**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**(Mark One)**

**ý****Quarterly Report Pursuant to Section 13or 15(d) of the Securities Exchange Act of 1934**

** **

**for the quarterly period ended June 30, 2003.**

**Or**

 

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

 

**for the transition periodfrom                                       to                                       **

 

**Commission File Number 000-50266**

 

**TRINITY CAPITAL CORPORATION**

(Exact name of registrant as specified in its charter)

 

| **New Mexico**                                        |   | **85-0242376**                          |
|-------------------------------------------------------|--------|-----------------------------------------|
| (State of incorporation)                              |   | (I.R.S. Employer Identification Number) |
|                                                  |   |                                    |
| **1200 Trinity Drive, Los Alamos, New Mexico  87544** |
| (Address of principal executive offices)              |
|                                                  |
| **(505) 662-5171**                               |
| Telephone number                                      |

 

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 13 months (or for suchshorter period that the registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90 days.  Yes ý  No o

 

Indicate by check mark whether the registrantis an accelerated filer (as defined in Rule 12b-2 of the Securities ExchangeAct of 1934).  Yes ý  No o

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

Indicate the number of shares outstanding ofeach of the issuer’s classes of common stock, as of the latest practicabledate: 6,683,107 shares of common stock, no par value, outstanding as of July31, 2003.

 

 

----

 

**TRINITY CAPITAL CORPORATION AND SUBSIDIARIES**

 
| **PART I.  FINANCIAL INFORMATION** |
|-----------------------------------------|
|                                    |   |
| Item 1                                  | Financial Statements |
|                                    |   |
| Item  2                                 | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |
|                                    |   |
| Item  3                                 | Quantitative  and Qualitative Disclosures About Market Risk |
|                                    |   |
| Item  4                                 | Controls  and Procedures |
|                                    |   |
| **PART II.  OTHER INFORMATION**    |
|                                    |   |
| Item 1                                  | Legal Proceedings |
|                                    |   |
| Item  2                                 | Changes  in securities and use of proceeds |
|                                    |   |
| Item 3                                  | Defaults upon  senior securities |
|                                    |   |
| Item  4                                 | Submission  of matters of vote of securities holders |
|                                    |   |
| Item 5                                  | Other information |
|                                    |   |
|                                    | SIGNATURES |

 

1

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**PART I – FINANCIAL INFORMATION**

**Item 1.  FinancialStatements**

**TRINITY CAPITAL CORPORATION &SUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEETS**

**June 30, 2003 and December 31, 2002**

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

**(Unaudited)**

 
|                                                                                                                                                                                                                                                                             |   | **June 30,  2003** |       | **December 31,  2002** |       |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|------------|------------------------|------------|
| **ASSETS**                                                                                                                                                                                                                                                                       |   |               | ** ** |                   | ** ** |
| Cash  and due from banks                                                                                                                                                                                                                                                         |   | $                  | 40,843     |                   | $          | 37,559 |   |
| Interest  bearing deposits with banks                                                                                                                                                                                                                                            |   | 17,381             |       | 3,420                  |       |
| **Cash and cash equivalents**                                                                                                                                                                                                                                                    |   | **58,224**         | ** ** | **40,979**             | ** ** |
| Investment  securities available for sale                                                                                                                                                                                                                                        |   | 55,468             |       | 35,894                 |       |
| Investment  securities held to maturity, at amortized cost (fair value of $76,040 at June  30, 2003 and $71,639 at December 31, 2002)                                                                                                                                       |   | 73,540             |       | 69,923                 |       |
| Loans  (net of allowance for loan losses of $6,833 at June 30, 2003 and $6,581 at  December 31, 2002)                                                                                                                                                                       |   | 689,451            |       | 653,867                |       |
| Loans  held for sale                                                                                                                                                                                                                                                             |   | 60,228             |       | 76,197                 |       |
| Premises  and equipment, net                                                                                                                                                                                                                                                     |   | 17,913             |       | 17,353                 |       |
| Accrued  interest receivable                                                                                                                                                                                                                                                     |   | 6,857              |       | 7,458                  |       |
| Mortgage  servicing rights, net                                                                                                                                                                                                                                                  |   | 4,048              |       | 3,650                  |       |
| Other  real estate owned                                                                                                                                                                                                                                                         |   | 2,306              |       | 3,707                  |       |
| Other  assets                                                                                                                                                                                                                                                                    |   | 4,766              |       | 2,904                  |       |
|                                                                                                                                                                                                                                                                             |   |               |       |                   |       |
| **Total assets**                                                                                                                                                                                                                                                                 |   | $                  | 972,801    |                   | $          | 911,932 |   |
|                                                                                                                                                                                                                                                                             |   |               |       |                   |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                                                                    |   |               |       |                   |       |
| Liabilities                                                                                                                                                                                                                                                                      |   |               |       |                   |       |
| Deposits:                                                                                                                                                                                                                                                                        |   |               |       |                   |       |
| Noninterest  bearing                                                                                                                                                                                                                                                             |   | $                  | 68,702     |                   | $          | 53,753 |   |
| Interest  bearing                                                                                                                                                                                                                                                                |   | 781,858            |       | 736,333                |       |
| **Total deposits**                                                                                                                                                                                                                                                               |   | 850,560            |       | 790,086                |       |
| Long-term  borrowings                                                                                                                                                                                                                                                            |   | 35,981             |       | 39,492                 |       |
| Borrowings  made by Employee Stock Ownership Plan (ESOP) to outside parties                                                                                                                                                                                                      |   | 2,357              |       | 2,888                  |       |
| Accrued  interest payable                                                                                                                                                                                                                                                        |   | 2,784              |       | 2,919                  |       |
| Other  liabilities                                                                                                                                                                                                                                                               |   | 4,242              |       | 4,679                  |       |
| **Total liabilities**                                                                                                                                                                                                                                                            |   | 895,924            |       | 840,064                |       |
|                                                                                                                                                                                                                                                                             |   |               |       |                   |       |
| Company  obligated mandatorily redeemable trust preferred securities                                                                                                                                                                                                             |   | 15,510             |       | 15,501                 |       |
| Stock  owned by Employee Stock Ownership Plan (ESOP) participants;  673,194 shares at June 30, 2003 and December 31, 2002, at fair value;  net of unearned ESOP shares of 144,565 shares at June 30, 2003 and  177,541 shares at December 31, 2002, at historical cost |   | 9,955              |       | 9,462                  |       |
| Commitments  and contingencies                                                                                                                                                                                                                                                   |   |               |       |                   |       |
| Stockholders’  Equity                                                                                                                                                                                                                                                       |   |               |       |                   |       |
| Common  stock, no par, authorized 40,000,000 shares; issued  6,856,800 shares                                                                                                                                                                                          |   | 6,836              |       | 6,836                  |       |
| Additional  paid-in capital                                                                                                                                                                                                                                                      |   | 236                |       | 199                    |       |
| Retained  earnings                                                                                                                                                                                                                                                               |   | 44,432             |       | 39,990                 |       |
| Accumulated  other comprehensive income                                                                                                                                                                                                                                          |   | 467                |       | 439                    |       |
|                                                                                                                                                                                                                                                                             |   |               |       |                   |       |
| Total  stockholders’ equity before treasury stock                                                                                                                                                                                                                           |   | 51,971             |       | 47,464                 |       |
|                                                                                                                                                                                                                                                                             |   |               |       |                   |       |
| Treasury  stock, at cost, 29,128 shares                                                                                                                                                                                                                                     |   | (559               | )          | (559                   | )          |
|                                                                                                                                                                                                                                                                             |   |               |       |                   |       |
| **Total stockholders’ equity**                                                                                                                                                                                                                                              |   | 51,412             |       | 46,905                 |       |
|                                                                                                                                                                                                                                                                             |   |               |       |                   |       |
| **Total liabilities and stockholders’ equity**                                                                                                                                                                                                                              |   | $                  | 972,801    |                   | $          | 911,932 |   |

 

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

 

2

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**TRINITY CAPITAL CORPORATION &SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF INCOME**

