Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’sregistrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

Indicate by check mark whether registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large"large accelerated filer,” “accelerated filer”" "accelerated filer", "smaller reporting company", and “smaller reporting company”"emerging growth company" in Rule 12b-2 of the Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

The aggregate market value of the registrant’sregistrant's common stock (“("Common Stock”Stock") held by non-affiliates as of June 30,December 31, 2016 the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $26,105,000  (based on the last sale price of the Common Stock at September 30, 2016 of $4.00 per share).$43,697,000.

 

This documentForm 10-K contains forward-looking statements of the Company and its management within the meaning of such term in the Private Securities Litigation Reform Act of 1995, with respect to the financial condition, results of operations, plans, objectives, future performance and business of the Company.  Forward-looking statements, which may beare based upon beliefs, expectations and assumptions of the Company’sCompany's management and on information currently available to management, are generally identifiable by the use of words such as “believe,” “expect,” “anticipate,” “plan,” “intend,” “estimate,” “may,” “will,” “would,” “could,” “should”"believe," "expect," "anticipate," "plan," "intend," "estimate," "may," "will," "would," "could," "should" or other similar expressions.  Additionally, all statements in this document,Form 10-K, including forward-looking statements, speak only as of the date they are made, and the Company undertakes no obligation to update or revise any statement in light of new information or future events, except as required by law.

 

The Company’sCompany's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. The factors that could cause actual results and outcomes to differ materially from those contained in, or implied by, the forward-looking statements included herein and that could have a material adverse effect on the operations and future prospects of the Company and its subsidiaries are detailed under “Risk Factors”"Risk Factors" and elsewhere in this report.Form 10-K.  These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.

This Annual Report on Form 10-K for the year ended December 31, 2015 (this “Form 10-K) is the Company’s first report since the Company filed its Annual Report on Form 10-K for the year ended December 31, 2014 on May 9, 2016.  This Form 10-K for the year ended December 31, 2015  contains: (i)contains the consolidated financial information for the years ended December 31, 20152016 and 20142015 and the consolidated statements of operations, comprehensive income (loss), changes in stockholders equity and cash flows for the years ended December 31, 2016, 2015, 2014, and 2013; and (ii) the selected consolidated financial data for the years ended December 31, 2015, 2014, 2013, 2012, and 2011 (unaudited) required pursuant to Item 6 of this Form 10-K.2014. The consolidated financial information as of and for the quarterly periods ended September 30, 2015, June 30, 2015, March 30,31, 2015, September 30, 2014, June 30, 2014, March 31, 2014, which have not been filed with the Securities and Exchange Commission (the “SEC”"SEC"), will not be separately presented as the Company determined that due to the length of time that has passed the separate presentation is not material. Comparative quarterly information will,was, however, be provided in the Company’sCompany's Quarterly Reports on Form 10-Q for the quarterly periods beginning March 31, 2016.

As detailed in Item 9A, “Controls"Controls and Procedures”Procedures" in this Form 10-K, there are material weaknesses in our internal control over financial reporting and disclosure controls dating to 2006, that have not yet been fully remediated. The override of controls by former members of management and these material weaknesses, caused the misstatements of the Company’s financial statements noted above.

 

General. Trinity Capital Corporation, a bank holding company organized in 1977 under the laws of the State of New Mexico, is the sole stockholder of the Bank and the sole stockholder of Title Guaranty & Insurance Company (“("Title Guaranty”Guaranty").  Title Guaranty holds effectively no assets and is in the process of being dissolved by the Company.  In addition, Trinity owns all the common shares of four business trusts, created by Trinity for the sole purpose of issuing trust preferred securities that had an aggregate outstanding balance of $37.1 million as of December 31, 2016.

General. The Bank is a national banking association founded in 1963 by local investors to provide convenient, full-service banking to the sole stockholderunique scientific community that developed around the Los Alamos National Laboratory (the "Laboratory").  The Laboratory is a pre-eminent research facility for scientific and technological development in numerous scientific fields.  As of TCC Advisors Corporation (“TCC Advisors”),December 31, 2016, the sole memberLaboratory employed (directly and indirectly) approximately 10,500 people, making it the largest employer in Los Alamos County.  The Laboratory is the cornerstone of LANB Investment Advisors, LLC,the community and has attracted numerous other scientific business to the area.

The Bank is a full-service commercial banking institution with seven bank offices in Los Alamos, White Rock, Santa Fe, and Albuquerque, New Mexico limited liability company (“LANB Investment Advisors”and is regulated by the Office of the Comptroller of the Currency ("OCC"),.

The Bank is the sole member of Triscensions ABQ, LLC, a New Mexico limited liability company, and the sole member of FNM Investment Fund IV, LLC, a Delaware Limited Liability Company (“("FNM Investment Fund IV”IV").  The Bank is also a member of Cottonwood Technology Group, LLC (“Cottonwood”("Cottonwood"), a management consulting and counseling company for technology startup companies, which is also designed to manage venture capital funds. FNM Investment Fund IV is a member of Finance New Mexico—Investor Series IV, LLC, a New Mexico Limited Liability Company (“("FNM CDE IV”IV"), an entity created by the Bank to fund loans and investments in a New Market Tax Credit project.  In addition, Trinity owns all the common shares of four business trusts, created by Trinity for the sole purpose of issuing trust preferred securities that had an aggregate outstanding balance of $37.1 million as of December 31, 2015.

In February 2006, TCC Funds, a Delaware statutory trust was created with Trinity as its sponsor, to allow for the creation of a mutual fund. TCC Funds remains dormant with no planned use at this time.was dissolved in January 2017. In August 2008, the Bank invested in Cottonwood. Cottonwood assists in the management of, and counsels, startup companies involved in technology transfer from research institutions in New Mexico, as well as establishing and managing venture funds. Additionally, the Bank is participating in a venture capital fund managed by Cottonwood.  In 2009, the Bank created FNM Investment Fund IV to acquire a 99.99% interest in FNM CDE IV. Both of these entities were created for the sole purpose of funding loans to, and investments in, a New Market Tax Credit project located in downtown Albuquerque, New Mexico. In September 2010, the Bank invested in Southwest Medical Technologies, LLC (“SWMT”).  In November 2015, the Bank sold its interests in SWMT and wrote down its remaining interest to zero. The Bank initially formed LANB Investment Advisors in October 2012 to house a Registered Investment Advisor as part of its Trust and Investment Department operations. This entity has remained dormant since its creation with no planned use at this time.  Trinity is alsowas dissolved in the process of dissolving this entity.

 

Products and Services. The Bank provides a full range of financial services for deposit customers and lends money to creditworthy borrowers at competitive interest rates.  The Bank’sBank's products include certificates of deposit, checking and saving accounts, on-line banking, Individual Retirement Accounts, loans, mortgage loan servicing, trust and investment services, international services and safe deposit boxes.  These business activities make up the Bank’sBank's three key processes: investment of funds, generation of funds and service-for-fee income.  The profitability of operations depends primarily on the Bank’sBank's net interest income, which is the difference between total interest earned on interest-earning assets and total interest paid on interest-bearing liabilities, and its ability to maintain efficient operations.  In addition to the Bank’sBank's net interest income, it produces income through mortgage servicing operations and noninterest income processes, such as trust and investment services.

