and cash flows from financing activities. Net cash (usedin) provided by operating activities was $7.7 million and ($1.2) million forthe three months ended March 31, 2007 and March 31, 2006.  Net cashprovided by operating activities increased $8.9 million in the first threemonths of 2007 compared to the first three months of 2006 largely due to anincrease in the sale of loans held for sale, net of originations, of $8.3million over the first three months of 2006. Net cash used in investingactivities was $(30.6) million and ($19.6) million for the three months ended March31, 2007 and March 31, 2006.  The $11.0 million increase in cash used ininvesting activities was largely due to cash used in the purchases ofinvestment securities, which increased $20.5 million in 2007 compared to thefirst quarter of 2006.  This waspartially offset by proceeds from the maturities of securities, which increased$6.8 million from the first quarter of 2006 to the first quarter of 2007.  Net cash used in financing activities was($8.9) million and ($8.0) million for the three months ended March 31, 2007 andMarch 31, 2006, respectively.  The $940 thousand decrease in cash providedby financing activities was mainly due to a decrease in new deposit growth of$1.4 million from the first three months of 2007 compared to the first threemonths of 2006 and a decrease of cash used in the purchase of treasury stock of$362 thousand, which was partially offset by a decrease in cash used byborrowings (net of repayments) of $1.3 million.

In the event that additional short-term liquidity isneeded, we have established relationships with several large regional banks toprovide short-term borrowings in the form of federal funds purchases.Management believes that we could borrow up to $122.0 million for a shorttime from these banks on a collective basis based on current lines of credit wehave at these banks. Additionally, we are a member of the FHLB and have theability to borrow from the FHLB. As a contingency plan for significant fundingneeds, the Asset/Liability Management 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, 2007, the Company’stotal risk-based capital ratio was 11.70%, the Tier 1 capital to risk-weightedassets ratio was 9.87%, and the Tier 1 capital to average assets ratio was8.20%.  At December 31, 2006, the Company’stotal risk-based capital ratio was 11.50%, the Tier 1 capital to risk-weightedassets ratio was 9.60%, and the Tier 1 capital to average assets ratio was7.97%.

At March 31, 2007, the Bank’stotal risk-based capital ratio was 11.26%, the Tier 1 capital to risk-weightedassets ratio was 10.14%, and the Tier 1 capital to average assets ratio was8.43%.  At December 31, 2006, the Bank’stotal risk-based capital ratio was 10.97%, the Tier 1 capital to risk-weightedassets ratio was 9.87%, and the Tier 1 capital to average assets ratio was8.17%.  The Bank was categorized as “well-capitalized”under Federal Deposit Insurance Corporation regulations at March 31, 2007 andDecember 31, 2006.

At March 31, 2007 and December31, 2006, the Company’s book value per common share was $12.81 and $12.35.

**Item 3. Quantitative and Qualitative Disclosures About Market Risk**

**Asset Liability Management**

Our net interest income is subject to “interest raterisk” to the extent that it can vary based on changes in the general level ofinterest rates. It is our policy to maintain an acceptable level of interestrate risk over a range of possible changes in interest rates while remainingresponsive to market demand for loan and deposit products. The strategy weemploy to manage our interest rate risk is to measure our risk using anasset/liability simulation model and adjust the maturity of securities in itsinvestment portfolio to manage that risk.

Interest rate risk can also be measured by analyzingthe extent to which the repricing of assets and liabilities are mismatched tocreate an interest sensitivity “gap.” An asset or liability is considered to beinterest rate sensitive within a specific time period if it will mature orreprice within that time period. The interest rate sensitivity gap is definedas the difference between the amount of interest earning assets maturing orrepricing within a specific time period and the amount of interest bearingliabilities maturing or repricing within that 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 negativewhen the amount of interest rate sensitive liabilities exceeds the amount ofinterest rate sensitive assets. During a period of rising interest rates,therefore, a negative gap would tend to adversely affect net interest income.Conversely, during a period of falling interest rates, a negative gap positionwould tend to result in an increase in net interest income.