**For the Three and Six Months Ended June 30,2003 and 2002**

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

**(Unaudited)**

 
|                                                                  |   | **Three Months Ended** |   | **Six Months Ended** |   |
|-----------------------------------------------------------------------|--------|------------------------|--------|----------------------|--------|
|                                                                  |   | **June 30, 2003**      |   | **June 30, 2002**    |   | **June 30, 2003** |   | **June 30, 2002** |   |
| Interest  income:                                                     |   |                   |   |                 |   |   |   |   |   |
| Loans,  including fees                                                |   | $                      | 12,364 |                 | $      | 11,988 |   | $ | 24,856 |   | $ | 24,523 |   |
| Investment  securities:                                               |   |                   |   |                 |   |   |   |   |   |
| Taxable                                                               |   | 855                    |   | 943                  |   | 1,739 |   | 1,884 |   |
| Nontaxable                                                            |   | 122                    |   | 76                   |   | 226 |   | 142 |   |
| Federal  funds sold                                                   |   | 2                      |   | —               |   | 2 |   | 2 |   |
| Other  interest bearing deposits                                      |   | 67                     |   | 158                  |   | 133 |   | 257 |   |
| **Total interest income**                                             |   | 13,410                 |   | 13,165               |   | 26,956 |   | 26,808 |   |
| Interest  expense:                                                    |   |                   |   |                 |   |   |   |   |   |
| Deposits                                                              |   | 4,150                  |   | 4,961                |   | 8,403 |   | 10,240 |   |
| Short-term  borrowings                                                |   | 2                      |   | 25                   |   | 2 |   | 172 |   |
| Long-term  borrowings                                                 |   | 370                    |   | 414                  |   | 758 |   | 843 |   |
| **Total interest expense**                                            |   | 4,522                  |   | 5,400                |   | 9,163 |   | 11,255 |   |
| **Net interest income**                                               |   | 8,888                  |   | 7,765                |   | 17,793 |   | 15,553 |   |
| Provision  for loan losses                                            |   | 600                    |   | 600                  |   | 1,200 |   | 1,300 |   |
| **Net interest income after provision for loan losses**               |   | 8,288                  |   | 7,165                |   | 16,593 |   | 14,253 |   |
| Other  income:                                                        |   |                   |   |                 |   |   |   |   |   |
| Mortgage  loan servicing fees                                         |   | 559                    |   | 442                  |   | 1,040 |   | 809 |   |
| Loan  and other fees                                                  |   | 439                    |   | 400                  |   | 826 |   | 759 |   |
| Service  charges on deposits                                          |   | 329                    |   | 284                  |   | 628 |   | 547 |   |
| Gain  on sale of loans                                                |   | 3,497                  |   | 1,050                |   | 6,723 |   | 2,152 |   |
| Other  operating income                                               |   | 478                    |   | 237                  |   | 848 |   | 446 |   |
|                                                                  |   | 5,302                  |   | 2,413                |   | 10,065 |   | 4,713 |   |
| Other  expenses:                                                      |   |                   |   |                 |   |   |   |   |   |
| Salaries  and employee benefits                                       |   | 3,655                  |   | 2,710                |   | 7,217 |   | 5,346 |   |
| Occupancy                                                             |   | 444                    |   | 451                  |   | 906 |   | 903 |   |
| Data  processing                                                      |   | 348                    |   | 273                  |   | 649 |   | 536 |   |
| Marketing                                                             |   | 376                    |   | 300                  |   | 664 |   | 574 |   |
| Amortization  and valuation of mortgage servicing rights              |   | 2,093                  |   | 986                  |   | 2,861 |   | 1,631 |   |
| Supplies                                                              |   | 219                    |   | 146                  |   | 430 |   | 272 |   |
| Other                                                                 |   | 1,376                  |   | 862                  |   | 2,746 |   | 1,791 |   |
|                                                                  |   | 8,511                  |   | 5,728                |   | 15,473 |   | 11,053 |   |
| **Income before income taxes and minority interest**                  |   | 5,079                  |   | 3,850                |   | 11,185 |   | 7,913 |   |
| Income  taxes                                                         |   | 1,820                  |   | 1,278                |   | 3,980 |   | 2,562 |   |
| **Income before minority interest**                                   |   | 3,259                  |   | 2,572                |   | 7,205 |   | 5,351 |   |
| Minority  interest in trust preferred securities                      |   | 423                    |   | 426                  |   | 851 |   | 853 |   |
| Net  income                                                           |   | $                      | 2,836  |                 | $      | 2,146 |   | $ | 6,354 |   | $ | 4,498 |   |
|                                                                  |   |                   |   |                 |   |   |   |   |   |
| Basic  earnings per common share                                      |   | $                      | 0.42   |                 | $      | 0.32 |   | $ | 0.95 |   | $ | 0.68 |   |
|                                                                  |   |                   |   |                 |   |   |   |   |   |
| Diluted  earnings per common share                                    |   | $                      | 0.42   |                 | $      | 0.32 |   | $ | 0.95 |   | $ | 0.68 |   |
|                                                                  |   |                   |   |                 |   |   |   |   |   |
| Dividends  declared per common share                                  |   | $                      | 0.29   |                 | $      | 0.25 |   | $ | 0.29 |   | $ | 0.25 |   |
|                                                                  |   |                   |   |                 |   |   |   |   |   |
| Weighted  average common shares outstanding                           |   | 6,681,362              |   | 6,618,808            |   | 6,677,550 |   | 6,618,808 |   |
|                                                                  |   |                   |   |                 |   |   |   |   |   |
| Weighted  average common shares outstanding including dilutive shares |   | 6,712,496              |   | 6,640,119            |   | 6,708,684 |   | 6,640,119 |   |

 

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

 

3

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**TRINITY CAPITAL CORPORATION &SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**For the Six Months Ended June 30, 2003 and2002**

**(Amounts in thousands)**

**(Unaudited)**

 
|                                                                                        |   | **Six Months Ended** |   |
|---------------------------------------------------------------------------------------------|--------|----------------------|--------|
|                                                                                        |   | **June 30, 2003**    |   | **June 30, 2002** |   |
| Cash  Flows From Operating Activities                                                       |   |                 |   |   |   |
| Net  income                                                                                 |   | $                    | 6,354  |   | $ | 4,498 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities:          |   |                 |   |   |   |
| Depreciation  and amortization                                                              |   | 898                  |   | 803 |   |
| Net  amortization (accretion) of:                                                           |   |                 |   |   |   |
| Mortgage  servicing rights                                                                  |   | 1,040                |   | 804 |   |
| Premiums  and discounts on investment securities                                            |   | 691                  |   | 48 |   |
| Trust  preferred security issuance costs                                                    |   | 9                    |   | 6 |   |
| Provision  for loan losses                                                                  |   | 1,200                |   | 1,300 |   |
| Change  in mortgage servicing rights valuation allowance                                    |   | 1,821                |   | 827 |   |
| Federal  Home Loan Bank (FHLB) stock dividends received                                     |   | (40                  | )      | (45 | ) |
| Gain  on sale of loans                                                                      |   | (6,723               | )      | (2,152 | ) |
| (Gain)  loss on disposal of other real estate owned                                         |   | (9                   | )      | 110 |   |
| Write-down  of value of other real estate owned                                             |   | 580                  |   | — |   |
| (Increase)  in accrued interest and other assets                                            |   | (1,261               | )      | (405 | ) |
| (Decrease)  in accrued interest and other liabilities                                       |   | (590                 | )      | (3,209 | ) |
| Release  of Employee Stock Ownership Plan (ESOP) shares                                     |   | 530                  |   | 512 |   |
| **Net cash provided by operating activities before  originations and gross sales of loans** |   | 4,500                |   | 3,097 |   |
| Gross  sales of loans held for sale                                                         |   | 314,950              |   | 94,030 |   |
| Origination  of loans held for sale                                                         |   | (295,517             | )      | (89,578 | ) |
| **Net cash (used in) provided by operating activities**                                     |   | 23,933               |   | 7,549 |   |
| Cash  Flows From Investing Activities                                                       |   |                 |   |   |   |
| Proceeds  from maturities and paydowns of investment securities available for sale          |   | 9,620                |   | 2,500 |   |
| Proceeds  from maturities and paydowns of investment securities held to maturity            |   | 5,680                |   | 9,575 |   |
| Purchase  of investment securities available for sale                                       |   | (29,446              | )      | (18,474 | ) |
| Purchase  of investment securities held to maturity                                         |   | (9,650               | )      | (22,218 | ) |
| Proceeds  from sale of other real estate owned                                              |   | 3,009                |   | 1,087 |   |
| Loans  funded, net of repayments                                                            |   | (38,963              | )      | 17,076 |   |
| Purchases  of premises and equipment                                                        |   | (1,458               | )      | (2,407 | ) |
| **Net cash used in investing activities**                                                   |   | (61,208              | )      | (12,861 | ) |
| Cash  Flows From Financing Activities                                                       |   |                 |   |   |   |
| Net  increase in demand deposits, NOW accounts and savings accounts                         |   | 36,649               |   | 49,486 |   |
| Net  increase (decrease) in time deposits                                                   |   | 23,825               |   | (14,705 | ) |
| Proceeds  from issuances of short-term borrowings                                           |   | 51,194               |   | — |   |
| Repayment  of short-term borrowings                                                         |   | (51,194              | )      | (15,000 | ) |
| Repayment  of long-term borrowings                                                          |   | (3,511               | )      | (2,815 | ) |
| Repayment  of ESOP debt                                                                     |   | (531                 | )      | (412 | ) |
| Dividend  payments                                                                          |   | (1,912               | )      | (1,673 | ) |
| **Net cash provided by financing activities**                                               |   | 54,520               |   | 14,881 |   |
| **Net increase in cash and cash equivalents**                                               |   | 17,245               |   | 9,569 |   |
| Cash  and cash equivalents:                                                                 |   |                 |   |   |   |
| Beginning  of period                                                                        |   | 40,979               |   | 41,400 |   |
| End of  period                                                                              |   | $                    | 58,224 |   | $ | 50,969 |   |
|                                                                                        |   |                 |   |   |   |
| Supplemental  Disclosures of Cash Flow Information                                          |   |                 |   |   |   |
| Cash  payments for:                                                                         |   |                 |   |   |   |
| Interest                                                                                    |   | $                    | 9,298  |   | $ | 12,439 |   |
| Income  taxes                                                                               |   | 5,064                |   | 3,200 |   |
| Non-cash  investing and financing activities:                                               |   |                 |   |   |   |
| Transfers  from loans to other real estate owned                                            |   | 2,179                |   | 1,015 |   |
| Dividends  declared, not yet paid                                                           |   | 1,912                |   | 1,707 |   |
| Change  in unrealized gain on investment securities, net of taxes                           |   | 28                   |   | 112 |   |

 

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

 

4

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**TRINITY CAPITAL CORPORATION &SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**Note 1.  Basis of Presentation**

 

The accompanying unaudited consolidated financial statements includethe consolidated balances and results of operations of Trinity CapitalCorporation (the “Company”) and its wholly owned subsidiaries: Los AlamosNational Bank (the “Bank”), Title Guaranty & Insurance Company (the “TitleCompany”), Trinity Capital Trust I (“Trust I”), and Trinity CapitalTrust II (“Trust II”), collectively referred to as the “Company”. Thebusiness activities of the Company consist solely of the operations of itswholly owned subsidiaries. All significant intercompany balances andtransactions have been eliminated in consolidation.  In the opinion of management, all adjustments (consisting only ofnormal recurring adjustments) necessary for a fair presentation of thefinancial position, results of operations and cash flows for the interimperiods have been made.  The results ofoperations for the three and six months ended June 30, 2003 are not necessarilyindicative of the results to be expected for the entire fiscal year.

 

The unaudited interim financial statements have been prepared inconformity with accounting principles generally accepted in the United Statesof America and industry practice. Certain information in footnote disclosure normally included infinancial statements prepared in accordance with accounting principlesgenerally accepted in the United States of America and industry practice hasbeen condensed or omitted pursuant to rules and regulations of the Securitiesand Exchange Commission.  Thesefinancial statements should be read in conjunction with the consolidatedfinancial statements and notes thereto included in the Company’s December 31,2002 audited financial statements filed on Form 10.

 

The preparation of financial statements in conformity with accountingprincipals generally accepted in the United States of America requiresmanagement to make estimates and assumptions which affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesas of the date of the financial statements, as well as the reported amounts ofincome and expenses during the reported periods.  Actual results could differ from those estimates.