 

 

General. The Bank provides a broad range of commercial and retail lending services to corporations, partnerships, individuals and government agencies primarily within the Bank’sBank's existing market areas.  The Bank actively markets its services to qualified borrowers.  Lending officers build relationships with new borrowers entering the Bank’sBank's market areas as well as long-standing members of the local business community.  The Bank has established lending policies that include a number of underwriting factors to be considered in making a loan, including location, loan-to-value ratio, cash flow and the credit history of the borrower.  As of December 31, 2015,2016, the Bank’sBank's maximum legal lending limit to one borrower was $22.1$22.0 million; however, the Bank may impose additional limitations on the amount it is willing to lend to one borrower as part of its credit risk management policies.  The Bank’sBank's loan portfolio is comprised primarily of loans in the areas of commercial real estate, residential real estate, construction, general commercial and consumer lending.  In addition, Trinity has one construction loan.  As of December 31, 2015,2016, commercial real estate loans comprised approximately 44.2%51.6% of the total loan portfolio; residential real estate mortgages made up approximately 30.7%; general commercial loans comprised 11.1%27.1%; construction real estate loans comprised 10.6%9.7%; general commercial loans comprised 9.0%; and consumer lending comprised 3.4%2.6%.  In addition, the Bank originates residential mortgage loans for sale to third parties, primarily the Federal National Mortgage Association (“Fannie Mae”), and services most of these loans for the buyers; however, beginning in late 2015, management began moving toward a strategy to sell most newly originated mortgage loans with servicing released. In 2016, the Bank then made a further strategy change to an outsourced solution whereby the Bank generates residential mortgage applications for non-affiliated residential mortgage companies on a fee basis.  These changes in strategy were primarily based upon new compliance requirements and capital treatment relating to residential mortgage loans.

Commercial Real Estate Loans. The Bank’sBank's commercial real estate lending concentrates on loans to building contractors and developers, as well as owner occupied properties. The Bank collateralizes these loans and, in most cases, obtains personal guarantees to help ensure repayment.  The Bank’sBank's commercial real estate loans are primarily made based on the identified cash flow of the borrower and secondarily on the underlying real estate collateral.  Credit support provided by the borrower for most of these loans and the probability of repayment is based on the liquidation of the real estate and enforcement of a personal guarantee, if any exists. The primary repayment risk for a commercial real estate loan is the potential loss of revenue of the business which could impact the cash flows, and fair value of the property.

 

Residential Real Estate Loans. Residential real estate lending has been an important part of the Bank’s business since its formation in 1963.  The majority of the residential real estate loans originated and retained by the Bank are in the form of 15- and 30-year variable rate loans.  The Bank also originates 15- to 30-year fixed rate residential mortgages and sells most of these loans to outside investors.  In 2015,2016, the Bank made a strategic change to an outsourced solution whereby the Bank generates residential mortgage applications for non-affiliated residential mortgage companies on a fee basis.  In 2016, the Bank originated approximately $68.3$55.8 million in residential real estate loans sold to third parties. As of December 31, 2015,2016, the total sold residential mortgage loan portfolio serviced by the Bank on behalf of third parties was $865.6$780.3 million.  The Bank does not engage in financing sub-prime loans nor does it participate in any sub-prime lending programs.  The Bank participates in the current U.S. Department of the Treasury (the “Treasury”"Treasury") programs, including the Home Affordable Modification Program, to work with borrowers who are in danger of, or who have defaulted on residential mortgage loans.

 

Construction Loans. The Bank is active in financing the construction of residential and commercial properties in New Mexico, primarily in Northern New Mexico.  Management continues to de-emphasize this type of lending in favor of other types of loans.    The Bank manages the risks of construction lending through the use of underwriting and construction loan guidelines and requires work be conducted by reputable contractors.  Construction loans are structured either to convert to permanent loans at the end of the construction phase or to be paid off upon receiving financing from another financial institution.  The amount financed on construction loans is based on the appraised value of the property, as determined by an independent appraiser, and an analysis of the potential marketability and profitability of the project and the costs of construction.  Approximately 40%20% of all construction loans have terms that do not exceed 24 months.  Loan proceeds are typically disbursed on a percentage of completion basis, as determined by inspections, with all construction required to be completed prior to the final disbursement of funds.

 

Construction loans afford the Bank an opportunity to receive yields higher than those obtainable on adjustable rate mortgage loans secured by existing residential properties.  However, these higher yields correspond to the higher risks associated with construction lending.

 

Commercial Loans. The Bank is an active commercial lender.  The Bank’sBank's focus in commercial lending concentrates on loans to business services companies and retailers.  The Bank provides various credit products to commercial customers, including lines of credit for working capital and operational purposes and term loans for the acquisition of equipment and other purposes.  Collateral on commercial loans typically includes accounts receivable, furniture, fixtures, inventory and equipment.  In addition, most commercial loans have personal guarantees to ensure repayment.  The terms of approximately 60% of commercial loans range from one to seveneight years.  A significant portion of the Bank’sBank's commercial business loans reprice within one year or have floating interest rates.

 

Consumer Loans. The Bank also provides all types of consumer loans, including motor vehicle, home improvement, credit cards, signature loans and small personal credit lines.  Consumer loans typically have shorter terms and lower balances with higher yields compared to the Bank’sBank's other loans, but generally carry higher risks of default.  Consumer loan collections are dependent on the borrower’sborrower's continuing financial stability, and thus are more likely to be affected by adverse personal circumstances.

Additional information on the risks associated with banking activities and products and concentrations can be found under Part I, Item 1A, “Risk Factors”"Risk Factors" of this Form 10-K.

Competition. There is strong competition, both in originating loans and in attracting deposits, in the Bank’sBank's market areas.  Competition in originating real estate loans comes primarily from large regional banks, other commercial banks, credit unions, savings institutions and mortgage bankers making loans secured by real estate located in the Bank’sBank's market areas. Commercial banks, credit unions and finance companies, including finance company affiliates of automobile manufacturers, provide vigorous competition in consumer lending.  The Bank competes for real estate and other loans principally on the basis of the interest rates and loan fees charged, the types of loans originated and the quality and speed of services provided to borrowers. Insurance companies and internet-based financial institutions present growing areas of competition both for loans and deposits.

 

There is substantial competition in attracting deposits from other commercial banks, savings institutions, money market and mutual funds, credit unions and other investment vehicles.  The Bank’sBank's ability to attract and retain deposits depends on its ability to provide investment opportunities that satisfy the requirements of investors as to rate of return, liquidity, risk and other factors.  The financial services industry has become more competitive as technological advances enable companies to provide financial services to customers outside their traditional geographic markets and provide alternative methods for financial transactions.  These technological advances may diminish the importance of depository institutions and other financial intermediaries in the transfer of funds between parties.

 

Employees. As of December 31, 2015,2016, we had 307277 full time-equivalent employees.  As of June 30, 2016, the number of full-time equivalent employees has been reduced to 296. We are not a party to any collective bargaining agreements.

General. Financial institutions, their holding companies and their affiliates are extensively regulated under federal and state law.  As a result, the growth and earnings performance of Trinity may be affected not only by management decisions and general economic conditions, but also by requirements of federal and state statutes and by the regulations and policies of various bank regulatory agencies, including the OCC, the Board of Governors of the Federal Reserve System (the “FRB”"FRB"), the Federal Deposit Insurance Corporation (the “FDIC”"FDIC") and the Consumer Financial Protection Bureau (the “CFPB”"CFPB").  Furthermore, taxation laws administered by the Internal Revenue Service and state taxing authorities, accounting rules developed by the Financial Accounting Standards Board (the “FASB”"FASB") and securities laws administered by the SEC and state securities authorities have an impact on the business of Trinity. The effect of these statutes, regulations, regulatory policies and accounting rules are significant to the operations and results of Trinity and the Bank, and the nature and extent of future legislative, regulatory or other changes affecting financial institutions are impossible to predict with any certainty.

 

This supervisory and regulatory framework subjects banks and bank holding companies to regular examination by their respective regulatory agencies, which results in examination reports and ratings that are not publicly available and that can impact the conduct and growth of their business. These examinations consider not only compliance with applicable laws and regulations, but also capital levels, asset quality and risk, management ability and performance, earnings, liquidity, and various other factors. The regulatory agencies generally have broad discretion to impose restrictions and limitations on the operations of a regulated entity where the agencies determine, among other factors, that such operations are unsafe or unsound, fail to comply with applicable law or are otherwise inconsistent with laws and regulations or with the supervisory policies of these agencies.

The following is a summary of the material elements of the supervisory and regulatory framework applicable to Trinity and the Bank.  It does not describe all of the statutes, regulations and regulatory policies that apply, nor does it restate all of the requirements of those that are described.  The descriptions are qualified in their entirety by reference to the particular statutory and regulatory provision.

