Trinity Capital 10-Q 2010 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the quarterly period ended June 30, 2010.

Or

[ ]Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the transition period from                                                       to                                               

Commission File Number 000-50266

TRINITY CAPITAL CORPORATION

(Exact name of registrant as specified in its charter)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter 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 x No [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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). Yes [ ] No [ ]

Indicate by check mark whether the registrant is a large accelerated filed, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer,” “large accelerated filer” and “Smaller Reporting Company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer  [ ]	Accelerated Filer  [ X ]
Non-Accelerated Filer  [ ]	Smaller Reporting Company[ ]

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

[ ]  Yes  [ X ]  No

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date 6,450,339 shares of common stock, no par value, outstanding as of August 6, 2010.

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 1A.	Risk Factors
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.	Defaults Upon Senior Securities
Item 4.	Removed and Reserved
Item 5.	Other Information
Item 6.	Exhibits
	SIGNATURES
	CERTIFICATIONS

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

TRINITY CAPITAL CORPORATION & SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

June 30, 2010 and December 31, 2009

(Amounts in thousands, except share data)

	June 30, 2010		December 31, 2009
	(Unaudited)
ASSETS
Cash and due from banks	$	20,424	$	18,761
Interest-bearing deposits with banks		72,591		188,114
Federal funds sold and securities purchased under resell agreements		112		620
Cash and cash equivalents		93,127		207,495
Investment securities available for sale		182,669		136,756
Investment securities held to maturity, at amortized cost (fair value of $11,424 at June 30, 2010 and $10,808 at  December 31, 2009)		11,271		11,436
Other investments		9,397		9,568
Loans (net of allowance for loan losses of $29,658 at June 30, 2010 and $24,504 at December 31, 2009)		1,158,389		1,215,282
Loans held for sale		7,948		9,245
Premises and equipment, net		31,058		31,949
Leased property under capital leases, net		2,211		2,211
Accrued interest receivable		7,232		6,840
Mortgage servicing rights, net		7,044		7,647
Other intangible assets		594		830
Other real estate owned		29,513		16,750
Prepaid expenses		7,329		8,648
Net deferred tax assets		7,015		4,979
Other assets		8,057		7,105
Total assets	$	1,562,854	$	1,676,741

 (Continued on following page)

TRINITY CAPITAL CORPORATION & SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

June 30, 2010 and December 31, 2009

(Amounts in thousands, except share data)

(Continued from prior page)

	June 30, 2010			December 31, 2009
	(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits:
Noninterest-bearing	$	85,896		$	87,238
Interest-bearing		1,276,540			1,381,207
Total deposits		1,362,436			1,468,445
Short-term borrowings		1,173			20,000
Long-term borrowings		32,300			13,493
Long-term capital lease obligations		2,211			2,211
Junior subordinated debt owed to unconsolidated trusts		37,116			37,116
Accrued interest payable		4,644			5,038
Other liabilities		4,777			7,536
Total liabilities		1,444,657			1,553,839
Stock owned by Employee Stock Ownership Plan (ESOP) participants; 636,585 shares and 627,030 shares at June 30, 2010 and December 31, 2009, respectively, at fair value	$	9,230		$	12,541
Commitments and contingencies (Note 13)
Stockholders' equity
Preferred stock, no par, authorized 1,000,000 shares
Series A, 5% cumulative perpetual, 35,539 shares issued and outstanding at June 30, 2010 and December 31, 2009, $1,000.00 liquidation value, at amortized cost		33,702			33,597
Series B, 9% cumulative perpetual, 1,777 shares issued and outstanding at June 30, 2010 and December 31, 2009, $1,000.00 liquidation value, at amortized cost		2,061			2,077
Common stock, no par, authorized 20,000,000 shares; issued 6,856,800 shares, shares outstanding 6,450,339 and 6,440,784 at June 30, 2010 and December 31, 2009, respectively		6,836			6,836
Additional paid-in capital		1,827			1,869
Retained earnings		75,148			77,054
Accumulated other comprehensive gain		359			142
Total stockholders' equity before treasury stock		119,933			121,575
Treasury stock, at cost, 406,461 shares and 416,016 shares at June 30, 2010 and December 31, 2009, respectively		(10,966	)		(11,214	)
Total stockholders' equity		108,967			110,361
Total liabilities and stockholders' equity	$	1,562,854		$	1,676,741