 

**Note 2. Comprehensive Income**

 

Comprehensive income includes net income, as well as the change in netunrealized gain on investment securities available for sale, net of tax.  Comprehensive income was $3.0 million and$2.4 million for the three month period ended June 30, 2003 and 2002,respectively, and $6.4 million and $4.6 million for the six month period endedJune 30, 2003 and 2002, 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 June 30,**                                |   | **Six Months Ended June 30,** |   |
|------------------------------------------------------------------------------------|--------|----------------------------------------------------------------|--------|-------------------------------|--------|
|                                                                               |   | **2003**                                                       |   | **2002**                      |   | **2003** |   | **2002** |   |
|                                                                               |   | **(Unaudited; in thousands, except share and per share data)** |   |
| Net  income                                                                        |   | $                                                              | 2,836  |                          | $      | 2,146 |   | $ | 6,354 |   | $ | 4,498 |   |
| Weighted  average common shares issued                                             |   | 6,856,800                                                      |   | 6,856,800                     |   | 6,856,800 |   | 6,856,800 |   |
| LESS:  Weighted average treasury stock shares                                      |   | (29,128                                                        | )      | (29,128                       | )      | (29,128 | ) | (29,128 | ) |
| LESS:  Weighted average unearned Employee Stock Ownership Plan (ESOP) stock shares |   | (146,310                                                       | )      | (208,864                      | )      | (150,122 | ) | (208,864 | ) |
| Weighted  average common shares outstanding, net                                   |   | 6,681,362                                                      |   | 6,618,808                     |   | 6,677,550 |   | 6,618,808 |   |
| Basic  earnings per common share                                                   |   | $                                                              | 0.42   |                          | $      | 0.32 |   | $ | 0.95 |   | $ | 0.68 |   |
| Weighted  average dilutive shares from stock option plan                           |   | 31,134                                                         |   | 21,311                        |   | 31,134 |   | 21,311 |   |
| Weighted  average common shares outstanding including dilutive shares              |   | 6,712,496                                                      |   | 6,640,119                     |   | 6,708,684 |   | 6,640,119 |   |
| Diluted  earnings per common share                                                 |   | $                                                              | 0.42   |                          | $      | 0.32 |   | $ | 0.95 |   | $ | 0.68 |   |

 

5

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**Note 4. Recent Accounting Pronouncements**

 

In January 2003, the FASB issued FIN 46,"Consolidation of Variable Interest Entities". FIN 46 clarifies theapplication of Accounting Research Bulletin No. 51, "ConsolidatedFinancial Statements" to certain variable interest entities (VIEs) inwhich equity investors do not have the characteristics of a controllingfinancial interest or do not have sufficient equity at risk for the entity tofinance its activities without additional subordinated financial support fromother parties. The recognition and measurement provisions of thisInterpretation are effective for newly created VIEs formed after January 31,2003, and for existing VIEs on the first interim or annual reporting periodbeginning after June 15, 2003. The Company has no newly formed VIEs subject tothe January 31, 2003 effective date. The Company will adopt the provisions ofFIN 46 for existing VIEs on July 1, 2003. The Company is in the process ofdetermining whether its pre-existing balance sheet and off-balance sheetstructures are subject to the provisions of FIN 46. At this time the Companydoes not believe that adoption of FIN 46 will have a material effect on theCompany's financial statements.

 

In April2003, the Financial Accounting Standards Board (FASB) issued Statement ofFinancial Accounting Standards (SFAS) No. 149, *Amendment of Statement 133 onDerivative Instruments and Hedging Activities*.  This Statement amends and clarifiesfinancial accounting and reporting for derivative instruments, includingcertain derivative instruments embedded in other contracts (collectivelyreferred to as derivatives) and for hedging activities under FASB Statement No.133, *Accountingfor Derivative Instruments and Hedging Activities.*  This Statement is effective for contracts entered into or modifiedafter June 30, 2003, and for hedging relationships designated after June 30,2003.  Management believes that thecurrent accounting for derivative instruments by the Company is in compliancewith this standard, and no change in disclosures will be required uponadoption.  As a result, there should beno impact to the Company’s financial statements.

 

InMay 2003, the FASB issued SFAS No. 150, *Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity*.  This Statement establishes standards for howan issuer classifies and measures certain financial instruments withcharacteristics of both liabilities and equity. It requires that an issuerclassify a financial instrument that is within its scope as a liability (or anasset in some circumstances). Many of those instruments were previouslyclassified as equity. Some of the provisions of this Statement are consistentwith the current definition of liabilities in FASB Concepts Statement No. 6, *Elements of Financial Statements.* ThisStatement is effective for financial instruments entered into or modified afterMay 31, 2003, and otherwise is effective at the beginning of the first interimperiod beginning after June 15, 2003. In the September 30, 2003 interim financials, the Company willre-classify the Company obligated mandatorily redeemable trust preferredsecurities from mezzanine capital to liabilities in accordance with thisstandard.  The result of thisreclassification will be to increase liabilities, and decrease mezzaninecapital, by approximately $15.5 million.

 

**Note 5. Long Term Borrowings**

 

The Company had Federal Home Loan Bank advances withmaturity dates greater than one year of $36.0 million and $40.0 million as ofJune 30, 2003 and December 31, 2002, respectively.  As of June 30, 2003, the advances have fixed interest ratesranging from 2.16% to 6.343%.

 

**Note 6.  Company Obligated Mandatorily Redeemable Trust Preferred Securities**

 

At June 30, 2003 and December 31, 2002, the Companyhad $15.5 million in fixed rate trust preferred securities through TrinityCapital Trust I and Trinity Capital Trust II, both being special purpose trustsand wholly owned subsidiaries of the Company.

 

In March 2000, the Company issued $10 million in trustpreferred securities to outside investors through a newly formed special-purposetrust, Trinity Capital Trust I. The trust is a wholly owned consolidatedsubsidiary of the Company and its sole liability is the junior subordinateddebentures. Distributions are cumulative and are payable semi-annually at arate of $108.75 per annum of the stated liquidation amount of $1,000 perpreferred security. Distributions of $544,000 and $1,088,000 were paid to outsideinvestors for the six months ended June 30, 2003 and the twelve months endedDecember 31, 2002, respectively. The obligations of Trust I are fully andunconditionally guaranteed, on a subordinated basis, by the Company.

 

In November 2001, the Company issued $6 million in trustpreferred securities to outside investors through a newly formed special-purposetrust, Trinity Capital Trust II. Trust II is a wholly ownedconsolidated subsidiary of the Company and its sole liability is the juniorsubordinated debentures. Distributions are cumulative and are payablesemi-annually at a rate of $99.50 per annum of the stated liquidation amount of$1,000 per preferred security. Distributions of $299,000 and $614,000 were paidto outside investors for the six months ended June 30, 2003 and the twelvemonths ended December 31, 2002, respectively. The obligations of Trust II are fully and unconditionallyguaranteed, on a subordinated basis, by the Company.

 

6

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The Company issued the trust preferred securities to enhance itsregulatory capital base, while also providing added liquidity. Under applicableregulatory guidelines, the trust preferred securities qualify as Tier 1capital up to a maximum 25% of Tier 1 capital. Any additional portion oftrust preferred securities would qualify as Tier 2 capital. As of June 30,2003, all outstanding trust preferred securities qualified as Tier 1capital. As the Company’s stockholders’ equity increases, the amount of Tier 1capital that can be comprised of trust preferred securities will increase.

 

The trust preferred securities are mandatorily redeemable upon thematurity of the debentures on December 8, 2031, or to the extent of anyearlier redemption of any debentures by the Company, and are callable beginningDecember 8, 2006.

 

Issuance costs of $212,000 related to the trust preferred securitieswere deferred and are being amortized over the period until mandatoryredemption of the securities in December, 2031. During the six months endedJune 30, 2003 and the year ended December 31, 2002 and 2001, respectively,$9,000 and $22,000 of these issuance costs were amortized.

 

Dividends accrued and unpaid to securities holders totaled $379,000 and$408,000 on June 30, 2003 and December 31, 2002, respectively.

 

**Note 7. Pro Forma Impact of Stock-Based Compensation Plans**

 

As allowed under SFAS No.123, *Accounting for Stock-Based Compensation*,the Company measures stock-based compensation cost in accordance with themethods prescribed in Accounting Principles Board (APB) Opinion No. 25, *Accounting for Stock Issued to Employees*. As stock options are granted at fair value, there are no charges to earningsassociated with stock options granted.  Accordingly, no compensation costhas been recognized for grants made to date.  Had compensation cost beendetermined based on the fair value method prescribed in FASB Statement No. 123,reported net income and earnings per common share would have been reduced tothe pro forma amounts shown below (dollars in thousands, except earnings pershare data): 
|                                                                                                                                          |   | **Three  Months Ended June 30,**                     |   | **Six Months  Ended June 30,** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------|--------|--------------------------------|--------|
|                                                                                                                                          |   |                                                 |   |                           |   | **2003** |   | **2002** |   |
|                                                                                                                                          |   | **(Unaudited;  in thousands except per share data)** |   |
| Net income as reported                                                                                                                        |   | $                                                    | 2,836  |                           | $      | 2,146 |   | $ | 6,354 |   | $ | 4,498 |   |
| Deduct: Total stock-based employee  compensation expense determined under fair value based method for all awards,  net of related tax effects |   | 27                                                   |   | 27                             |   | 54 |   | 54 |   |
|                                                                                                                                          |   |                                                 |   |                           |   |   |   |   |   |
| Pro forma net income                                                                                                                          |   | $                                                    | 2,809  |                           | $      | 2,119 |   | $ | 6,300 |   | $ | 4,444 |   |
|                                                                                                                                          |   |                                                 |   |                           |   |   |   |   |   |
| Earnings per share:                                                                                                                           |   |                                                 |   |                           |   |   |   |   |   |
| Basic — as reported                                                                                                                      |   | $                                                    | 0.42   |                           | $      | 0.32 |   | $ | 0.95 |   | $ | 0.68 |   |
| Basic — pro forma                                                                                                                        |   | $                                                    | 0.42   |                           | $      | 0.32 |   | 0.94 |   | 0.67 |   |
|                                                                                                                                          |   |                                                 |   |                           |   |   |   |   |   |
| Diluted — as reported                                                                                                                    |   | $                                                    | 0.42   |                           | $      | 0.32 |   | $ | 0.95 |   | $ | 0.68 |   |
| Diluted — pro forma                                                                                                                      |   | $                                                    | 0.42   |                           | $      | 0.32 |   | 0.94 |   | 0.67 |   |

 

7

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**Item 2****. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations**

 

*This discussion isintended to focus on certain financial information regarding Trinity and the Bankand is written to provide the reader with a more thorough understanding of itsfinancial statements. The following discussion and analysis of Trinity’sfinancial position and results of operations should be read in conjunction withthe information set forth in Item 3, Quantitative and QualitativeDisclosures about Market Risk and the annual audited consolidated financialstatements filed on Form 10.*

 

**Special NoteConcerning Forward-Looking Statements**

 

This Form 10-Q (including information incorporated by reference)contains, and future oral and written statements of Trinity may contain,forward-looking statements, within the meaning of such term in thePrivate Securities Litigation Reform Act of 1995, with respect to the financialcondition, results of operations, plans, objectives, future performance andbusiness of Trinity. Forward-looking statements, which may be based uponbeliefs, expectations and assumptions of our management and on informationcurrently available to management, are generally identifiable by the use ofwords such as “believe,” “expect,” “anticipate,” “plan,” “intend,” “estimate,”“may,” “will,” “would,” “could,” “should” or other similar expressions.Additionally, all statements in this document, including forward-lookingstatements, speak only as of the date they are made, and we undertake noobligation to update any statement in light of new information or futureevents.