22

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The following tables set forth the amounts of interestearning assets and interest bearing liabilities outstanding at March 31, 2007,which we anticipate, based upon certain assumptions, to reprice or mature ineach of the future time periods shown. Except as stated below, the amount ofassets and liabilities shown which reprice or mature during a particular periodwere determined based on the earlier of the term to repricing or the term torepayment of the asset or liability. These tables are intended to provide anapproximation of the projected repricing of assets and liabilities at March 31,2007 on the basis of contractual maturities and scheduled rate adjustmentswithin a three-month period and subsequent selected time intervals. The loanamounts in the table reflect principal balances expected to be reinvestedand/or repriced as a result of contractual amortization and rate adjustments onadjustable-rate loans. The contractual maturities and amortization of loans andinvestment securities reflect modest prepayment assumptions. While NOW, moneymarket and savings deposit accounts have adjustable rates, it is assumed thatthe interest rates on these accounts will not adjust immediately to changes inother interest rates. Therefore, the table is calculated assuming that theseaccounts will reprice based upon an historical analysis of decay rates of theseparticular accounts, with repricing assigned to these accounts from 1 to 11months.

 
| ** **                                              | ** ** | **Time to Maturity or  Repricing** | ** ** |
|---------------------------------------------------------|------------|------------------------------------|------------|
| **As of March 31, 2007:**           | ** ** | **0-90 Days**                 | ** ** | **91-365 Days** | ** ** | **1-5 Years** | ** ** | **Over 5 Years** | ** ** | **Total** | ** ** |
| ** **                                              | ** ** | **(Dollars in thousands)**         | ** ** |
| **Interest  Earning Assets:**                           |       |                               |       |   |   |   |   |   |   |   |   |
| Loans                                                   |       | $                                  | 557,248    |   | $ | 456,937 |   | $ | 56,980 |   | $ | 89,293 |   | $ | 1,160,458 |   |
| Loans held for  sale                                    |       | 9,843                              |       | — |   | — |   | — |   | 9,843 |   |
| Investment  securities                                  |       | 26,801                             |       | 53,150 |   | 14,824 |   | 11,493 |   | 106,268 |   |
| Securities  purchased under agreements to resell        |       | 749                                |       | — |   | — |   | — |   | 749 |   |
| Interest bearing  deposits with banks                   |       | 21,820                             |       |   |   |   |   |   |   | 21,820 |   |
| Investment in  unconsolidated trusts                    |       | 186                                |       | — |   | — |   | 930 |   | 1,116 |   |
| Total interest earning assets                           |       | $                                  | 616,647    |   | $ | 510,087 |   | $ | 71,804 |   | $ | 101,716 |   | $ | 1,300,254 |   |
| **Interest  Bearing Liabilities:**                      |       |                               |       |   |   |   |   |   |   |   |   |
| NOW deposits                                            |       | $                                  | 48,075     |   | $ | 29,487 |   | $ | — |   | $ | — |   | $ | 77,562 |   |
| Money market  deposits                                  |       | 217,388                            |       | — |   | — |   | — |   | 217,388 |   |
| Savings deposits                                        |       | 148,780                            |       | 77,969 |   | — |   | — |   | 226,749 |   |
| Time deposits  over $100,000                            |       | 112,712                            |       | 174,432 |   | 52,322 |   | 1,530 |   | 340,996 |   |
| Time deposits  under $100,000                           |       | 58,033                             |       | 131,523 |   | 26,422 |   | 1,145 |   | 217,123 |   |
| Short-term  borrowings                                  |       | —                             |       | — |   | — |   | — |   | — |   |
| Long-term  borrowings                                   |       | 7                                  |       | 23 |   | 27,677 |   | 35,888 |   | 63,595 |   |
| Capital lease  obligations                              |       | —                             |       | — |   | — |   | 2,211 |   | 2,211 |   |
| Borrowings made  by ESOP to outside parties             |       | 271                                |       | — |   | — |   | — |   | 271 |   |
| Junior  subordinated debt owed to unconsolidated trusts |       | 6,186                              |       | — |   | — |   | 30,930 |   | 37,116 |   |
| Total interest bearing liabilities                      |       | $                                  | 591,452    |   | $ | 413,434 |   | $ | 106,421 |   | $ | 71,704 |   | $ | 1,183,011 |   |
| Rate sensitive  assets (RSA)                            |       | $                                  | 616,647    |   | $ | 1,126,734 |   | $ | 1,198,538 |   | $ | 1,300,254 |   | $ | 1,300,254 |   |
| Rate sensitive  liabilities (RSL)                       |       | 591,452                            |       | 1,004,886 |   | 1,111,307 |   | 1,183,011 |   | 1,183,011 |   |
| Cumulative GAP  (GAP=RSA-RSL)                           |       | 25,195                             |       | 121,848 |   | 87,231 |   | 117,243 |   | 117,243 |   |
| RSA/Total assets                                        |       | 45.52                              | %          | 83.17 | % | 88.47 | % | 95.97 | % | 95.97 | % |
| RSL/Total assets                                        |       | 43.66                              | %          | 74.17 | % | 82.03 | % | 87.32 | % | 87.32 | % |
| GAP/Total assets                                        |       | 1.86                               | %          | 9.00 | % | 6.44 | % | 8.65 | % | 8.65 | % |
| GAP/RSA                                                 |       | 4.09                               | %          | 10.81 | % | 7.28 | % | 9.02 | % | 9.02 | % |