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

TRINITY CAPITAL CORPORATION & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three and Six Months Ended June 30, 2010 and 2009

(Amounts in thousands except share and per share data)

(Unaudited)

	Three Months Ended June 30,				Six Months Ended June 30,
	2010		2009		2010		2009
Interest income:
Loans, including fees	$	16,638	$	18,998	$	33,910	$	37,990
Investment securities:
Taxable		776		946		1,409		1,144
Nontaxable		299		263		597		480
Federal funds sold		-		-		-		1
Other interest-bearing deposits		75		77		180		86
Investment in unconsolidated trusts		21		21		41		42
Total interest income		17,809		20,305		36,137		39,743
Interest expense:
Deposits		3,605		5,017		7,568		9,933
Short-term borrowings		17		189		233		252
Long-term borrowings		253		213		381		524
Long-term capital lease obligations		67		67		134		134
Junior subordinated debt owed to unconsolidated trusts		684		697		1,367		1,406
Total interest expense		4,626		6,183		9,683		12,249
Net interest income		13,183		14,122		26,454		27,494
Provision for loan losses		11,101		12,632		15,358		16,793
Net interest income after provision for loan losses		2,082		1,490		11,096		10,701
Other income:
Mortgage loan servicing fees		654		435		1,300		1,222
Trust fees		456		329		811		705
Loan and other fees		804		706		1,470		1,319
Service charges on deposits		433		453		841		860
Gain on sale of loans		758		2,426		1,478		5,495
Gain on sale of securities		-		36		47		734
Title insurance premiums		274		424		462		865
Other operating income		85		152		111		255
Total other income		3,464		4,961		6,520		11,455

 (Continued on following page)

TRINITY CAPITAL CORPORATION & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three and Six Months Ended June 30, 2010 and 2009

(Amounts in thousands except share and per share data)

(Unaudited)

(Continued from prior page)

	Three Months Ended June 30,						Six Months Ended June 30,
	2010			2009			2010			2009
Other expenses:
Salaries and employee benefits	$	5,091		$	4,658		$	10,169		$	9,702
Occupancy		1,028			789			2,005			1,613
Data processing		709			693			1,433			1,324
Marketing		375			440			731			888
Amortization and valuation of mortgage servicing rights		974			(99	)		1,283			887
Amortization and valuation of other intangible assets		97			10			222			133
Supplies		118			166			209			352
Loss on sale of other real estate owned		1,053			313			1,485			531
Postage		161			117			322			284
Bankcard and ATM network fees		335			324			498			654
Legal, professional and accounting fees		573			613			1,326			981
FDIC insurance premiums		934			937			1,832			1,184
Collection expenses		448			169			828			291
Other		781			517			1,319			1,312
Total other expense		12,677			9,647			23,662			20,136
(Loss) Income before income taxes		(7,131	)		(3,196	)		(6,046	)		2,020
(Benefit) provision for income taxes		(2,537	)		(1,392	)		(1,888	)		593
Net (loss) income	$	(4,594	)	$	(1,804	)	$	(4,158	)	$	1,427
Dividends and discount accretion on preferred shares		528			529			1,057			552
Net (loss) income available to common shareholders	$	(5,122	)	$	(2,333	)	$	(5,215	)	$	875
Basic (loss) earnings per common share	$	(0.80	)	$	(0.36	)	$	(0.81	)	$	0.14
Diluted (loss) earnings per common share	$	(0.80	)	$	(0.36	)	$	(0.81	)	$	0.14

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

TRINITY CAPITAL CORPORATION & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Six Months Ended June 30, 2010 and 2009

(Amounts in thousands)

(Unaudited)