 

Our ability to predict results or the actual effect of future plans orstrategies is inherently uncertain. Factors which could have a material adverseeffect on our operations and future prospects include, but are not limited to,the following:

 

•                                          The strength of the United States economy ingeneral and the strength of the local economies in which we conduct our operationswhich may be less favorable than expected and may result in, among otherthings, a deterioration in the credit quality and value of our assets.

 

•                                          The economic impact of any future terroristthreats or attacks, and the response of the United States to any such threatsand attacks.

 

•                                          The effects of, and changes in, federal, state andlocal laws, regulations and policies affecting banking, securities, insuranceand monetary and financial matters.

 

•                                          The effects of changes in interest rates(including the effects of changes in the rate of prepayments of the Company’sassets) and the policies of the Board of Governors of the Federal ReserveSystem.

 

•                                          Our ability to compete with other financialinstitutions as effectively as we currently intend due to increases incompetitive pressures in the financial services sector.

 

•                                          Our inability to obtain new customers and toretain existing customers.

 

•                                          The timely development and acceptance of productsand services, including products and services offered through alternativedelivery channels such as the Internet.

 

•                                          Technological changes implemented by us and byother parties, including third party vendors, which may be more difficult ormore expensive than anticipated or which may have unforeseen consequences to usand its customers.

 

•                                          Our ability to develop and maintain secure andreliable electronic systems.

 

•                                          Our ability to retain key executives and employeesand the difficulty that we may experience in replacing key executives andemployees in an effective manner.

 

•                                          Consumer spending and saving habits which maychange in a manner that affects our business adversely.

 

•                                          Business combinations and the integration ofacquired businesses which may be more difficult or expensive than expected.

 

•                                          The costs, effects and outcomes of existing orfuture litigation.

 

•                                          Changes in accounting policies and practices, asmay be adopted by state and federal regulatory agencies and the

 

8

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FinancialAccounting Standards Board.

 

•                                          Our ability to manage the risks associated withthe foregoing as well as anticipated.

 

These risks and uncertainties should be considered in evaluatingforward-looking statements and undue reliance should not be placed onsuch statements. Additional information concerning Trinity and our business,including other factors that could materially affect our financial results,will be included in our filings with the Securities and Exchange Commission.

 

**IncomeStatement Analysis**

 

***NetIncome-General.***  Net income for the three months ended June30, 2003 was $2.8 million, compared to $2.1 million for the same period of2002.  Earnings per share increased by$0.10 to $0.42 for the three months ended June 30, 2003 from $0.32 for the sameperiod of 2002.  This represented anincrease in earnings per share of 31.25%. The increase in net income was primarily the result of strong netinterest income and other operating income, which was partially offset by anincrease in other expenses.

 

Net income for the six months ended June 30, 2003 was $6.4 million,compared to $4.5 million for the same period of 2002.  Earnings per share increased by $0.27 to $0.95 for the six monthsended June 30, 2002 from $0.68 for the same period of 2002.  This represented an increase in earnings pershare of 39.7%.  The increase in netincome was primarily the result of strong operating income, which was partiallyoffset by an increase in other expenses.

 

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 thought to be adequate to cover probable creditlosses in the loan portfolio. Non-interest income or other income consists ofmortgage loan servicing fees, loan and other fees, mortgage servicing rights originatedand capitalized, service charges on deposits, gain on sale of loans and otheroperating income. Other expenses include salaries and employee benefits,occupancy expenses, data processing expenses, marketing, amortization andvaluation of mortgage servicing rights, supplies expense 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 marketingexpense. 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.

 

9

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

 
|                                                       |   | **Three Months Ended June 30,**       |    |
|------------------------------------------------------------|--------|---------------------------------------|---------|
|                                                       |   | **2003**                              |    | **2002** |   |
|                                                       |   | **Average  Balance**                  |    | **Interest** |   | **Yield/Rate** |   | **Average  Balance** |   | **Interest** |   | **Yield/Rate** |   |
|                                                       |   | **(Unaudited; Dollars in thousands)** |    |
| **Interest Earning Assets:**                               |   |                                  |    |   |   |   |   |   |   |   |   |   |   |
| Loans(1)(2)                                                |   | $                                     | 739,089 |   | $ | 12,364 |   | 6.71 | % | $ | 627,479 |   | $ | 11,988 |   | 7.66 | % |
| Taxable  investment securities                             |   | 108,528                               |    | 855 |   | 3.16 |   | 74,916 |   | 943 |   | 5.05 |   |
| Investment  securities exempt from federal income taxes(3) |   | 13,923                                |    | 190 |   | 5.47 |   | 7,254 |   | 107 |   | 5.92 |   |
| Federal  funds sold                                        |   | 1,016                                 |    | 2 |   | 0.79 |   | 88 |   | — |   | 1.68 |   |
| Other  interest bearing deposits                           |   | 24,155                                |    | 67 |   | 1.11 |   | 37,492 |   | 158 |   | 1.69 |   |
| Total  interest earning assets                             |   | 886,711                               |    | 13,478 |   | 6.10 |   | 747,229 |   | 13,196 |   | 7.08 |   |
| Non-interest  earning assets                               |   | 67,457                                |    |   |   |   |   | 67,106 |   |   |   |   |   |
| Total  assets                                              |   | $                                     | 954,168 |   |   |   |   |   | $ | 814,335 |   |   |   |   |   |
|                                                       |   |                                  |    |   |   |   |   |   |   |   |   |   |   |
| **Interest Bearing Liabilities:**                          |   |                                  |    |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                                  |   |                                  |    |   |   |   |   |   |   |   |   |   |   |
| NOW  and money market deposit                              |   | $                                     | 192,513 |   | $ | 637 |   | 1.33 | % | $ | 159,616 |   | $ | 758 |   | 1.90 | % |
| Savings  deposit                                           |   | 216,706                               |    | 836 |   | 1.55 |   | 168,129 |   | 902 |   | 2.15 |   |
| Time  deposits                                             |   | 360,837                               |    | 2,677 |   | 2.98 |   | 315,726 |   | 3,301 |   | 4.19 |   |
| Short-term  borrowings                                     |   | 565                                   |    | 2 |   | 1.42 |   | 5,000 |   | 25 |   | 2.01 |   |
| Long-term  borrowings                                      |   | 36,667                                |    | 370 |   | 4.05 |   | 38,529 |   | 414 |   | 4.31 |   |
| Total  interest bearing liabilities                        |   | 807,288                               |    | 4,522 |   | 2.25 |   | 687,000 |   | 5,400 |   | 3.15 |   |
| Demand  deposits-non-interest bearing                      |   | 62,872                                |    |   |   |   |   | 48,365 |   |   |   |   |   |
| Other  non-interest bearing liabilities                    |   | 22,276                                |    |   |   |   |   | 26,252 |   |   |   |   |   |
| Stockholders’  equity, including stock owned by ESOP  |   | 61,732                                |    |   |   |   |   | 52,718 |   |   |   |   |   |
| Total  liabilities and stockholders equity                 |   | $                                     | 954,168 |   |   |   |   |   | $ | 814,335 |   |   |   |   |   |
| Net  interest income/interest rate Spread(4)               |   |                                  |    | $ | 8,956 |   | 3.85 | % |   |   | $ | 7,796 |   | 3.93 | % |
|                                                       |   |                                  |    |   |   |   |   |   |   |   |   |   |   |   |   |
| Net  interest margin on a fully tax equivalent basis(5)    |   |                                  |    |   |   | 4.05 | % |   |   |   |   | 4.18 | % |
|                                                       |   |                                  |    |   |   |   |   |   |   |   |   |   |   |
| Net  interest margin(5)                                    |   |                                  |    |   |   | 4.02 | % |   |   |   |   | 4.17 | % |

 

----

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

 

(2)                                  Interest income includes loan origination fees of$801,000 and $472,000 for the three months ended June 30, 2003 and 2002,respectively.

 

(3)                                  Non-taxable investment income is presented on afully tax equivalent basis, adjusting for federal and state exemption ofinterest income and associated disallowed interest expense. Effective tax ratewas 39% and 37% for 2003 and 2002, respectively. Disallowed expense was $68,000and $32,000 for 2003 and 2002, respectively.

 

(4)                                  Interest rate spread represents the differencebetween the average yield on interest earning assets and the average cost ofinterest bearing liabilities and is presented on a fully tax equivalent basis.

 

(5)                                  Net interest margin represents net interest incomeas a percentage of average interest earning assets.