Financial Regulatory Reform. On July 21, 2010, former President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”"Dodd-Frank Act") into law.  The Dodd-Frank Act represents a sweeping reform of the U.S. supervisory and regulatory framework applicable to financial institutions and capital markets in the wake of the global financial crisis, certain aspects of which are described below in more detail. In particular, and among other factors,, the Dodd-Frank Act: created a Financial Stability Oversight Council as part of a regulatory structure for identifying emerging systemic risks and improving interagency cooperation; created the CFPB, which is authorized to regulate providers of consumer credit, savings, payment and other consumer financial products and services; narrowed the scope of federal preemption of state consumer laws enjoyed by national banks and federal savings associations and expanded the authority of state attorneys general to bring actions to enforce federal consumer protection legislation; imposed more stringent capital requirements on bank holding companies and subjected certain activities, including interstate mergers and acquisitions, to heightened capital conditions; with respect to mortgage lending, (i) significantly expanded  requirements applicable to loans secured by 1-4 family residential real property, (ii) imposed strict rules on mortgage servicing, and (iii) required the originator of a securitized loan, or the sponsor of a securitization, to retain at least 5% of the credit risk of securitized exposures unless the underlying exposures are qualified residential mortgages or meet certain underwriting standards; repealed the prohibition on the payment of interest on business checking accounts; restricted the interchange fees payable on debit card transactions for issuers with $10 billion in assets or greater; in the so-called “Volcker"Volcker Rule,”" subject to numerous exceptions, prohibited depository institutions and affiliates from certain investments in, and sponsorship of, hedge funds and private equity funds and from engaging in proprietary trading; provided for enhanced regulation of advisers to private funds and of the derivatives markets; enhanced oversight of credit rating agencies; and prohibited banking agency requirements tied to credit ratings. These statutory changes shifted the regulatory framework for financial institutions, impacted the way in which they do business and have the potential to constrain revenues.

 

 

Trinity and Bank Required Capital Levels. Due to the risks to their business, depository institutions are generally required to hold more capital than other businesses, which directly affects earnings capabilities. While capital has historically been one of the key measures of the financial health of both bank holding companies and banks, its role is becominghas become fundamentally more important in the wake of the global financial crisis, as the banking regulators recognized that the amount and quality of capital held by banks prior to the crisis was insufficient to absorb losses during periods of severe stress.  Certain provisions of the Dodd-Frank Act and Basel III, discussed below, establish strengthened capital standards for banks and bank holding companies, require more capital to be held in the form of common stock and disallow certain funds from being included in capital determinations. Once fully implemented, these standards will represent regulatory capital requirements that are meaningfully more stringent than those in place historically.

 

 

Higher capital levels may also be required if warranted by the particular circumstances or risk profiles of individual banking organizations. For example, the FRB’sFRB's capital guidelines contemplate that additional capital may be required to take adequate account of, among other factors, interest rate risk, or the risks posed by concentrations of credit, nontraditional activities or securities trading activities. Further, any banking organization experiencing or anticipating significant growth would be expected to maintain capital ratios, including tangible capital positions (i.e., Tier 1 Capital less all intangible assets), well above the minimum levels.

 

As of December 31, 2015,2016, the Bank exceeded its minimum regulatory capital requirements under OCC capital adequacy guidelines.  However, as discussed under “–" The Bank – Enforcement Action,”" the Bank has agreed with the OCC to maintain certain heightened regulatory capital ratios.  As of December 31, 2015,2016, the Bank exceeded the heightened regulatory capital ratios to which it had agreed.  As of December 31, 2015,2016, Trinity had regulatory capital in excess of the FRB’s requirements and met theFRB, Dodd-Frank Act and Basel III requirements.

Basel III. After an extended rulemaking process that included a prolonged comment period, inIn July 2013, the U.S. federal banking agencies approved the implementation of the Basel III regulatory capital reforms in pertinent part, and, at the same time, promulgated rules effecting certain changes required by the Dodd-Frank Act (the “Basel"Basel III Rule”Rule").  In contrast to capital requirements historically, which were in the form of guidelines, Basel III was released in the form of regulations by each of the agencies.  The Basel III Rule became effective on January 1, 2015 and is applicable to all U.S. banks that are subject to minimum capital requirements, including federal and state banks and savings and loan associations, as well as to bank and savings and loan holding companies other than “small"small bank holding companies”companies" (generally bank holding companies with consolidated assets of less than $1 billion).

 

The Basel III Rule not only increases most of the required minimum capital ratios, but it introduces the concept of Common Equity Tier 1 Capital ("CET1"), which consists primarily of common stock, related surplus (net of Treasury stock), retained earnings, and Common Equity Tier 1CET1 minority interests subject to certain regulatory adjustments.  The Basel III Rule also expanded the definition of capital as in effect currentlyprior to January 1, 2015 by establishing more stringent criteria that instruments must meet to be considered Additional Tier 1 Capital (Tier 1 Capital in addition to Common Equity) and Tier 2 Capital.  A number of instruments that qualified as Tier 1 Capital prior to the Basel III Rule implementation do notno longer qualify as such, or their qualifications have changed. For example, cumulative preferred stock and certain hybrid capital instruments, including trust preferred securities, no longer qualify as Tier 1 Capital of any kind, with the exception, subject to certain restrictions, of such instruments issued before May 10, 2010, by bank holding companies with total consolidated assets of less than $15 billion as of December 31, 2009. For those institutions, trust preferred securities and other non-qualifying capital instruments currently included in consolidated Tier 1 Capital are permanently grandfathered under the Basel III Rule, subject to certain restrictions.   Noncumulative perpetual preferred stock, which now qualifies as simple Tier 1 Capital, will not qualify as Common Equity Tier 1 Capital,CET1, but will qualify as Additional Tier 1 Capital. The Basel III Rule also constrains the inclusion of minority interests, mortgage-servicing assets, and deferred tax assets in capital and requires deductions from Common Equity Tier 1 CapitalCET1 in the event such assets exceed a certain percentage of a bank’s Common Equity Tier 1 Capital.bank's CET1.

 

The Basel III Rule requires:

 

Trinity and the Bank areThe Basel III Rule also required to maintainimplements a “capital"capital conservation buffer”buffer" of 2.5% above the new regulatory minimum risk-based capital requirements. The purpose of the conservation buffer is to ensure that banks maintain a buffer of capital that can be used to absorb losses during periods of financial and economic stress.  The capital conservation buffer will beginbegan to be phased in beginning in January 2016 at 0.625% of risk-weighted assets and will increase by that amount each year until fully implemented in January 2019.  An institution would be subject to limitations on certain activities, including payment of dividends, share repurchases and discretionary bonuses to executive officers, if its capital level is below the buffered ratio. Factoring in the fully phased-in conservation buffer increases the minimum ratios described above to 7.0% for Common Equity Tier 1,CET1, 8.5% for Tier 1 Capital and 10.5% for Total Capital.

The Basel III Rule maintains the general structure of the current prompt corrective action framework, while incorporatingbut increases the increasedcapital level requirements. The prompt corrective action guidelines were also revised to add the Common Equity Tier 1CET1 Capital ratio.  In order to be a “well-capitalized”"well-capitalized" depository institution under the new regime, a bank must maintain a Common Equity Tier 1CET1 Capital ratio of 6.5% or more; a Tier 1 Capital ratio of 8.0% or more; a Total Capital ratio of 10.0% or more; and a leverage ratio of 5.0% or more.  ItHowever, these "well capitalized" capital requirements are less than the fully buffered risk-based capital ratios described above.  Accordingly, it is possible under the Basel III Rule to be well-capitalized while remainingyet still be out of compliance with the capital conservation bufferfully phased in buffered ratios discussed above.

 

The Basel III Rule also revises a number of the risk weightings (or their methodologies) for bank assets that are used to determine the capital ratios. For nearly every class of assets, the Basel III Rule requires a more complex, detailed and calibrated assessment of credit risk and calculation of risk weightings. While Basel III would have changed the risk-weighting for residential mortgage loans based on loan-to-value ratios and certain product and underwriting characteristics, there was concern in the United States that the proposed methodology for risk weighting residential mortgage exposures and the higher risk weightings for certain types of mortgage products would increase costs to consumers and reduce their access to mortgage credit. As a result, the Basel III Rule does not effect this change, and banks will continue to apply a risk weight of 50% or 100% to their exposure from residential mortgages, with the risk weighting depending on, among other factors, whether the mortgage was a prudently underwritten first lien mortgage.