	Six Months Ended June 30,
	2010			2009
Cash Flows From Operating Activities
Net (loss) income	$	(4,158	)	$	1,427
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,551			1,244
Net amortization of:
Mortgage servicing rights		924			1,289
Other intangible assets		236			133
Premium and discounts on investment securities, net		308			10
Junior subordinated debt owed to unconsolidated trusts issuance costs		7			7
Provision for loan losses		15,358			16,793
Change in mortgage servicing rights valuation allowance		359			(402	)
Loss on disposal of premises and equipment		9			-
(Gain) on sale of investment securities		(47	)		(734	)
Federal Home Loan Bank (FHLB) stock dividends received		(5	)		(3	)
Loss on venture capital investments		98			274
Gain on sale of loans		(1,478	)		(5,495	)
Loss on disposal of other real estate owned		424			270
Write-down of value of other real estate owned		1,079			270
(Increase) in other assets		(2,167	)		(3,603	)
(Decrease) increase in other liabilities		(1,414	)		609
Stock options and stock appreciation rights expenses		72			73
Tax benefit recognized for exercise of stock options		-			(10	)
Net cash provided by operating activities before originations and gross sales of loans		11,156			12,152
Gross sales of loans held for sale		67,237			262,068
Origination of loans held for sale		(65,142	)		(263,193	)
Net cash provided by operating activities		13,251			11,027

 (Continued on following page)

TRINITY CAPITAL CORPORATION & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Six Months Ended June 30, 2010 and 2009

(Amounts in thousands)

(Unaudited)

(Continued from prior page)

	Six Months Ended June 30,
	2010			2009
Cash Flows From Investing Activities
Proceeds from maturities and paydowns of investment securities, available for sale	$	50,146		$	3,109
Proceeds from maturities and paydowns of investment securities, held to maturity		165			122
Proceeds from maturities and paydowns of investment securities, other		171			-
Proceeds from sale of investment securities, available for sale		3,422			42,910
Purchase of investment securities available for sale		(99,426	)		(52,385	)
Purchase of investment securities other		(93	)		(2,466	)
Proceeds from sale of other real estate owned		5,063			3,907
Loans funded, net of repayments		22,206			(43,882	)
Purchases of loans		-			(1,101	)
Purchases of premises and equipment		(669	)		(6,131	)
Net cash (used in) investing activities		(19,015	)		(55,917	)
Cash Flows From Financing Activities
Net (decrease) in demand deposits, NOW accounts and savings accounts		(99,001	)		(25,621	)
Net (decrease) in time deposits		(7,008	)		107,643
Proceeds from issuances of borrowings		20,000			30,000
Repayment of borrowings		(20,020	)		(19	)
Purchase of treasury stock		-			(473	)
Issuance of common stock		134			290
Issuance of preferred stock		-			35,539
Common shares dividend payments		(1,739	)		(2,580	)
Preferred shares dividend payments		(970	)		(258	)
Tax benefit recognized for exercise of stock options		-			10
Net cash (used in) provided by financing activities		(108,604	)		144,531
Net (decrease) increase in cash and cash equivalents		(114,368	)		99,641
Cash and cash equivalents:
Beginning of period		207,495			25,262
End of period	$	93,127		$	124,903
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest	$	10,077		$	12,732
Income taxes		72			4,623
Non-cash investing and financing activities:
Transfers from loans to other real estate owned		19,329			9,761
Dividends declared, not yet paid		242			2,824
Change in unrealized gain on investment securities, net of taxes		217			(1,935	)

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

TRINITY CAPITAL CORPORATION & SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Basis of Presentation