 

10

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For the second quarter of 2003, net interest income on a fully taxequivalent basis increased $1.2 million to $9.0 million from $7.8 million forthe second quarter of 2002.  Theincrease in net interest income resulted from a decrease in interest expense of$878 thousand (11.3%), while interest income on a fully tax equivalent basiswas virtually unchanged.  Interestexpense decreased due to a decrease in rate on interest bearing liabilities of90 basis points, which accounted for a decrease in interest expense of $1.6million.  This was partially offset byan increase in interest-bearing liabilities of $120.3 million, which accountedfor an increase in interest expense of $1.6 million.  Interest income on a fully tax equivalent basis decreased due toa decrease in rate on interest earning assets of 98 basis points, whichaccounted for a decrease in interest income on a fully tax equivalent basis of$2.1 million.  This was offset by anincrease in volume of $139.5 million (18.7%), which accounted for an increaseof $2.4 million in interest income on a fully tax equivalent basis.  The net interest margin expressed in a fullytax equivalent basis decreased 13 basis points to 4.05% for 2003 from 4.18% for2002.

 
|                                                       |   | **Six Months Ended June 30,**         |    |
|------------------------------------------------------------|--------|---------------------------------------|---------|
|                                                       |   | **2003**                              |    | **2002** |   |
|                                                       |   | **Avera1e  Balance**                  |    | **Interest** |   | **Yield/Rate** |   | **Average  Balance** |   | **Interest** |   | **Yield/Rate** |   |
|                                                       |   | **(Unaudited; Dollars in thousands)** |    |
| **Interest Earning Assets:**                               |   |                                  |    |   |   |   |   |   |   |   |   |   |   |
| Loans(1)(2)                                                |   | $                                     | 728,786 |   | $ | 24,856 |   | 6.88 | % | $ | 631,251 |   | $ | 24,523 |   | 7.83 | % |
| Taxable  investment securities                             |   | 103,845                               |    | 1,739 |   | 3.38 |   | 72,047 |   | 1,884 |   | 5.27 |   |
| Investment  securities exempt from federal income taxes(3) |   | 12,371                                |    | 353 |   | 5.75 |   | 6,869 |   | 205 |   | 6.02 |   |
| Federal  funds sold                                        |   | 538                                   |    | 2 |   | 0.75 |   | 263 |   | 2 |   | 1.53 |   |
| Other  interest bearing deposits                           |   | 23,568                                |    | 133 |   | 1.14 |   | 31,160 |   | 257 |   | 1.66 |   |
| Total  interest earning assets                             |   | 869,108                               |    | 27,083 |   | 6.28 |   | 741,590 |   | 26,871 |   | 7.31 |   |
| Non-interest  earning assets                               |   | 68,054                                |    |   |   |   |   | 68,343 |   |   |   |   |   |
| Total  assets                                              |   | $                                     | 937,162 |   |   |   |   |   | $ | 809,933 |   |   |   |   |   |
|                                                       |   |                                  |    |   |   |   |   |   |   |   |   |   |   |
| **Interest Bearing Liabilities:**                          |   |                                  |    |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                                  |   |                                  |    |   |   |   |   |   |   |   |   |   |   |
| NOW  and money market deposit                              |   | $                                     | 193,014 |   | $ | 1,337 |   | 1.40 | % | $ | 152,955 |   | $ | 1,428 |   | 1.88 | % |
| Savings  deposit                                           |   | 213,098                               |    | 1,725 |   | 1.63 |   | 164,749 |   | 1,756 |   | 2.15 |   |
| Time  deposits                                             |   | 351,311                               |    | 5,341 |   | 3.07 |   | 317,742 |   | 7,056 |   | 4.48 |   |
| Short-term  borrowings                                     |   | 290                                   |    | 2 |   | 1.39 |   | 10,138 |   | 172 |   | 3.42 |   |
| Long-term  borrowings                                      |   | 37,519                                |    | 758 |   | 4.07 |   | 39,378 |   | 843 |   | 4.32 |   |
| Total  interest bearing liabilities                        |   | 795,232                               |    | 9,163 |   | 2.32 |   | 684,962 |   | 11,255 |   | 3.31 |   |
| Demand  deposits-non-interest bearing                      |   | 59,341                                |    |   |   |   |   | 46,743 |   |   |   |   |   |
| Other  non-interest bearing liabilities                    |   | 20,274                                |    |   |   |   |   | 26,329 |   |   |   |   |   |
| Stockholders’  equity, including stock owned by ESOP  |   | 62,315                                |    |   |   |   |   | 51,899 |   |   |   |   |   |
| Total  liabilities and stockholders equity                 |   | $                                     | 937,162 |   |   |   |   |   | $ | 809,933 |   |   |   |   |   |
| Net  interest income/interest rate Spread(4)               |   |                                  |    | $ | 17,920 |   | 3.96 | % |   |   | $ | 15,616 |   | 4.00 | % |
|                                                       |   |                                  |    |   |   |   |   |   |   |   |   |   |   |   |   |
| Net  interest margin on a fully tax equivalent basis(5)    |   |                                  |    |   |   | 4.16 | % |   |   |   |   | 4.25 | % |
|                                                       |   |                                  |    |   |   |   |   |   |   |   |   |   |   |
| Net  interest margin(5)                                    |   |                                  |    |   |   | 4.13 | % |   |   |   |   | 4.23 | % |

 

----

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

 

(2)                                  Interest income includes loan origination fees of$1,753,000 and $1,073,000 for the six months ended June 30, 2003 and 2002,respectively.

 

(3)                                  Non-taxable investment income is presented on afully tax equivalent basis, adjusting for federal and state exemption ofinterest income and associated disallowed interest expense. Effective tax ratewas 39% and 36% for 2003 and 2002, respectively. Disallowed expense was$126,000 and $63,000 for 2003 and 2002, respectively.

 

(4)                                  Interest rate spread represents the differencebetween the average yield on interest earning assets and the average cost ofinterest bearing liabilities and is presented on a fully tax equivalent basis.

 

(5)                                  Net interest margin represents net interest incomeas a percentage of average interest earning assets.

 

11

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For the six months ended June 30, 2003, net interest income on a fullytax equivalent basis increased $2.3 million to $17.9 million from $15.6 millionfor the six months ended June 30, 2002. The increase in net interest income resulted from a decrease in interestexpense of $2.1 million (18.6%), while interest income on a fully taxequivalent basis was virtually unchanged. Interest expense decreased due to a decrease in rate on interest bearingliabilities of 99 basis points, which accounted for a $3.4 milliondecrease.  This was partially offset byan increase in the volume of interest-bearing liabilities of $110.3 million,which increased interest expense by $1.3 million.  Interest income on a fully tax equivalent basis decreased due toa decrease in rate on interest earning assets of 103 basis points, whichaccounted for a decrease of $4.1 million. This was offset by an increase in volume of $129.2 million (15.7%),which accounted for an increase of $4.3 million in interest income on a fullytax equivalent basis.  The net interestmargin expressed in a fully tax equivalent basis decreased 9 basis points to4.16% for 2003 from 4.25% for 2002.

 

***Volume,Mix and Rate Analysis of Net Interest Income.***  Thefollowing tables present the extent to which changes in volume, changes ininterest rates, and changes in the interest rates times the changes in volumeof interest earning assets and interest bearing liabilities have affected ourinterest income and interest expense during the periods indicated. Informationis provided on changes in each category due to (i) changes attributable tochanges in volume (change in volume times the prior period interest rate),(ii) changes attributable to changes in interest rate (changes in ratetimes the prior period volume) and (iii) changes attributable to changesin rate/volume (changes in interest rate times changes in volume).  Changes attributable to the combined impactof volume and rate have been allocated proportionally to the changes due tovolume and the changes due to rate:

 
|                                                       |   | **Three Months Ended June 30,** |   | **Six Months Ended June 30,** |   |
|------------------------------------------------------------|--------|---------------------------------|--------|-------------------------------|--------|
|                                                       |   | **2003 Compared to 2002**       |   | **2003 Compared to 2002**     |   |
|                                                       |   | **Change Due to Volume**   |   | **Change Due to Rate**   |   | **Total Change** |   | **Change Due to Volume** |   | **Change Due to Rate** |   | **Total Change** |   |
|                                                       |   | **(In thousands)**              |   |
| **Interest Earning Assets:**                               |   |                            |   |                          |   |   |   |   |   |   |   |   |   |
| Loans                                                      |   | $                               | 1,976  |                          | $      | (1,599 | ) | $ | 377 |   | $ | 3,530 |   | $ | (3,197 | ) | $ | 333 |   |
| Taxable  investment securities                             |   | 337                             |   | (425                          | )      | (88 | ) | 667 |   | (812 | ) | (145 | ) |
| Investment  securities exempt from federal income taxes(1) |   | 92                              |   | (9                            | )      | 83 |   | 157 |   | (9 | ) | 148 |   |
| Federal  funds sold                                        |   | 2                               |   | —                        |   | 2 |   | 1 |   | (1 | ) | — |   |
| Other  interest bearing deposits                           |   | (46                             | )      | (45                           | )      | (91 | ) | (54 | ) | (70 | ) | (124 | ) |
| Total  increase (decrease) in interest income              |   | 2,361                           |   | (2,078                        | )      | 283 |   | 4,301 |   | (4,089 | ) | 212 |   |
|                                                       |   |                            |   |                          |   |   |   |   |   |   |   |   |   |
| **Interest Bearing Liabilities:**                          |   |                            |   |                          |   |   |   |   |   |   |   |   |   |
| NOW  and money market deposit accounts                     |   | 137                             |   | (258                          | )      | (121 | ) | 325 |   | (416 | ) | (91 | ) |
| Savings  deposits                                          |   | 224                             |   | (290                          | )      | (66 | ) | 447 |   | (478 | ) | (31 | ) |
| Time  deposits                                             |   | 427                             |   | (1,051                        | )      | (624 | ) | 686 |   | (2,401 | ) | (1,715 | ) |
| Short-term  borrowings                                     |   | (17                             | )      | (6                            | )      | (23 | ) | (106 | ) | (64 | ) | (170 | ) |
| Long-term  borrowings                                      |   | (20                             | )      | (24                           | )      | (44 | ) | (39 | ) | (46 | ) | (85 | ) |
| Total  increase (decrease) in interest expense             |   | 751                             |   | (1,629                        | )      | (878 | ) | 1,313 |   | (3,405 | ) | (2,092 | ) |
| Increase  (decrease) in net interest income                |   | $                               | 1,610  |                          | $      | (449 | ) | $ | 1,161 |   | $ | 2,988 |   | $ | (684 | ) | $ | 2,304 |   |

 

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(1)                                  Non-taxable investment income is presented on afully tax equivalent basis, adjusting for federal and state exemption ofinterest income and associated disallowed interest expense. Effective tax ratefor three months ended June 30 was 39% and 37% for 2003 and 2002, respectively;and for the six months ended June 30 was 39% and 36% for 2003 and 2002,respectively. Disallowed expense for three months ended June 30 was $68,000 and$32,000 for 2003 and 2002, respectively; and for the six months ended June 30was $126,000 and $63,000 for 2003 and 2002, respectively.

 

***OtherIncome.***  In the second quarter of 2003, other incomeincreased by $2.9 million (120.8%) to $5.3 million from $2.4 million for thesecond quarter of 2002.  Gain on loanssold increased $2.4 million due to the generation and sale of mortgages duringhistorically high mortgage refinancing volume.