 

Furthermore, there was significant concern noted by the financial industry in connection with the Basel III rulemaking as to the proposed treatment of accumulated other comprehensive income (“AOCI”). Basel III requires unrealized gains and losses on available-for-sale securities to flow through to regulatory capital as opposed to the current treatment, which neutralizes such effects.  Recognizing the problem for community banks, the U.S. bank regulatory agencies adopted theThe Basel III Rule withprovided for a one-time election for smaller institutions like Trinity and the Bank to opt out of including most elements of AOCIaccumulated other comprehensive income ("AOCI") in regulatory capital.  This opt-out, which was required to be made in the first quarter of 2015, excluded from regulatory capital both unrealized gains and losses on available-for-sale debt securities and accumulated net gains and losses on cash-flow hedges and amounts attributable to defined benefit post-retirement plans. Trinity made the opt-out election in the first quarter of 2015.

 

 

 

General.  Trinity, as the sole stockholder of the Bank, is a bank holding company.  As a bank holding company, Trinity is registered with, and is subject to regulation and examination by, the FRB under the BHCA.  In accordance with FRB policy, and as now codified by the Dodd-FrankBank Holding Company Act Trinity is legally obligated to act as a source of financial strength to the Bank and to commit resources to support the Bank in circumstances where Trinity might not otherwise do so.("BHCA").  Trinity is required to file with the FRB periodic reports of Trinity’sTrinity's operations and such additional information regarding Trinity and its subsidiaries as the FRB may require.

 

Enforcement Action.  On September 26, 2013, the FRB entered into a Written Agreement with Trinity (the “Written Agreement”"Written Agreement").  The Written Agreement requires Trinity to serve as a source of strength to the Bank and restricts Trinity’sTrinity's ability to issue dividends and other capital distributions and to repurchase or redeem any Trinity stock without the prior written approval of the FRB.  The Written Agreement further requires that Trinity implement a capital plan, subject to approval by the FRB, and submit cash flow projections to the FRB.  Finally, the Written Agreement requires Trinity to comply with all applicable laws and regulations and to provide quarterly progress reports to the FRB.

 

Because Trinity is deemed to be in “troubled condition”"troubled condition" by virtue of the Written Agreement, it also is required to: (i) obtain the prior approval of the FRB for the appointment of new directors and the hiring or promotion of senior executive officers; and (ii) comply with restrictions on severance payments and indemnification payments to institution-affiliated parties.

Acquisitions, Change in Control, and Activities.  The primary purpose of a bank holding company is to control and manage banks.  The BHCA generally requires the prior approval of the FRB for any merger involving a bank holding company or any acquisition by a bank holding company of another bank or bank holding company.  Subject to certain conditions (including deposit concentration limits established by the BHCA and the Dodd-Frank Act), the FRB may allow a bank holding company to acquire banks located in any state of the United States. In approving interstate acquisitions, the FRB is required to give effect to applicable state law limitations on the aggregate amount of deposits that may be held by the acquiring bank holding company and its insured depository institution affiliates in the state in which the target bank is located (provided that those limits do not discriminate against out-of-state depository institutions or their holding companies) and state laws that require the target bank be in existence for a minimum period of time (not to exceed five years) before being acquired by an out-of-state bank holding company.  Furthermore, in accordance with the Dodd-Frank Act, bank holding companies must be well-capitalized and well-managed in order to effect interstate mergers or acquisitions.

Under the BHCA, any company must obtain approval of the FRB or, acting under delegated authority, the appropriate Federal Reserve Bank, prior to acquiring control of Trinity or the Bank.  For purposes of the BHCA, “control”"control" is defined as ownership of 25% or more of any class of voting securities of Trinity or the Bank, the ability to control the election of a majority of the directors, or exercise of a controlling influence over management or policies of Trinity or the Bank.

The Change in Bank Control Act, as amended (the “CIBC”"CIBC"), and the related regulations of the FRB require any person or groups of persons acting in concert (except for companies required to make application under the BHCA), to file a written notice with the FRB or, acting under delegated authority, the appropriate Federal Reserve Bank, before the person or group acquires control of Trinity. The CIBC defines “control”"control" as the direct or indirect power to vote 25% or more of any class of voting securities or to direct the management or policies of a bank holding company or an insured bank. A rebuttable presumption of control arises under the CIBC where a person or group controls 10% or more, but less than 25%, of a class of the voting stock of a company or insured bank which is a reporting company under the Exchange Act, such as Trinity, or such ownership interest is greater than the ownership interest held by any other person or group.

The BHCA generally prohibits Trinity from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company that is not a bank and from engaging in any business other than that of banking, managing and controlling banks or furnishing services to banks and their subsidiaries.  This general prohibition is subject to a number of exceptions. The principal exception allows bank holding companies to engage in, and to own shares of companies engaged in, certain businesses found by the FRB prior to November 11, 1999 to be “so"so closely related to banking ... as to be a proper incident thereto.”"  This authority would permit Trinity to engage in a variety of banking-related businesses, including the ownership and operation of a savings association, or any entity engaged in consumer finance, equipment leasing, the operation of a computer service bureau (including software development) and mortgage banking and brokerage. The BHCA generally does not place territorial restrictions on the domestic activities of non-bank subsidiaries of bank holding companies.

Additionally, bank holding companies that meet certain eligibility requirements prescribed by the BHCA and elect to operate as financial holding companies may engage in, or own shares in companies engaged in, a wider range of nonbanking activities, including securities and insurance underwriting and sales, merchant banking and any other activity that the FRB, in consultation with the Secretary of the Treasury, determines by regulation or order is financial in nature or incidental to any such financial activity or that the FRB determines by order to be complementary to any such financial activity and does not pose a substantial risk to the safety or soundness of depository institutions or the financial system generally.  Trinity does not currently operate as a financial holding company.

Dividend Payments.  In addition to applicable restrictions in the Written Agreement, Trinity’sTrinity's ability to pay dividends to its stockholders also may be affected by both general corporate law considerations and policies of the FRB applicable to bank holding companies. New Mexico law prohibits Trinity from paying dividends if, after giving effect to the dividend: (i) Trinity would be unable to pay its debts as they become due in the usual course of its business; or (ii) Trinity’sTrinity's total assets would be less than the sum of its total liabilities and (unless Trinity’sTrinity's articles of incorporation otherwise permit) the maximum amount that then would be payable, in any liquidation, in respect of all outstanding shares having preferential rights in liquidation.

As a general matter, the FRB has indicated that the board of directors of a bank holding company should eliminate, defer or significantly reduce dividends to stockholders if:  (i) the company’scompany's net income available to stockholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends; (ii) the prospective rate of earnings retention is inconsistent with the company’scompany's capital needs and overall current and prospective financial condition; or (iii) the company will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios. The FRB also possesses enforcement powers over bank holding companies and their non-bank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations.  Among these powers is the ability to proscribe the payment of dividends by banks and bank holding companies.  As discussed above in “Trinity – Enforcement Action,” the Written Agreement restricts the ability of Trinity to pay dividends without FRB approval.

 

Source of Strength.  Under the FRB's “source-of-strength”"source-of-strength" doctrine, a bank holding company is required to act as a source of financial and managerial strength to any of its subsidiary banks. The holding company is expected to commit resources to support a subsidiary bank, including at times when the holding company may not be in a financial position to provide such support. A bank holding company's failure to meet its source-of-strength obligations may constitute an unsafe and unsound practice or a violation of the FRB's regulations, or both. The source-of-strength doctrine most directly affects bank holding companies in situations where the bank holding company's subsidiary bank fails to maintain adequate capital levels. This doctrine was codified by the Dodd-Frank Act, but the FRB has not yet adopted regulations to implement this requirement.