 

Certain shortcomings are inherent in the method ofanalysis presented in the foregoing table. For example, although certain assetsand liabilities may have similar maturities or periods to repricing, they mayreact in different degrees to changes in market interest rates. Also, theinterest rates on certain types of assets and liabilities may fluctuate inadvance of changes in market interest rates, while interest rates on othertypes of assets may lag behind changes in market rates. Additionally, in theevent of a change in interest rates, prepayment and early withdrawal levelswould likely deviate significantly from those assumed in calculating the table.Therefore, we do not rely solely on a gap analysis to manage our interest raterisk, but rather we use what we believe to be the more reliable simulationmodel relating to changes in net interest income.

23

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Based on simulation modeling at March 31, 2007 andDecember 31, 2006, our net interest income would change over a one-year timeperiod due to changes in interest rates as follows:

**Change in NetInterest Income Over One Year Horizon**
|   |   |   |   |
|--------|--------|--------|--------|

 

 
|                                                              | ** ** | **At March 31, 2007**      | ** ** | **At December 31, 2006**   | ** ** |
|--------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| **Changes in Levels of  Interest Rates** | ** ** | **Dollar Change**     | ** ** | **Percentage Change** | ** ** | **Dollar Change** | ** ** | **Percentage Change** | ** ** |
| ** **                                                   | ** ** | **(Dollars in thousands)** |
| + 2.00                                                       | %          | $                          | (2,861     | )                          | (5.92      | )% | $ | (2,695 | ) | (5.69 | )% |
| + 1.00                                                       |       | (140                       | )          | (0.29                      | )          | (180 | ) | (0.38 | ) |
| (1.00                                                        | )          | (2,325                     | )          | (4.81                      | )          | (1,629 | ) | (3.44 | ) |
| (2.00                                                        | )          | (2,929                     | )          | (6.06                      | )          | (2,070 | ) | (4.37 | ) |
|                                                              |            |                            |            |                            |            |  |  |  |  |  |  |

 

Our simulations used assume the following:

1.                                       Changes in interest rates are immediate.

2.                                       It is our policy that interest rate exposure dueto a 2% interest rate rise or fall be limited to 15% of our annual net interestincome, as forecasted by the simulation model. As demonstrated by the tableabove, our interest rate risk exposure was within this policy at March 31,2007.

Changes in net interest income between the periodsabove reflect changes in the composition of interest earning assets andinterest bearing liabilities, related interest rates, repricing frequencies,and the fixed or variable characteristics of the interest earning assets andinterest bearing liabilities.  Projections of income given by the modelare not actual predictions, but rather show our relative interest raterisk.  Actual interest income may vary from model projections.

**Item 4.  Controls and Procedures.**

**Evaluation of Disclosure Controls and Procedures**

We have establisheddisclosure controls and procedures to ensure that material information relatingto the Company, including its consolidated subsidiaries, is made known to theofficers who certify our financial reports and to other members of seniormanagement and the board of directors and to ensure that information that isrequired to be disclosed in reports we file with the SEC is properly and timelyrecorded, processed, summarized and reported. A review and evaluation wasperformed by our management, including the Company’s Chief Executive Officer(the “CEO”) and Chief Financial Officer (the “CFO”), of the effectiveness ofthe design and operation of our disclosure controls and procedures as of March31, 2007, pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934.Based upon and as of the date of that review and evaluation, the CEO and CFOhave concluded that our current disclosure controls and procedures wereeffective as of March 31, 2007.