 

12

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In the six months ended June 30, 2003, other income increased by $5.4 million(114.9%) to $10.1 million from $4.7 million for the six months ended June 30,2002.  Gain on loans sold increased $4.6million due to the generation and sale of mortgages during historically highmortgage refinancing volume.

 

***Other Expenses.***  For thesecond quarter of 2003, other expenses increased $2.8 million (49.1%) to $8.5million in 2003 from $5.7 million in the second quarter of 2002.  Salaries and employee benefits increased by$945 thousand (34.9%), due to an increase in staff of 64 full-time equivalentemployees (28.8%), most of whom were officer and supervisor level employees inthe loan department.  The increase instaff was necessary because of the extremely high mortgage loan refinancingvolume during the year.

 

In the six monthsended June 30, 2003, other expenses increased $4.4 million (39.6%) to $15.5million in 2003 from $11.1 million in 2002. Salaries and employee benefits increased by $1.9 million (35.0%), due toan increase in staff of 64 full-time equivalent employees (28.8%), most of whomwere officer and supervisor level employees in the loan department.  The increase in staff was necessary becauseof the extremely high mortgage loan refinancing volume during the year.  In addition, amortization and valuation ofmortgage servicing rights increased $1.2 million from the six months ended June30, 2002 to the six months ended June 30, 2003, due to large declines of thevaluation of the mortgage servicing asset in the falling interest rateenvironment.

 

***Income Taxes.***  In thesecond quarter of 2003, income tax expense increased $500 thousand (38.5%) overthe second quarter of 2002 to a total of $1.8 million compared to $1.3million.  The effective tax rateincreased to 39.1% in the second quarter of 2003, compared to 37.3% in thesecond quarter of 2002.

 

In the six monthsended June 30, 2003, income tax expense increased $1.4 million (53.8%) over thesix months ended June 30, 2002 to a total of $4.0 million compared to $2.6million.  The effective tax rateincreased to 38.5% in the first six months of 2003, compared to 36.3% in thefirst six months of 2002.

 

***Balance Sheet—General.***  In thesix months ended June 30, 2003, total assets had increased $60.9 million (6.7%)to a total of $927 million on June 30, 2003 compared to $911.9 million onDecember 31, 2002.  During the sameperiod, total liabilities increased $55.8 million (6.6%) to a total of $895.9million on June 30, 2003 from $840.1 on December 31, 2002.  Stockholders’ equity increased $4.5 million(9.6%) to $51.4 million on June 30, 2003 compared to $46.9 million on December31, 2002.  Growth in total liabilitieshas been primarily fueled by growth in total loans of $60.0 million (7.59%),which in turn has funded growth in cash and cash equivalents, investmentsecurities and loans.

 

***Investment Securities.***  Theprimary purposes of the investment portfolio are to provide a source ofearnings for liquidity management purposes, to provide collateral to pledgeagainst public deposits and to control interest rate risk. In managing theportfolio, we seek to obtain the objectives of safety of principal, liquidity,diversification and maximized return on funds. For an additional discussionwith respect to these matters, see “Liquidity” and “Capital Resources” underItem 2 and “Asset Liability Management” under Item 2A below.

 

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

** **
|                                 |   | **At June 30, 2003** |   | **At December 31, 2002** |   | **At June 30, 2002** |   |
|--------------------------------------|--------|----------------------|--------|-------------------------------|--------|----------------------|--------|
|                                 |   | **Amortized Cost**   |   | **Fair Value**                |   | **Amortized Cost**   |   | **Fair Value** |   | **Amortized Cost** |   | **Fair Value** |   |
|                                 |   | **(In thousands)**   |   |
| Securities  Available for Sale:      |   |                 |   |                          |   |                 |   |   |   |   |   |   |   |
| U.S.  Government agencies            |   | $                    | 49,718 |                          | 50,465 |                 | $      | 31,405 |   | $ | 32,107 |   | $ | 56,048 |   | $ | 57,142 |   |
| Equity  securities                   |   | 4,997                |   | 5,003                         |   | 3,781                |   | 3,787 |   | 3,718 |   | 3,724 |   |
| Total  securities available for sale |   | $                    | 54,715 |                          | $      | 55,468               |   | $ | 35,186 |   | $ | 35,894 |   | $ | 59,766 |   | $ | 60,866 |   |
|                                 |   |                 |   |                          |   |                 |   |   |   |   |   |   |   |
| Securities  Held to Maturity:        |   |                 |   |                          |   |                 |   |   |   |   |   |   |   |
| U.S.  Government agencies            |   | $                    | 53,594 |                          | $      | 55,862               |   | $ | 59,543 |   | $ | 61,055 |   | $ | 39,493 |   | $ | 39,966 |   |
| States  and political subdivisions   |   | 19,946               |   | 20,178                        |   | 10,380               |   | 10,584 |   | 7,689 |   | 7,876 |   |
| Total  securities held to maturity   |   | $                    | 73,540 |                          | $      | 76,040               |   | $ | 69,923 |   | $ | 71,639 |   | $ | 47,182 |   | $ | 47,842 |   |

 

13

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

 
|                       |   | **At June 30, 2003**                                |    | **At December 31, 2002** |   | **At June 30, 2002** |   |
|----------------------------|--------|-----------------------------------------------------|---------|--------------------------|--------|----------------------|--------|
|                       |   | **Amount**                                          |    | **Percent**              |   | **Amount**           |   | **Percent** |   | **Amount** |   | **Percent** |   |
|                       |   | **(June 30 data unaudited; Dollars in  thousands)** |    |
| Commercial                 |   | $                                                   | 70,070  |                     | 10.04  | %                    | $      | 65,778 |   | 9.94 | % | $ | 59,821 |   | 9.46 | % |
| Commercial  real estate    |   | 269,367                                             |    | 38.61                    | %      | 245,001              |   | 37.02 | % | 230,693 |   | 36.48 | % |
| Residential  real estate   |   | 206,110                                             |    | 29.55                    | %      | 200,408              |   | 30.28 | % | 201,970 |   | 31.93 | % |
| Construction  real estate  |   | 105,035                                             |    | 15.06                    | %      | 105,921              |   | 16.01 | % | 98,780 |   | 15.62 | % |
| Installment  and other     |   | 47,026                                              |    | 6.74                     | %      | 44,656               |   | 6.75 | % | 41,178 |   | 6.51 | % |
| Total  loans               |   | 697,608                                             |    | 100.00                   | %      | 661,764              |   | 100.00 | % | 632,442 |   | 100.00 | % |
| Unearned  income           |   | 1,324                                               |    |                     |   | 1,316                |   |   |   | 836 |   |   |   |
| Gross  loans               |   | 696,284                                             |    |                     |   | 660,448              |   |   |   | 631,606 |   |   |   |
| Allowance  for loan losses |   | 6,833                                               |    |                     |   | 6,581                |   |   |   | 6,275 |   |   |   |
| Net  loans                 |   | $                                                   | 689,451 |                     |   |                 | $      | 653,867 |   |   |   | $ | 625,331 |   |   |   |

 

Net loans increased $64.1 million (10.3%) to $689.4 million atJune 30, 2003 from $625.3 million at June 30, 2002. The increase was dueprimarily to growth in the Company’s commercial real estate and othercommercial loans portfolios.

 

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

 
|                                                          |   | **At June  30, 2003**                              |   | **At  December 31,  2002** |   | **At June  30, 2002** |   |
|---------------------------------------------------------------|--------|----------------------------------------------------|--------|----------------------------|--------|-----------------------|--------|
|                                                          |   | **(June 30 data unaudited: Dollars in Thousands)** |   |
| Non-accruing  loans                                           |   | $                                                  | 2,729  |                       | $      | 3,914                 |   | $ | 6,784 |   |
| Loans  90 days or more past due, still accruing interest |   | 145                                                |   | —                     |   | 326                   |   |
|                                                          |   |                                               |   |                       |   |                  |   |
| Total  non-performing loans                                   |   | 2,874                                              |   | 3,914                      |   | 7,110                 |   |
|                                                          |   |                                               |   |                       |   |                  |   |
| Other  real estate owned                                      |   | 2,306                                              |   | 3,707                      |   | 2,156                 |   |
| Other  repossessed assets                                     |   | 215                                                |   | 39                         |   | 32                    |   |
|                                                          |   |                                               |   |                       |   |                  |   |
| Total  non-performing assets                                  |   | $                                                  | 5,395  |                       | $      | 7,660                 |   | $ | 9,298 |   |
|                                                          |   |                                               |   |                       |   |                  |   |
| Total  non-performing loans to total loans                    |   | 0.41                                               | %      | 0.59                       | %      | 0.35                  | %      |
| Allowance  for loan losses to non-performing loans            |   | 237.75                                             | %      | 168.14                     | %      | 88.26                 | %      |
| Total  non-performing assets to total assets                  |   | 0.55                                               | %      | 0.84                       | %      | 1.12                  | %      |

 

At June 30, 2003, total non-performing assets decreased $3.9 million to$5.4 million from $9.3 million at June 30, 2002 due to decreases innon-performing loans of $4.2 million, which was partially offset by increasesin other real estate owned and other repossessed assets of $333 thousand.  The decreases in non-performing loans wereprimarily due to a $2.9 million construction loan that was moved into otherreal estate owned at a value of $2.5 million in 2002, and subsequently sold in2003.

 

At June 30, 2003, total non-performing assets decreased $2.3 million to$5.4 million from $7.7 million at December 31, 2002 due to decreases innon-performing loans of $1.0 million. The decreases in non-performing loans were primarily due to twocommercial real estate loans totaling $1.2 million that were moved to otherreal estate owned and subsequently sold in 2003.

 

*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.

 

14

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The allowance for loan losses is maintained at an amount thatmanagement believes will be adequate to absorb probable losses on existingloans, based on an evaluation of the collectibility of loans and prior lossexperience. This evaluation also takes into consideration such factors aschanges in the nature and volume of the loan portfolio, the value of underlyingcollateral, overall portfolio quality, review of specific problem loans, andcurrent economic conditions that may affect the borrower’s ability to pay. Whilemanagement uses the best information available to make its evaluation, futureadjustments to the allowance may be necessary if there are significant changesin economic conditions. In addition, as an integral part of their examinationprocess regulatory agencies periodically review the Company’s allowance forloan losses and may require the Company to make additions to the allowancebased on their evaluation of information available at the time of theirexaminations.