Federal Securities Regulation.  Trinity’sTrinity's common stock is registered with the SEC under the Securities Act of 1933, as amended, and the Exchange Act. Consequently, Trinity is subject to the information, proxy solicitation, insider trading and other restrictions and requirements of the SEC under the Exchange Act.

In June 2010, the Federal Reserve, OCC, and FDIC issued comprehensive final guidance on incentive compensation policies intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. The guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon the key principles that a banking organization's incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the organization's ability to effectively identify and manage risks; (ii) be compatible with effective internal controls and risk management; and (iii) be supported by strong corporate governance, including active and effective oversight by the organization's board of directors.

In addition, Section 956 of the Dodd-Frank Act addresses many investor protections, corporate governancerequired certain regulators (including the FDIC, SEC and executive compensation matters that will affect most U.S. publicly traded companies.  The Dodd-Frank Act will increase stockholder influence over boards of directorsFederal Reserve) to adopt requirements or guidelines prohibiting excessive compensation. In May 2016, the federal banking regulators, joined by requiring companies to give stockholders a non-binding vote on executive compensation and so-called “golden parachute” payments, and authorizing the SEC, proposed such a rule that is tailored based on the asset size of the institution.  All covered financial institutions would be subject to promulgate rulesa prohibition on paying compensation, fees, and benefits that wouldare "unreasonable" or "disproportionate" to the value of the services performed by a person covered by the proposed rule (generally, senior executive officers and employees who are significant risk-takers).  Moreover, the proposed rule includes a new requirement which provides that an incentive-based compensation arrangement must (i) include financial and non-financial measures of performance, (ii) be designed to allow stockholdersnon-financial measures of performance to nominateoverride financial measures of performance, when appropriate (so called safety and solicit voters for their own candidates using a company’s proxy materials. The legislation also directs the FRBsoundness factors), and (iii) be subject to promulgate rules prohibiting excessive compensation paidadjustment to executivesreflect actual losses, inappropriate risk taking, compliance deficiencies, or other measures or aspects of bank holding companies, regardless of whether such companies are publicly traded.financial and non-financial performance.

 

General.  The Bank is a national bank, chartered by the OCC under the National Bank Act.  The deposit accounts of the Bank are insured by the FDIC’sFDIC's Deposit Insurance Fund (the “DIF”"DIF") to the maximum extent provided under federal law and FDIC regulations, and the Bank is a member of the Federal Reserve System.  As a national bank, the Bank is subject to the examination, supervision, reporting and enforcement requirements of the OCC. The FDIC, as administrator of the DIF, also has regulatory authority over the Bank.  The Bank is also a member of the Federal Home Loan Bank System, which provides a central credit facility primarily for member institutions.

 

Enforcement Actions.  On November 30, 2012, the Bank entered into a Formal Agreement with the OCC (the “Formal Agreement”"Formal Agreement"). On December 17, 2013, the Bank entered into a Consent Order with the OCC (the “Consent Order”"Consent Order").  The focus of the Consent Order, which terminated the Bank’sBank's Formal Agreement, is on improving the Bank’sBank's credit administration, credit underwriting, internal controls, compliance and management supervision.  Additionally, the Consent Order requires that the Bank maintain certain capital ratios and receive approval of the OCC prior to declaring dividends.  The Consent Order requires the Bank to maintain the following minimum capital ratios: (i) a Tier 1 leverage ratio of at least 8%; and (ii) a Total risk-based capital ratio of at least 11%.  This requirementBeing subject to meet and maintain a specific capital level in the Consent Order means that the Bank may not be deemed to be “well capitalized”"well capitalized" under the prompt corrective action rules.

 

Because the Bank is deemed to be in “troubled condition”"troubled condition" by virtue of the Consent Order, it also is required to: (i) obtain the prior approval of the OCC for the appointment of new directors and the hiring or promotion of senior executive officers; and (ii) comply with restrictions on severance payments and indemnification payments to institution-affiliated parties.

 

Deposit Insurance.  The Dodd-Frank Act permanently increasesincreased the maximum amount of deposit insurance for bank, savings institutions, and credit unions to $250,000 per insured depositor, retroactive to January 1, 2009.  As an FDIC-insured institution, the Bank is required to pay deposit insurance premium assessments to the FDIC.  The FDIC has adopted a risk-based assessment system whereby FDIC-insured depository institutions pay insurance premiums at rates based on their risk classification.  An institution’sinstitution's risk classification is assigned based on its capital levels and the level of supervisory concern the institution poses to the regulators.

Under the Federal Deposit Insurance Act an institution’sinstitution's assessment base is calculated based on its average consolidated total assets less its average tangible equity. This may shift the burden of deposit insurance premiums toward those large depository institutions that rely on funding sources other than U.S. deposits.  Additionally, the Dodd-Frank Act makes changes to the minimum designated reserve ratio of the DIF, increasing the minimum from 1.15% to 1.35% of the estimated amount of total insured deposits, requires large institutions to bear the burden of raising the reserve ratio from 1.15% to 1.35%, and eliminating the requirement that the FDIC pay dividends to depository institutions when the reserve ratio exceeds certain thresholds.  The FDIC has until September 3, 2020 to meet the 1.35% reserve ratio target. Several of these provisions could increaseThe reserve ratio reached 1.15% effective June 30, 2016.  Lower rates, surcharges, and new pricing became effective July 1, 2016 and those appeared on the Bank’s FDIC deposit insurance premiums.December 30, 2016 invoice.

In addition, all FDIC-insured institutions are required to pay assessments to the FDIC to fund interest payments on bonds issued by the Financing Corporation (“FICO”("FICO"), an agency of the federal government established to recapitalize the predecessor to the DIF. These assessments, which are included in Deposit Insurance Premiums on the Consolidated Statements of Income, will continue until the FICO bonds mature between 2017 and 2019.

 

Supervisory Assessments.  National banks are required to pay supervisory assessments to the OCC to fund the operations of the OCC.  The amount of the assessment is calculated using a formula that takes into account the bank’sbank's size and its supervisory condition.  During the years ended December 31, 20152016 and 2014,2015, the Bank paid supervisory assessments to the OCC totaling $648$720 thousand and $662$648 thousand, respectively.

 

Dividend Payments.  The primary source of funds for Trinity is dividends from the Bank.  Under the National Bank Act, a national bank may pay dividends out of its undivided profits in such amounts and at such times as the bank’sbank's board of directors deems prudent.  Without prior OCC approval, however, a national bank may not pay dividends in any calendar year that, in the aggregate, exceed the bank’sbank's year-to-date net income plus the bank’sbank's retained net income for the two preceding years.

The payment of dividends by any financial institution is affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations, and a financial institution generally is prohibited from paying any dividends if, following payment thereof, the institution would be undercapitalized.

 

The Bank may not pay any dividend unless it complies with certain provisions of the Consent Order and receives a prior written determination of no supervisory objection from the OCC.

 

Insider Transactions.  The Bank is subject to certain restrictions imposed by federal law on “covered transactions”"covered transactions" between the Bank and its “affiliates.”"affiliates." Trinity is an affiliate of the Bank for purposes of these restrictions, and covered transactions subject to the restrictions include extensions of credit to Trinity, investments in the stock or other securities of Trinity and the acceptance of the stock or other securities of Trinity as collateral for loans made by the Bank.  The Dodd-Frank Act enhances the requirements for certain transactions with affiliates as of July 21, 2011, including an expansion of the definition of “covered transactions”"covered transactions" and an increase in the amount of time for which collateral requirements regarding covered transactions must be maintained.

Certain limitations and reporting requirements are also placed on extensions of credit by the Bank to its directors and officers, to directors and officers of Trinity and its subsidiaries, to principal stockholders of Trinity and to “related interests”"related interests" of such directors, officers and principal stockholders.  In addition, federal law and regulations may affect the terms upon which any person who is a director or officer of Trinity or the Bank, or a principal stockholder of Trinity, may obtain credit from banks with which the Bank maintains a correspondent relationship.

Safety and Soundness Standards/ Risk Management.  The federal banking agencies have adopted guidelines that establish operational and managerial standards to promote the safety and soundness of federally insured depository institutions.  The guidelines set forth standards for internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, asset quality and earnings.