**Changes in Internal Control over Financial Reporting.**

There have been no changes to our internal controlover financial reporting during the last fiscal quarter that have affected, orare reasonably likely to affect, our internal control over financial reporting.

 

24

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**PART II — OTHER INFORMATION**

**Item 1.   Legal Proceedings**

Neither Trinity, the Bank, Title Guaranty, TCCAppraisal Services, TCC Advisors or TCC Funds are involved in any pending legalproceedings other than routine legal proceedings occurring in the normal courseof business, which, in the opinion of management, in the aggregate, arematerial to our consolidated financial condition.

**Item 1A. Risk Factors**

In addition to the other information in this QuarterlyReport on Form 10-Q, shareholders or prospective investors should carefullyconsider the risk factors appearing in Trinity’s Form 10-K for the year-ending2006 filed with the Securities and Exchange Commission on March 16, 2007beginning on page 9. There have been no material changes to the risk factors aspreviously disclosed in Trinity’s Form 10-K.

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

On January 16, 2007, the Company announced that itwould repurchase up to $1.0 million in outstanding shares of the Company’scommon stock. The Company’s Board of Directors determined that the repurchaseof stock was a sensible use of the Company’s current capital. The stock wasconverted into treasury shares.  This repurchase plan expired on March 31,2007.

During the first quarterof 2007, we repurchased the following securities:
| **Period**                    | ** ** | **(a)  Total number  of shares  purchased** | ** ** | **(b)  Average price  paid per share** | ** ** | **(c)  Total number of shares  purchased as part of  publicly announced plans  or programs** | ** ** | **(d)  Maximum approximate  dollar value that may yet be  purchased under the plans or  programs** | ** ** |
|-------------------------------|------------|-------------------------------------------------------|------------|-------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| January 1-January 31,  2007   |       | 5,380                                                 |       | $                                                     | 28.00      |                                                                                                                                      | 5,380      |                                                                                                                                                 | $          | 849,360 |   |
| February 1-February 28,  2007 |       | 7,892                                                 |       | 28.00                                                 |       | 13,272                                                                                                                                    |       | 628,384                                                                                                                                              |       |
| March 1-March 31, 2007        |       | 9,820                                                 |       | 28.00                                                 |       | 23,092                                                                                                                                    |       | —                                                                                                                                               |       |
| Total                         |       | 23,092                                                |       | $                                                     | 28.00      |                                                                                                                                      | 23,092     |                                                                                                                                                 | $          | — |   |

 

**Item 3.  Defaults Upon SeniorSecurities**

None

**Item 4.  Submission of Mattersto a Vote of Security Holders**

None

**Item 5.  Other Information**

None

**Item 6.  Exhibits**
| 31.1 |   | Certification of Chief Executive Officer Pursuant to  Rule 13a-14(a)/15d-14(a)                                                                       |
|------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.2 |   | Certification of Chief Financial Officer Pursuant to  Rule 13a-14(a)/15d-14(a)                                                                       |
| 32.1 |   | Certification of Chief Executive Officer Pursuant to  18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002  |
| 32.2 |   | Certification of Chief Financial Officer Pursuant to  18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |

 

25

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**SIGNATURES**

Pursuant to the requirements of Section 12 of theSecurities Exchange Act of 1934, the registrant has duly caused thisregistration statement to be signed on its behalf by the undersigned, thereuntoduly authorized.

 
|                    | **TRINITY  CAPITAL CORPORATION** |
|--------------------|----------------------------------|
|               |                             |   |
|               |                             |   |
| Date: May 10, 2007 | By:                              | /s/ WILLIAM C. ENLOE |
|               |                             | William C. Enloe |
|               |                             | President and Chief Executive Officer |
|               |                             |   |
|               |                             |   |
| Date: May 10, 2007 | By:                         | /s/ DANIEL R. BARTHOLOMEW |
|               |                             | Daniel R. Bartholomew |
|               |                             | Chief Financial Officer |

 

26

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