 

The following table presents an analysis of the allowance for loanlosses for the periods presented:

 
|                                          |   | **Three Months Ended**                |    | **Six Months Ended** |   |
|-----------------------------------------------|--------|---------------------------------------|---------|----------------------|--------|
|                                          |   | **June 30, 2003**                     |    | **June 30, 2002**    |   | **June 30, 2003** |   | **June 30, 2002** |   |
|                                          |   | **(Unaudited; Dollars in thousands)** |    |
| Balance at beginning of period                |   | $                                     | 6,560   |                 | $      | 5,938 |   | $ | 6,581 |   | $ | 5,637 |   |
| Provision for loan losses                     |   | 600                                   |    | 600                  |   | 1,200 |   | 1,300 |   |
| Total charge-offs                             |   | 367                                   |    | 273                  |   | 1,016 |   | 699 |   |
| Total recoveries                              |   | 40                                    |    | 10                   |   | 68 |   | 37 |   |
| Net charge-offs                               |   | 327                                   |    | 263                  |   | 947 |   | 662 |   |
| Balance at end of period                      |   | $                                     | 6,833   |                 | $      | 6,275 |   | $ | 6,833 |   | $ | 6,275 |   |
| Gross loans at end of period                  |   | $                                     | 696,284 |                 | $      | 631,606 |   | $ | 696,284 |   | $ | 631,606 |   |
| Ratio of allowance to total loans             |   | 0.98                                  | %       | 0.99                 | %      | 0.98 | % | 0.99 | % |
| Ratio of net charge-offs to average loans (1) |   | 0.18                                  | %       | 0.17                 | %      | 0.26 | % | 0.21 | % |

 

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

 

Net charge-offs for the three months ended June 30, 2003 totaled $327thousand, an increase of $64 thousand from $263 thousand from the three monthsended June 30, 2002.  The majority ofthe charge-offs were residential real estate and commercial loans.  The provision for loan losses remained thesame for the three months ended June 30, 2003 and June 30, 2002, due tomanagement’s analysis of current non-performing loans.

 

Net charge-offs for the six months ended June 30, 2003 totaled $947thousand, an increase of $285 thousand from $662 thousand from the six monthsended June 30, 2002.  The majority ofthe charge-offs were commercial real estate, largely due to a single commercialreal estate charge off of $296 thousand. The provision for loan losses decreased $100 thousand for the six monthsended June 30, 2003 compared to the six months ended June 30, 2002, due tomanagement’s analysis of current non-performing loans.

 

The Company maintains its allowance for loan losses at a level thatmanagement believes will be adequate to absorb probable losses on existingloans based on an evaluation of the collectibility of loans and prior lossexperience. Three methods are used to evaluate the adequacy of the allowancefor loan losses: (1) historical loss experience, based on loss experienceby quality classification in the previous twelve calendar quarters;(2) specific identification, based upon management’s assessment of loansand the probability that a charge off will occur in the upcoming quarter; and(3) loan concentrations, based on current or expected economic factors inthe geographic and industry sectors where management believes the Company mayeventually experience some loan losses.

 

Additions to the allowance for loan losses, which are charged toearnings through the provision for loan losses, are determined based on avariety of factors, as indicated above. Although management believes theallowance for loan losses is sufficient to cover probable losses inherent inthe loan portfolio, there can be no assurance that the allowance will provesufficient to cover actual future loan losses.

 

Along with other financial institutions, management shares a concernfor the outlook of the economy during 2003. A slowdown in economic activitybeginning in 2001 severely impacted several major industries as well as theeconomy as a whole. Even though there are numerous indications of emergingstrength, it is not certain that this strength is sustainable. In addition,consumer confidence may be negatively impacted by the recent substantialdecline in equity prices. These events could still adversely affect cash flowsfor both commercial and individual borrowers, as a result of which, the Companycould experience increases in problem assets, delinquencies and losses onloans.

 

15

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*Potential ProblemLoans.*  The Company utilizes an internal assetclassification system as a means of reporting problem and potential problem assets.At scheduled Board of Directors meetings every quarter, a watch list ispresented, showing all loans listed as “Special Mention,”“Substandard,”“Doubtful” and “Loss.” An asset is classified Substandard if it is inadequatelyprotected by the current net worth and paying capacity of the obligor or of thecollateral pledged, if any. Substandard assets include those characterized bythe distinct possibility that the Company will sustain some loss if thedeficiencies are not corrected. Assets classified as Doubtful have all theweaknesses inherent in those classified Substandard with the addedcharacteristic that the weaknesses present make collection or liquidation infull, on the basis of currently existing facts, conditions and values, highlyquestionable and improbable. Assets classified as Loss are those considereduncollectible and viewed as non-bankable assets, worthy of charge-off. Assetsthat do not currently expose the Company to sufficient risk to warrantclassification in one of the aforementioned categories, but possess weaknessesthat may or may not be within the control of the customer are deemed to beSpecial Mention.

 

The Company’s determination as to the classification of its assets andthe amount of its valuation allowances is subject to review by the Bank’sprimary regulators, which can order the establishment of additional general orspecific loss allowances. The OCC, in conjunction with the other federalbanking agencies, has adopted an interagency policy statement on the allowancefor loan losses. The policy statement provides guidance for financialinstitutions on both the responsibilities of management for the assessment andestablishment of adequate allowances and guidance for banking agency examinersto use in determining the adequacy of general valuation guidelines. Generally,the policy statement recommends that (i) institutions have effectivesystems and controls to identify, monitor and address asset quality problems;(ii) management has analyzed all significant factors that affect thecollectibility of the portfolio in a reasonable manner; and(iii) management has established acceptable allowance evaluation processesthat meet the objectives set forth in the policy statement. Management believesit has established an adequate allowance for probable loan losses. The Companyanalyzes its process regularly, with modifications made if needed, and reportsthose results quarterly at Board of Directors meetings. However, there can beno assurance that regulators, in reviewing the Company’s loan portfolio, willnot request the Company to materially increase its allowance for loan losses atthe time. Although management believes that adequate specific and general loanloss allowances have been established, actual losses are dependent upon futureevents and, as such, further additions to the level of specific and generalloan loss allowances may become necessary.

 

The aggregate principal amounts of potential problem loans as of June30, 2003 and 2002 were approximately $24.7 million and $27.7 million,respectively. Included in these potential problem loan totals are non-accrual,Special Mention, Substandard and Doubtful classifications, which comprise thewatch list presented to the Board of Directors. All loans classified as Losshave been charged-off. Loans in this category generally include loans that wereclassified for risk management and regulatory purposes.

 

**Sources of Funds**

 

***Liquidityand Sources of Capital***

 

The Company’s cash flows are composed of three classifications: cashflows from operating activities, cash flows from investing activities and cashflows from financing activities. Net cash provided by operating activities was$23.9 million and $7.5 million for the six months ended June 30, 2003 and 2002,respectively.  Net cash provided byoperating activities increased $16.4 million in the first six months of 2003compared to the first six months of 2002 largely due to the sale of loans heldfor sale that increased $220.9 million over the first six months of 2002, whichwas partially offset by the origination of loans held for sale that increased$205.9 million in the same period.  Netcash (used in) investing activities was ($61.2) million and ($12.9) million forthe six months ended June 30, 2003 and 2002, respectively.  The $48.3 million increase in cash used byinvesting activities was largely due to the increase of cash used by loansfunded, net of repayments of $56.0 million. Net cash provided by financing activities was $54.5 million and $14.9million for the six months ended June 30, 2003 and 2002, respectively.  The $39.6 million increase in cash providedby financing activities was mainly due to an increase in cash provided bydeposit accounts of $25.7 million, and a decrease in cash used by short- andlong-term borrowings repayments of $14.3 million from the first six months of2002 compared to the first six months of 2003.

 

TheCompany expects to have available cash to meet its liquidity needs. Liquidity management is monitored by the Asset/Liability committee of the Bank,which takes into account the marketability of assets, the sources and stabilityof funding and the level of unfunded commitments.  In the event that additionalshort-term liquidity is needed, we have established relationships with severallarge regional banks to provide short-term borrowings in the form of federalfunds purchases. We have borrowed, and management believes that we could againborrow, $75.7 million for a short time from these banks on a collectivebasis. Additionally, we are a member of the Federal Home Loan Bank (“FHLB”) andhas the ability to borrow from the FHLB. As a contingency plan for significantfunding needs, the Asset/Liability Management committee may also consider thesale of investment securities, selling securities under agreement torepurchase, sale of certain loans and/or the temporary curtailment of lendingactivities.

 

At June 30, 2003, the Company’s total risk-based capitalratio was 11.51%, Tier 1 capital to risk-weighted assets ratio was 10.57%, andTier 1 capital to average asset ratio was 8.03%.  The Bank was categorized as “Well-Capitalized” under FederalDeposit

 

16

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Insurance Corporation regulations at June 30, 2003 andDecember 31, 2002.  At December 31,2002, the Company’s total risk-based capital ratio was 11.15%, Tier 1 capitalto risk-weighted assets ratio was 10.21%, and Tier 1 capital to average assetratio was 7.89%.

 

At June 30, 2003, the Company’s book value per commonshare was $9.18.

 

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

 

**Asset LiabilityManagement**

 

The Company’s net interest income is subject to “interest rate risk” tothe extent that it can vary based on changes in the general level of interestrates. It is the Company’s 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 strategyemployed by the Company to manage its interest rate risk is to measure its riskusing an asset/liability simulation model and adjust the maturity of securitiesin its investment portfolio to manage that risk.

 

Interest rate risk can also be measured by analyzing the extent towhich the repricing of assets and liabilities are mismatched to create aninterest sensitivity “gap”. An asset or liability is said to be interest ratesensitive within a specific time period if it will mature or reprice withinthat time period. The interest rate sensitivity gap is defined as the differencebetween the amount of interest earning assets maturing or repricing within aspecific time period and the amount of interest bearing liabilities maturing orrepricing within that same time period. A gap is considered positive when theamount of interest rate sensitive assets exceeds the amount of interest ratesensitive liabilities. A gap is considered negative when the amount of interestrate sensitive liabilities exceeds the amount of interest rate sensitiveassets. During a period of rising interest rates, therefore, a negative gapwould tend to adversely affect net interest income. Conversely, during a periodof falling interest rates, a negative gap position would tend to result in anincrease in net interest income.