In general, the safety and soundness guidelines prescribe the goals to be achieved in each area, and each institution is responsible for establishing its own procedures to achieve those goals.  If an institution fails to comply with any of the standards set forth in the guidelines, the institution’sinstitution's primary federal regulator may require the institution to submit a plan for achieving and maintaining compliance. If an institution fails to submit an acceptable compliance plan, or fails in any material respect to implement a compliance plan that has been accepted by its primary federal regulator, the regulator is required to issue an order directing the institution to cure the deficiency. Until the deficiency cited in the regulator’sregulator's order is cured, the regulator may restrict the institution’sinstitution's rate of growth, require the institution to increase its capital, restrict the rates the institution pays on deposits or require the institution to take any action the regulator deems appropriate under the circumstances. Noncompliance with the standards established by the safety and soundness guidelines may also constitute grounds for other enforcement action by the federal banking regulators, including cease and desist orders and civil money penalty assessments.

During the past decade, the bank regulatory agencies have increasingly emphasized the importance of sound risk management processes and strong internal controls when evaluating the activities of the institutions they supervise.  Properly managing risks has been identified as critical to the conduct of safe and sound banking activities and has become even more important as new technologies, product innovation, and the size and speed of financial transactions have changed the nature of banking markets.  The agencies have identified a spectrum of risks facing a banking institution including, but not limited to, credit, market, liquidity, operational, legal, and reputational risk. In particular, recent regulatory pronouncements have focused on operational risk, which arises from the potential that inadequate information systems, operational problems, breaches in internal controls, fraud, or unforeseen catastrophes will result in unexpected losses. The Bank is expected to have active board and senior management oversight; adequate policies, procedures, and limits; adequate risk measurement, monitoring, and management information systems; and comprehensive internal controls.

 

Branching Authority. National banks headquartered in New Mexico, such as the Bank, have the same branching rights in New Mexico as banks chartered under New Mexico law, subject to OCC approval.  New Mexico law grants New Mexico-chartered banks the authority to establish branches anywhere in the State of New Mexico, subject to receipt of all required regulatory approvals.

 

 

Federal Home Loan Bank System.  The Bank is a member of the Federal Home Loan Bank of Dallas (the “FHLB”"FHLB"), which serves as a central credit facility for its members. The FHLB is funded primarily from proceeds from the sale of obligations of the FHLB system. It makes loans to member banks in the form of FHLB advances. All advances from the FHLB are required to be fully collateralized as determined by the FHLB.

 

Community Reinvestment Act Requirements.  The Community Reinvestment Act requires the Bank to help meet the credit needs of its entire community, including low- and moderate-income neighborhoods.  Federal regulators regularly assess the Bank’sBank's record of meeting the credit needs of its communities. Applications for additional acquisitions would be affected by the evaluation of the Bank’sBank's effectiveness in meeting its Community Reinvestment Act obligations.

 

Anti-Money Laundering and Know-Your-Customer.  The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “Patriot Act”"Patriot Act") is designed to deny terrorists and criminals the ability to obtain access to the U.S. financial system and has significant implications for depository institutions, brokers, dealers and other businesses involved in the transfer of money. The Patriot Act mandates financial services companies to have policies and procedures with respect to measures designed to address any or all of the following matters: (i) customer identification programs; (ii) money laundering; (iii) terrorist financing; (iv) identifying and reporting suspicious activities and currency transactions; (v) currency crimes; and (vi) cooperation between financial institutions and law enforcement authorities.  TheIn addition, on May 10, 2016, the Financial Crimes Enforcement Network has proposed new regulations that would requireissued a final rule regarding customer due diligence requirements for covered financial institutions in connection with their Bank Secrecy Act and Anti-Money Laundering policies.  The final rule has a requirement to obtain beneficial ownership information for certain accounts, however, it has yet to establish final regulations on this topic.understand the nature and purpose of customer relationships and identify the "beneficial owner" of legal entity customers.  The formal implementation date is May 11, 2018.

 

Bank Secrecy Act, Anti-Money Laundering and Know-Your-Customer.Act.  Trinity and the Bank are also subject to the Bank Secrecy Act, as amended by the USA PATRIOT Act, which gives the federal government powers to address money laundering and terrorist threats through enhanced domestic security measures, expanded surveillance powers, and mandatory transaction reporting obligations. The Bank Secrecy Act imposes an affirmative obligation on the Bank to report currency transactions that exceed certain thresholds and to report other transactions determined to be suspicious. The Bank Secrecy Act requires that all banking institutions develop and provide for the continued administration of a program reasonably designed to assure and monitor compliance with certain recordkeeping and reporting requirements regarding both domestic and international currency transactions. These programs must, at a minimum, provide for a system of internal controls to assure ongoing compliance, provide for independent testing of such systems and compliance, designate individuals responsible for such compliance and provide appropriate personnel training.

 

Commercial Real Estate Guidance.  The interagency Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices guidance (“("CRE Guidance”Guidance") provides supervisory criteria, including the following numerical indicators, to assist bank examiners in identifying banks with potentially significant commercial real estate loan concentrations that may warrant greater supervisory scrutiny: (i) commercial real estate loans exceeding 300% of capital and increasing 50% or more in the preceding three years; or (ii) construction and land development loans exceeding 100% of capital. The CRE Guidance does not limit banks’banks' levels of commercial real estate lending activities, but rather guides institutions in developing risk management practices and levels of capital that are commensurate with the level and nature of their commercial real estate concentrations. Based on the Bank’sBank's current loan portfolio, the Bank does not exceed these guidelines. On December 18, 2015, the federal banking agencies jointly issued a “Statement"Statement on Prudent Risk Management for Commercial Real Estate Lending”Lending" reminding banks of the need to engage in risk management practices for commercial real estate lending.

 

Consumer Financial Protection Bureau. The CFPB was created under the Dodd-Frank Act to centralize responsibility for consumer financial protection with broad rulemaking, supervision and enforcement authority for a wide range of consumer protection laws that would apply to all banks and thrifts, including the Equal Credit Opportunity Act, Truth-in Lending Act (“TILA”("TILA"), Real Estate Settlement Procedures Act (“RESPA”("RESPA"), Fair Credit Reporting Act, Fair Debt Collection Act, the Consumer Financial Privacy provisions of the Gramm-Leach-Bliley Act and certain other statutes. Banking institutions with total assets of $10 billion or less, such as the Bank, remain subject to the supervision and enforcement of their primary federal banking regulator with respect to the federal consumer financial protection laws and such additional regulations as may be adopted by the CFPB.

 

Effective January 10, 2013, the CFPB released its final “Ability-to-Repay/"Ability-to-Repay/Qualified Mortgage”Mortgage" rules, which amended TILA’sTILA's implementing regulation, Regulation Z. Regulation Z currently prohibits a creditor from making a higher-priced mortgage loan without regard to the consumer's ability to repay the loan. The final rule implements sections 1411 and 1412 of the Dodd-Frank Act, which generally require creditors to make a reasonable, good faith determination of a consumer's ability to repay any consumer credit transaction secured by a dwelling (excluding an open-end credit plan, timeshare plan, reverse mortgage, or temporary loan) and establishes certain protections from liability under this requirement for “qualified"qualified mortgages.”" The final rule also implements section 1414 of the Dodd-Frank Act, which limits prepayment penalties. Finally, the final rule requires creditors to retain evidence of compliance with the rule for three years after a covered loan is consummated. This rule became effective January 10, 2014. The CFPB allowed for a small creditor exemption for banks with assets under $2 billion and that originate less than 500 mortgage loans in 2015. BeginningAs of January 1, 2016, the small creditor exemption will be allowed forwas extended to banks with assets under $2 billion and that originate less than 2,000 mortgage loans.