The accompanying unaudited consolidated financial statements include the consolidated balances and results of operations of Trinity Capital Corporation (“Trinity”) and its wholly owned subsidiaries: Los Alamos National Bank (the “Bank”), Title Guaranty & Insurance Company (“Title Guaranty”), TCC Advisors Corporation (“TCC Advisors”) and TCC Funds, collectively referred to as the “Company.” Trinity Capital Trust I (“Trust I”), Trinity Capital Trust III (“Trust III”), Trinity Capital Trust IV (“Trust IV”) and Trinity Capital Trust V (“Trust V”), collectively referred to as the “Trusts,” are trust subsidiaries of Trinity but are not consolidated in these financial statements (see “Consolidation” accounting policy below). Trinity sold the assets of TCC Appraisals as of May 1, 2008 and terminated the business of TCC Appraisals in January 2009. Termination of TCC Appraisals has had an immaterial effect on Trinity’s financial results. The Bank holds a 24% interest in Cottonwood Technology Group, LLC (“Cottonwood”). Cottonwood is owned by the Bank, the Los Alamos Commerce & Development Corporation and an individual not otherwise associated with Trinity or the Bank. Cottonwood completed the initial close on a pre-seed and seed stage investment fund in October 2009 and is focused on assisting new technologies, primarily those developed at New Mexico’s research and educational institutions, reach the market by providing management advice and capital consulting. The Bank’s full capital investment of $150 thousand was made in July 2009 and is reflected in these financial statements. In October 2008, the Bank purchased the assets of Allocca & Brunett, Inc., an investment advisory company in Santa Fe, New Mexico. Management expects to continue to transfer the assets of Allocca & Brunett to the Bank over the next several months. In 2009, the Bank created Finance New Mexico Investment Fund IV, LLC (“FNM Investment Fund IV”) and is the only member. FNM Investment Fund IV was created to acquire a 99.99% interest in FNM Investor Series IV, LLC (“FNM Investor Series IV”), 0.01% interest in which is held by Finance New Mexico, a governmental instrumentality. These entities were both created to enable the funding of loans to, and investments in, a New Market Tax Credit project. The amount of the new market tax credit was $1.9 million and is included in “other investments” on the balance sheet. The amount of the loan was $5.2 million and is included in “loans, net” on the balance sheet. In April 2010 the Bank activated TCC Advisors as a business unit operating one of the Bank’s foreclosed properties, Santa Fe Equestrian Park, in Santa Fe, New Mexico.  The initial size of the initial investment was $322 thousand.

The business activities of the Company consist solely of the operations of its wholly owned subsidiaries. All significant inter-company balances and transactions have been eliminated in consolidation. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods have been made. The results of operations for the three and six months ended June 30, 2010, are not necessarily indicative of the results to be expected for the entire fiscal year.

The unaudited consolidated interim financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and industry practice. Certain information in footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America and industry practice has been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s December 31, 2009 audited financial statements in its Form 10-K, filed with the SEC on March 16, 2010, as amended.

The consolidated financial statements include the accounts of the Company. The accounting and reporting policies of the Company conform to generally accepted accounting principles (GAAP) in the United States of America and general practices within the financial services industry. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the year. Actual results could differ from those estimates. Areas involving the use of management’s estimates and assumptions, and which are more susceptible to change in the near term, include the allowance for loan losses, valuation of other real estate owned, valuation of deferred tax assets and initial recording and subsequent valuation for impairment of mortgage servicing rights.

Certain items have been reclassified from prior period presentations in conformity with the current classification. These reclassifications did not result in any changes to previously reported net income or stockholders’ equity.

Note 2. Comprehensive (Loss) Income

Comprehensive (loss) income includes net (loss) income, as well as the change in net unrealized gain on investment securities available for sale, net of tax. Comprehensive income is presented in the following table:

	Three Months Ended June 30,						Six Months Ended June 30,
	2010			2009			2010			2009
	(Unaudited; in thousands)
Net (loss) income	$	(4,594	)	$	(1,804	)	$	(4,158	)	$	1,427
Securities available for sale:
Net change in unrealized (losses)		711			(736	)		316			(1,201	)
Related income tax expense		(220	)		286			(67	)		548
Net securities gains reclassified into earnings		-			(36	)		(47	)		(734	)
Related income tax benefit		-			16			15			215
Net effect on other comprehensive income for the period		491			(470	)		217			(1,172	)
Comprehensive (loss) income	$	(4,103	)	$	(2,274	)	$	(3,941	)	$	255

Note 3. (Loss) Earnings Per Share Data

The following table sets forth the computation of basic and diluted earnings per share for the periods indicated:

	Three Months Ended June 30,						Six Months Ended June 30,
	2010			2009			2010			2009
	(Unaudited; in thousands, except share and per share data)
Net (loss) income	$	(4,594	)	$	(1,804	)	$	(4,158	)	$	1,427
Dividends and discount accretion on preferred shares		528			529			1,057			552
Net (loss) income available to common shareholders	$	(5,122	)	$	(2,333	)	$	(5,215	)	$	875
Weighted average common shares issued		6,856,800			6,856,800			6,856,800			6,856,800
LESS: Weighted average treasury stock shares		(415,071	)		(409,720	)		(415,541	)		(408,990	)
Weighted average common shares outstanding, net		6,441,729			6,447,080			6,441,259			6,447,810
Basic (loss) earnings per common share	$	(0.80	)	$	(0.36	)	$	(0.81	)	$	0.14
Weighted average dilutive shares from stock option plan		-			-			-			7,922
Weighted average common shares outstanding including derivative shares		6,441,729			6,447,080			6,441,259			6,455,732
Diluted (loss) earnings per common share	$	(0.80	)	$	(0.36	)	$	(0.81	)	$	0.14

Certain stock options were not included in the above calculation, as these stock options would have an anti-dilutive effect as the exercise price is greater than current market prices. The total number of shares excluded was 412,500 and 421,395 as of June 30, 2010 and June 30, 2009, respectively.

Note 4. Recent Accounting Pronouncements and Regulatory Developments

On July 1, 2009, the Accounting Standards Codification became FASB’s officially recognized source of authoritative U.S. generally accepted accounting principles applicable to all public and non-public non-governmental entities, superseding existing FASB, AICPA, EITF and related literature. Rules and interpretive releases of the SEC under the authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. All other accounting literature is considered non-authoritative. The switch to the ASC affects the way companies refer to U.S. GAAP in financial statements and accounting policies. Citing particular content in the ASC involves specifying the unique numeric path to the content through the Topic, Subtopic, Section and Paragraph structure.

ASC Topic 810, “Consolidation.” New authoritative accounting guidance under ASC Topic 810, “Consolidation,” amended prior guidance to change how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated.  The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance.  The new authoritative accounting guidance requires additional disclosures about the reporting entity’s involvement with variable-interest entities and any significant changes in risk exposure due to that involvement as well as its effect on the entity’s financial statements.  The new authoritative accounting guidance under ASC Topic 810 became effective for the Company on January 1, 2010, and did not have an impact on the Company’s financial statements.

ASC Topic 820, “Fair Value Measurements and Disclosures.” New authoritative accounting guidance under ASC Topic 820, “Fair Value Measurements and Disclosures,” amends prior accounting guidance to amend and expand disclosure requirements about transfers in and out of Levels 1 and 2, clarified existing fair value disclosure requirements about the appropriate level of disaggregation, and clarified that a description of valuation techniques and inputs used to measure fair value was required for recurring and nonrecurring Level 2 and 3 fair value measurements.  The new authoritative accounting guidance under ASC Topic 860 became effective for the Company on January 1, 2010, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements.  Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years.  The new required disclosures are included in Note 17 – Fair Value Measurements.

ASC Topic 860, “Transfers and Servicing.” New authoritative accounting guidance under ASC Topic 860, “Transfers and Servicing,” amends prior accounting guidance to enhance reporting about transfers of financial assets, including securitizations, and where companies have continuing exposure to the risks related to transferred financial assets. The new authoritative accounting guidance eliminates the concept of a “qualifying special-purpose entity” and changes the requirements for derecognizing financial assets. The new authoritative accounting guidance also requires additional disclosures about all continuing involvements with transferred financial assets including information about gains and losses resulting from transfers during the period. The new authoritative accounting guidance under ASC Topic 860 became effective January 1, 2010, and did not have a significant impact on the Company’s financial statements.

ASC Topic 310 “Receivables.”  New authoritative accounting guidance under ASC Topic 310, “Receivables,” amended prior guidance to provide a greater level of disaggregated information about the credit quality of loans and leases and the Allowance for Loan and Lease Losses (the “Allowance”).  The new authoritative guidance also requires additional disclosures related to credit quality indicators, past due information, and information related to loans modified in a troubled debt restructuring.  The provisions of the new authoritative guidance under ASC Topic 310 will be effective in the reporting period ending December 31, 2010.  The new authoritative guidance amends only the disclosure requirements for loans and leases and the Allowance; the adoption will have no impact on the Company’s statements of income and condition.