 

The following table sets forth the amounts of interest earning assetsand interest bearing liabilities outstanding at June 30, 2003, which areanticipated by the Company, based upon certain assumptions, to reprice ormature in each of the future time periods shown. Except as stated below, theamount of assets and liabilities shown which reprice or mature during aparticular period were determined based on the earlier of the term to repricingor the term to repayment of the asset or liability. The table is intended toprovide an approximation of the projected repricing of assets and liabilitiesat June 30, 2003 on the basis of contractual maturities and scheduled rateadjustments within a three-month period and subsequent selected time intervals.The loan amounts in the table reflect principal balances expected to bereinvested and/or repriced as a result of contractual amortization and rateadjustments on adjustable-rate loans. Loan and investment securitiescontractual maturities and amortization reflect modest prepayment assumptions.While NOW, money market and savings deposit accounts have adjustable rates, itis assumed that the interest rates on these accounts will not adjustimmediately to changes in other interest rates.

 

Therefore, the table is calculated assuming that these accounts willreprice based upon an historical analysis of rate changes of these particularaccounts, with repricing assigned to these accounts from six to fourteenmonths.

 

Borrowings made by the Employee Stock Ownership Plan (ESOP) are notincluded below, as the Company does not recognize interest expense on theseborrowings. The Company makes discretionary contributions to the ESOP toservice this debt, and these contributions are recognized as compensationexpense.

 

17

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|                                                                 |   | **Time to Maturity or Repricing** |    |
|----------------------------------------------------------------------|--------|-----------------------------------|---------|
|                                                                 |   | **0-90 Days**                     |    | **91-365 Days** |   | **1-5 Years** |   | **Over 5 Years** |   | **Total** |   |
|                                                                 |   | **(Unaudited; In thousands)**     |    |
| **Interest Earning Assets:**                                         |   |                              |    |   |   |   |   |   |   |   |   |
| Loans                                                                |   | $                                 | 365,606 |   | $ | 320,108 |   | $ | 9,340 |   | $ | 1,230 |   | $ | 696,284 |   |
| Investment  securities                                               |   | 13,191                            |    | 23,696 |   | 92,121 |   | — |   | 129,008 |   |
| Interest  bearing deposits with banks                                |   | 17,381                            |    | — |   | — |   | — |   | 17,381 |   |
|                                                                 |   |                              |    |   |   |   |   |   |   |   |   |
| Total  interest earning assets                                       |   | $                                 | 396,178 |   | $ | 343,804 |   | $ | 101,461 |   | $ | 1,230 |   | $ | 842,673 |   |
|                                                                 |   |                              |    |   |   |   |   |   |   |   |   |
| **Interest Bearing Liabilities:**                                    |   |                              |    |   |   |   |   |   |   |   |   |
| NOW  and money market deposit accounts                               |   | $                                 | 94,812  |   | $ | 101,988 |   | $ | 2,392 |   | $ | — |   | $ | 199,192 |   |
| Savings  deposits                                                    |   | 69,115                            |    | 151,488 |   | — |   | — |   | 220,603 |   |
| Time  deposits                                                       |   | 94,608                            |    | 196,703 |   | 66,367 |   | 4,385 |   | 362,063 |   |
| Short-  and long-term borrowings                                     |   | 1,779                             |    | 5,459 |   | 25,174 |   | 3,569 |   | 35,981 |   |
| Company  obligated mandatorily redeemable trust preferred securities |   | —                            |    | — |   | — |   | 15,510 |   | 15,510 |   |
|                                                                 |   |                              |    |   |   |   |   |   |   |   |   |
| Total  interest bearing liabilities                                  |   | $                                 | 260,314 |   | $ | 455,638 |   | $ | 93,933 |   | $ | 23,464 |   | $ | 833,349 |   |
|                                                                 |   |                              |    |   |   |   |   |   |   |   |   |
| Rate  sensitive assets (RSA)                                         |   | $                                 | 396,178 |   | $ | 739,982 |   | $ | 841,443 |   | $ | 842,673 |   | $ | 842,673 |   |
| Rate  sensitive liabilities (RSL)                                    |   | 260,314                           |    | 715,952 |   | 809,885 |   | 833,349 |   | 833,349 |   |
| Cumulative  GAP (GAP=RSA-RSL)                                        |   | 135,864                           |    | 24,030 |   | 31,558 |   | 9,324 |   | 9,324 |   |
| RSA/Total  assets                                                    |   | 40.73                             | %       | 76.07 | % | 86.50 | % | 86.62 | % | 86.62 | % |
| RSL/Total  assets                                                    |   | 26.76                             | %       | 73.60 | % | 83.25 | % | 85.66 | % | 86.66 | % |
| GAP/Total  assets                                                    |   | 13.97                             | %       | 2.47 | % | 3.24 | % | 0.96 | % | 0.96 | % |
| GAP/RSA                                                              |   | 34.29                             | %       | 3.25 | % | 3.75 | % | 1.11 | % | 1.11 | % |

 

Certain shortcomings are inherent in the method of analysis presentedin the foregoing table. For example, although certain assets and liabilitiesmay have similar maturities or periods to repricing, they may react indifferent degrees to changes in market interest rates. Also, the interest rateson certain types of assets and liabilities may fluctuate in advance of changesin market interest rates, while interest rates on other types of assets may lagbehind changes in market rates. Additionally, in the event of a change ininterest rates, prepayment and early withdrawal levels would likely deviatesignificantly from those assumed in calculating the table. Therefore, theCompany does not rely solely on a gap analysis to manage its interest raterisk, but rather it uses what it believes to be the more reliable simulationmodel relating to changes in net interest income.

 

Based on simulation modeling at June 30, 2003 and December 31, 2002,the Company’s net interest income would change over a one-year time period dueto changes in interest rates as follows:

 

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

 

| **Changes in Levels of  Interest Rates** |   | **At June 30, 2003**                  |   | **At December 31, 2002** |   |
|------------------------------------------|--------|---------------------------------------|--------|--------------------------|--------|
|                                     |   | **Dollar Change**                     |   | **Percentage Change**    |   | **Dollar Change** |   | **Percentage Change** |   |
|                                     |   | **(Unaudited; Dollars in thousands)** |   |
| + 2.00                                   | %      | $                                     | (2,375 | )                        | (6.59  | )% | $ | (1,998 | ) | (5.35 | )% |
| + 1.00                                   |   | (1,712                                | )      | (4.75                    | )      | (1,063 | ) | (2.87 | ) |
| (1.00                                    | )      | 764                                   |   | 2.12                     |   | 1,579 |   | 4.52 |   |
| (2.00                                    | )      | (1,053                                | )      | (2.92                    | )      | 2,295 |   | 7.29 |   |
|                                          |        |                                       |        |                          |        |  |  |  |  |  |  |

 

Simulations used by the Company assume the following:

 

1.                                       Changes in interest rates are immediate.

 

2.                                       It is the Company’s policy that interest rateexposure due to a 2.00% interest rate rise or fall be limited to 15.0% of theCompany’s annual net interest income, as forecasted by the simulation model. Asdemonstrated by the table above, the Company’s interest rate risk exposure waswithin this policy at June 30, 2003.

 

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Changes in net interest income between June 30, 2003 and December 31,2002 reflect changes in the composition of interest earning assets and interestbearing liabilities, related interest rates, repricing frequencies, and thefixed or variable characteristics of the interest earning assets and interestbearing liabilities.

 

**Item 4****.  Controls andProcedures.**

 

An evaluation was performedunder the supervision and with the participation of the Company’s management,including the Chief Executive Officer and Chief Financial Officer, of theeffectiveness of the design and operation of the Company’s disclosure controlsand procedures (as defined in Rule 13a-15(e) promulgated under theSecurities and Exchange Act of 1934, as amended) as of June 30, 2003.Based on that evaluation, the Company’s management, including the ChiefExecutive Officer and Chief Financial Officer, concluded that the Company’sdisclosure controls and procedures were effective. There have been nosignificant changes in the Company’s internal controls or in other factors thatcould significantly affect internal controls.

 

**PART II – OTHER INFORMATION**

 

**Item 1.   LegalProceedings**

 

The majority of lawsuits theCompany and the Bank are involved in are foreclosure and collection proceedingsdue to loan default which arise in the normal course of business. However,because the Bank acts as a depository of funds, from time to time it is namedas a defendant in lawsuits (such as garnishment proceedings) involving claimsto the ownership of funds in particular accounts and in other actions arisingin the normal course of business. Management does not believe that there iscurrently any pending or threatened proceeding against either the Company orthe Bank which, if determined adversely, would have a material effect on itsbusiness, financial condition or results of operations.

 

**Item 2.  Changes inSecurities and Use of Proceeds**

 

None

 

**Item 3.  Defaults UponSenior Securities**

 

None

 

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

 

None

 

**Item 5.  OtherInformation**

 

None

 

**Item 6.  Exhibits andReports on Form 8-K**

 

(a)                                  Exhibits

 

31.1                           Certification of Chief Executive Officer Pursuant to Rule13a-14(a)/15d-14(a)

31.2                           Certification of Chief Financial Officer Pursuant to Rule13a-14(a)/15d-14(a)

32.1                           Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section1350, 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. Section1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

(b)                                 Reportson Form 8-K

 

Areport on Form 8-K was filed on July 3, 2003 pursuant to Item 5, whichreported, in the form of a press release, the declaration of a dividend on theshares of the Company’s common stock and the construction of a new branch inSanta Fe, New Mexico.

 

Areport on Form 8-K was filed on August 6, 2003 pursuant to Item 12, whichreported, in the form of a press release, the Company’s financial results forthe quarter ended June 30, 2003.

 

19

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**SIGNATURES**

 

Pursuant to the requirements of Section 12 of the SecuritiesExchange Act of 1934, the registrant has duly caused this registrationstatement to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 
|                   | **TRINITY  CAPITAL CORPORATION** |
|------------------------|----------------------------------|
|                   |                             |   |
|                   |                             |   |
| Date: August 14, 2003  | By:                              | /s/ WILLIAM C. ENLOE |
|                   |                             | William C. Enloe |
|                   |                             | President and Chief Executive Officer |
|                   |                             |   |
| Date:  August 14, 2003 |                             | /s/ Daniel R.  Bartholomew |
|                   |                             | Daniel R. Bartholomew |
|                   | By:                              | Chief Finanical Officer |
|                   |                             |   |

 

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