 

On November 20, 2013, pursuant to section 1032(f) of the Dodd-Frank Act, the CFPB issued the Know Before You Owe TILA/RESPA Integrated Disclosure Rule (“TRID”("TRID"), which combined the disclosures required under TILA and sections 4 and 5 of RESPA, into a single, integrated disclosure for mortgage loan transactions covered by those laws. TRID, which requires the use of a Loan Estimate that must be delivered or placed in the mail no later than the third business day after receiving the consumer’sconsumer's application and a Closing Disclosure that must be provided to the consumer at least three business days prior to consummation, became effective for applications received on or after October 3, 2015 for applicable closed-end consumer credit transactions secured by real property. Creditors must only use the Loan Estimate and Closing Disclosure forms for mortgage loan transactions subject to TRID. All other mortgage loan transactions continue to use the Good Faith Estimate and the Initial Truth-in-Lending Disclosure at application and the HUD-1 Settlement Statement and the Final Truth-in-Lending Disclosure at closing. TRID also has changed the scope of transactions applicable, and adjusted thenew tolerance requirements and record retention requirements. Of note, the creditor must retain evidence of compliance with the Loan Estimate requirements, including providing the Loan Estimate, and the Closing Disclosure requirements for three years after the later of the date of consummation, the date disclosures are required to be made or the date the action is required to be taken. Additionally, the creditor must retain copies of the Closing Disclosure, including all documents related to the Closing Disclosure, for five years after consummation.

Foreclosure and Loan Modifications. Federal and state laws further impact foreclosures and loan modifications, with many of such laws having the effect of delaying or impeding the foreclosure process on real estate secured loans in default. Mortgages on commercial property can be modified, such as by reducing the principal amount of the loan or the interest rate, or by extending the term of the loan, through plans confirmed under Chapter 11 of the Bankruptcy Code. In recent years, legislation has been introduced in the U.S. Congress that would amend the Bankruptcy Code to permit courts to modify mortgages secured by residences, although at this time the enactment of such legislation is not presently proposed. The scope, duration and terms of potential future legislation with similar effect continue to be discussed. Trinity cannot predict whether any such legislation will be passed or the impact, if any, it would have on Trinity’sTrinity's business.

 

Servicing.  OnEffective January 17, 2013, the CFPB announced rules to implement certain provisions of the Dodd-Frank Act relating to mortgage servicing. The new10, 2014, servicing rules require servicers to meet certain benchmarks for loan servicing and customer service in general.  Servicers must provide periodic billing statements and certain required notices and acknowledgments, promptly credit borrowers’borrowers' accounts for payments received and promptly investigate complaints by borrowers and are required to take additional steps before purchasing insurance to protect the lender’slender's interest in the property.  The servicing rules also call for additional notice, review and timing requirements with respect to delinquent borrowers, including early intervention, ongoing access to servicer personnel and specific loss mitigation and foreclosure procedures.  The rules provide for an exemption from most of these requirements for “small"small servicers.”" A small servicer is defined as a loan servicer that services 5,000 or fewer mortgage loans and services only mortgage loans that they or an affiliate originated or own. The servicing rules took effect on January 10, 2014.

 

 

Monetary Policy. The monetary policy of the FRB has a significant effect on the operating results of financial or bank holding companies and their subsidiaries. Among the tools available to the FRB to affect the money supply are open market transactions in U.S. government securities, changes in the discount rate on member bank borrowings and changes in reserve requirements against member bank deposits. These means are used in varying combinations to influence overall growth and distribution of bank loans, investments and deposits, and their use may affect interest rates charged on loans or paid on deposits.

 

Our business, financial condition and results of operations are subject to various risks, including those discussed below. The risks discussed below are those that we believe are the most significant risks, although additional risks not presently known to us or that we currently deem less significant may also adversely affect our business, financial condition and results of operations, perhaps materially.  The risks discussed below also include forward-looking statements, and our actual results may differ substantially from those discussed in these forward-looking statements.   In addition to the other information in this Form 10-K and our other filings with the SEC, stockholders or prospective investors should carefully consider the following risk factors:

We have identified various material weaknesses in our internal control over financial reporting which have materially adversely affected our ability to timely and accurately report our results of operations and financial condition. These material weaknesses have not been fully remediated as of the filing date of this Form 10-K and we cannot ensure that other material weaknesses will not be identified in the future.  Discussed under Part II, Item 9A “Controls"Controls and Procedures,”" we concluded that, as of and for the year ended December 31, 2015,2016, we had material weaknesses in our internal control over financial reporting and that, as a result, our disclosure controls and procedures and our internal control over financial reporting were not effective at such dates.date. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting that creates a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected on a timely basis.  See Part II, Item 9A “Controls"Controls and Procedures”Procedures" for a detailed discussion of the material weaknesses identified and related remedial activities. Management anticipates that these remedial actions, and further actions that are being developed, will strengthen the Company’sCompany's internal control over financial reporting and will, over time, address the material weaknesses that were identified.  Because some of these remedial actions will take place on a quarterly or annual basis, their successful implementation will continue to be evaluated before management is able to conclude that these material weaknesses have been remediated.  The Company cannot provide any assurance that these remediation efforts will be successful or that the Company’sCompany's internal control over financial reporting will be effective as a result of these efforts.  Moreover, we cannot assure you that additional material weaknesses in our internal control over financial reporting will not arise or be identified in the future.

As the Laboratory is the largest employer in Northern New Mexico, its health is central to the economic health of both Northern and Central New Mexico.  The main indicator of the Laboratory’sLaboratory's health is its funding.  The Laboratory’sLaboratory's funding is primarily based and dependent upon the federal government’sgovernment's budgeting process.  As such, funding is not certain and can be delayed and influenced, both negatively and positively, by international, national, state and local events and circumstances beyond the Laboratory’sLaboratory's control.  Additionally, the Laboratory’sLaboratory's funding can be influenced by both positive and negative events and circumstances influenced by the Laboratory. The Laboratory received from the Department of Energy (the Laboratory’sLaboratory's largest single historical source of funding) funding of $2.2 billion for its fiscal year 2016.  The fiscal year 2017 budget request is for $2.1 billion, a 4.4% decrease over the 2016 funding.  Any material fluctuation or delay in the Laboratory’sLaboratory's funding may affect our customers’customers' business and financial interests, adversely affect economic conditions in our market area, affect the ability of our customers to repay their loans to us and generally affect our financial condition and results of operations.

Our risk management processes may not fully identify and mitigate exposure to the various risks that we face, including interest rate, credit, liquidity and market risk.  We continue to refine our risk management techniques, strategies and assessment methods on an ongoing basis.  However, risk management techniques and strategies, both ours and those available to the market generally, may not be fully effective in mitigating our risk exposure in all economic market environments or against all types of risk.  For example, we might fail to identify or anticipate particular risks, or the systems that we use, and that are used within our business segments generally, may not be capable of identifying certain risks. Certain of our strategies for managing risk are based upon our use of observed historical market behavior.  We apply statistical and other tools to these observations to quantify our risk exposure.  Any failures in our risk management techniques and strategies to accurately identify and quantify our risk exposure could limit our ability to manage risks.  In addition, any risk management failures could cause our losses to be significantly greater than the historical measures indicate.  Further, our quantified modeling does not take all risks into account.  As a result, we also take a qualitative approach in reducing our risk.  Our qualitative approach to managing those risks could also prove insufficient, exposing us to material unanticipated losses.

We must effectively manage our credit risk, including risks specific to real estate value due to the large concentration of real estate loans in our loan portfolio. There are risks inherent in making any loan, including risks of nonpayment, risks resulting from uncertainties as to the future value of collateral and risks resulting from changes in economic and industry conditions.  The Loan Department of the Bank has been and remains focused on improving processes and controls to minimize our credit risk through prudent loan underwriting procedures, monitoring of the concentration of our loans within specific industries, monitoring of our collateral values and market conditions, stress testing and periodic independent reviews of outstanding loans performed by a third-party as well as external auditors.  However, we cannot assure such approval and monitoring procedures will eliminate these credit risks. If the overall economic climate in the United States, generally, and our market areas, specifically, do not continue to improve, our borrowers may experience difficulties in repaying their loans, and the level of non-performing loans, charge-offs and delinquencies could rise and require increases in the provision for loan losses, which would cause our net income and return on equity to decrease.

Real estate lending (including commercial, construction and residential) is a large portion of our loan portfolio.  These categories constitute approximately $720$695 million (85.5%(88.3%) of our total loan portfolio as of December 31, 2015.2016.  The fair value of real estate can fluctuate significantly in a short period of time as a result of market conditions in the geographic area in which the real estate is located.  Although a significant portion of such loans is secured by real estate, adverse developments affecting real estate values in one or more of our markets could increase the credit risk associated with our loan portfolio.  Additionally, commercial real estate lending typically involves larger loan principal amounts and the repayment of the loans generally is dependent, in large part, on sufficient income from the properties securing the loans to cover operating expenses and debt service.  Economic events or governmental regulations outside of the control of the borrower or lender could negatively impact the future cash flow and fair values of the affected properties.

The Bank’sBank's residential mortgage loan operations include origination, sale and servicing.  The Bank’sBank's residential mortgage loan portfolio does not include subprime mortgages and contains a limited number of non-traditional residential mortgages.  The Bank employs underwriting standards that it believes are in line with industry norms in making residential mortgage loans.  The Bank purchased mortgage-backed securities in the past several years based upon the returns and quality of these assets.  Neither Trinity nor the Bank engaged in the packaging and selling of loan pools, such as collateralized debt obligations, structured investment vehicles, or other instruments which contain subprime mortgage loans and have seen significant losses in value.  As such, Trinity does not foresee any charge-offs, write-downs or other losses outside the ordinary course of business with respect to our residential mortgage operations.  The majority of the residential mortgage loans originated by the Bank are sold to third-party investors, primarily to Fannie Mae.Mae.  The Bank continues to service the majority of loans that are sold to third-party investors, to provide a continuing source of income through mortgage servicing right (“MSR”("MSR") fees, although moving forward the Bank will not service as many of the loans that it sells to third parties.

If loans collateralized by real estate become troubled during a time when market conditions are declining or have declined, we may not be able to realize the amount of security anticipated at the time of originating the loan, which could cause us to increase our provision for loan losses and adversely affect our operating results and financial condition.  To mitigate such risk, we employ the use of independent third parties to conduct appraisals on our real estate collateral and adhere to limits set on the percentages for the loan amount to the appraised value of the collateral.  We continually monitor the real estate markets and economic conditions in the areas in which our loans are concentrated.

Our ability to continue extensive residential real estate lending in our market area is heavily dependent on building and retaining relationships with non-affiliate mortgage lenders.  As of December 31, 2015,2016, the Bank serviced a total of approximately $865.6$780.3 million in loans that were sold to Fannie Mae,, in addition to the approximately $258.6$214.7 million in residential real estate loans maintained on the balance sheet.  For many years, the Bank sold the majority of the residential real estate loans it generated to Fannie Mae on a servicing retained basis.  However, beginning in late 2015, the Bank began moving toward a strategy to sell most newly originated mortgages with servicing released.   In 2016, the Bank made a further strategy change to generate applications for non-affiliated mortgage companies on a fee basis.  These changes in strategy were primarily based upon new compliance requirements and capital treatment related to residential mortgage loans. If we are unable to identify new partners or fund the loans on our balance sheet, it could have the effect of limiting the Company’sCompany's fees associated with originating  such loans.loans, which in turn could adversely affect our business, financial condition and results of operations.

Our construction and development loans are based upon estimates of costs and value associated with the completed project. These estimates may be inaccurate and we may be exposed to more losses on these projects than on other loans. As of December 31, 2015,2016, construction loans, including land acquisition and development, totaled $89.3$76.0 million, or 10.6%9.7%, of our total loan portfolio.  Construction, land acquisition and development lending involve additional risks because funds are advanced based upon the value of the project, which is of uncertain value prior to its completion.  Because of the uncertainties inherent in estimating construction costs, as well as the fair value of the completed project and the effects of governmental regulation of real property and the general effects of the national and local economies, it is relatively difficult to evaluate accurately the total funds required to complete a project and the related loan-to-value ratio.  As a result, construction loans often involve the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project and the ability of the borrower to sell or lease the property, rather than the ability of the borrower or guarantor to repay principal and interest.  If our appraisal of the value of the completed project proves to be overstated, we may have inadequate security for the repayment of the loan upon completion of construction of the project.  If we are forced to foreclose on a project prior to or at completion due to a default, there can be no assurance that we will be able to recover all of the unpaid balance of, and accrued interest on, the loan as well as related foreclosure, sale and holding costs.  In addition, we may be required to fund additional amounts to complete the project and may have to hold the property for an unspecified period of time.

We maintain an allowance for loan losses, which is a reserve established through a provision for loan losses charged to expense, that we believe is appropriate to provide for probable incurred losses in our loan portfolio.  The amount of this allowance is determined by our management through a periodic review and consideration of several factors, including, but not limited to:

The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and requires us to make significant estimates of current credit risks and future trends, all of which may undergo material changes.   A deterioration or lack of improvement in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of our control, may require an increase in the allowance for loan losses.  In addition, bank regulatory agencies periodically review our allowance for loan losses and may require an increase in the provision for possible loan losses or the recognition of further loan charge-offs, based on judgments different than those of management.  In addition, if charge-offs in future periods exceed the allowance for loan losses, we will need additional provisions to increase the allowance for loan losses.  Any increases in the allowance for loan losses will result in a decrease in net income and, possibly, capital, and may have a material negative effect on our financial condition and results of operations.

Our ability to attract and retain management and key personnel may affect future growth and earnings, and legislation imposing compensation restrictions could adversely affect our ability to do so. Much of our future success will be strongly influenced by our ability to attract and retain management experienced in banking and financial services and familiarity with the communities in our market areas.  Our ability to retain executive officers, the functional area managers, branch managers and loan officers of our bank subsidiary will continue to be important to the successful implementation of our strategy.  It is also critical, as we address the Written Agreement and the Consent Order, to be able to attract and retain qualified management and loan officers with the appropriate level of experience and knowledge about our market areas to implement our community-based operating strategy.

We must compete with other banks and financial institutions in all lines of business.  The banking and financial services business in our market is highly competitive.  Our competitors include large regional banks, local community banks, savings institutions, securities and brokerage companies, mortgage companies, insurance companies, finance companies, money market mutual funds, credit unions and other non-bank financial service providers.  Many of these competitors are not subject to the same regulatory restrictions, which may therefore enable them to provide customers with an alternative to traditional banking services.

Increased competition in our markets may result in a decrease in the amounts of our loans and deposits, reduced spreads between loan rates and deposit rates or loan terms that are more favorable to the borrower.  Any of these results could have a material adverse effect on our ability to grow and remain profitable.  If increased competition causes us to significantly discount the interest rates we offer on loans or increase the amount we pay on deposits, our net interest income could be adversely impacted.  If increased competition causes us to modify our underwriting standards, we could be exposed to higher losses from lending activities.  Additionally, many of our competitors are much larger in total assets and capitalization, have greater access to capital markets, have larger lending limits and may be able to offer a broader range of financial services than we can offer.

 

Loss of customer deposits due to increased competition could increase our funding costs.  We rely on bank deposits to be a low cost and stable source of funding. We compete with banks and other financial services companies for deposits. If our competitors raise the rates they pay on deposits, our funding costs may increase, either because we raise our rates to avoid losing deposits or because we lose deposits and must rely on more expensive sources of funding. Higher funding costs could reduce our net interest margin and net interest income and could have a material adverse effect on our financial condition and results of operations.

Technology is continually changing and we must effectively implement new innovations in providing services to our customers.  The financial services industry is undergoing rapid technological changes with frequent innovations in technology-driven products and services.  In addition to better serving customers, the effective use of technology increases our efficiency and enables us to reduce costs.  Our future success will depend, in part, upon our ability to address the needs of our customers using innovative methods, processes and technology to provide products and services that will satisfy customer demands for convenience as well as to create additional efficiencies in our operations as we continue to grow and expand our market areas.  In order to ensure that we are responsive to customer needs as well as compliant with the numerous changes required by the rapid pace of regulatory initiatives, we underwent a conversion of our core information systems in July, 2016.  Our ability to successfully transition and implement the new system may affect our ability to meet the needs of our customers and capitalize on the opportunities for efficiencies presented through increased automation.