Note 5. Investment Securities

Amortized cost and fair values of investment securities are summarized as follows:

AVAILABLE FOR SALE	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In thousands)
June 30, 2010
U.S. Government sponsored agencies	$	85,114	$	172	$	(5	)	$	85,281
States and political subdivisions		26,550		529		(23	)		27,056
Residential mortgage-backed securities		70,453		885		(1,006	)		70,332
Totals	$	182,117	$	1,586	$	(1,034	)	$	182,669
December 31, 2009
U.S. Government sponsored agencies	$	68,502	$	23	$	(143	)	$	68,382
States and political subdivisions		26,112		494		(87	)		26,519
Residential mortgage-backed securities		41,906		563		(614	)		41,855
Totals	$	136,520	$	1,080	$	(844	)	$	136,756

HELD TO MATURITY	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In thousands)
June 30, 2010
States and political subdivisions	$	11,271	$	420	$	(267	)	$	11,424
Totals	$	11,271	$	420	$	(267	)	$	11,424
December 31, 2009
States and political subdivisions	$	11,436	$	-	$	(628	)	$	10,808
Totals	$	11,436	$	-	$	(628	)	$	10,808

OTHER INVESTMENTS	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(In thousands)
June 30, 2010
Non-marketable equity securities (including FRB and FHLB stock)	$	8,281	$	-	$	-	$	8,281
Investment in unconsolidated trusts		1,116		-		-		1,116
Totals	$	9,397	$	-	$	-	$	9,397
December 31, 2009
Non-marketable equity securities (including FRB and FHLB stock)	$	8,452	$	-	$	-	$	8,452
Investment in unconsolidated trusts		1,116		-		-		1,116
Totals	$	9,568	$	-	$	-	$	9,568

Realized net gains on sale of securities available for sale are summarized as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2010		2009		2010		2009
	(In thousands)
Gross realized gains	$	-	$	36	$	47	$	734
Gross realized losses		-		-		-		-
Net gains	$	-	$	36	$	47	$	734

A summary of unrealized loss information for investment securities, categorized by security type, at June 30, 2010 and December 31, 2009 is as follows:

	Less than 12 Months					12 Months or Longer					Total
AVAILABLE FOR SALE	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(In thousands)
June 30, 2010
U.S. Government sponsored agencies	$	10,076	$	(5	)	$	-	$	-		$	10,076	$	(5	)
States and political subdivisions		4,788		(2	)		1,979		(21	)		6,767		(23	)
Residential mortgage-backed securities		22,756		(859	)		5,031		(147	)		27,787		(1,006	)
Totals	$	37,620	$	(866	)	$	7,010	$	(168	)	$	44,630	$	(1,034	)
December 31, 2009
U.S. Government sponsored agencies	$	25,855	$	(143	)	$	-	$	-		$	25,855	$	(143	)
States and political subdivisions		4,540		(87	)		-		-			4,540		(87	)
Residential mortgage-backed securities		20,579		(527	)		1,481		(87	)		22,060		(614	)
Totals	$	50,974	$	(757	)	$	1,481	$	(87	)	$	52,455	$	(844	)

	Less than 12 Months					12 Months or Longer					Total
HELD TO MATURITY	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(In thousands)
June 30, 2010
States and political subdivisions	$	-	$	-		$	1,416	$	(267	)	$	1,416	$	(267	)
Totals	$	-	$	-		$	1,416	$	(267	)	$	1,416	$	(267	)
December 31, 2009
States and political subdivisions	$	9,937	$	(297	)	$	1,499	$	(331	)	$	11,436	$	(628	)
Totals	$	9,937	$	(297	)	$	1,499	$	(331	)	$	11,436	$	(628	)

At June 30, 2010, $47.3 million in debt securities (representing a total of 30 different securities) had unrealized losses with aggregate depreciation of 2.7% of the Company’s amortized cost basis. Of these securities, $8.9 million (representing a total of 9 different securities) had a continuous unrealized loss position for twelve months or longer with an aggregate depreciation of 4.9%. The unrealized losses relate principally to the general change in interest rates and illiquidity, and not credit quality, that has occurred since the securities purchase dates, and such unrecognized losses or gains will continue to vary with general interest rate level fluctuations in the future. As management does not intend to sell the securities, and it is unlikely that the Company will be required to sell the securities before their anticipated recovery, no declines are deemed to be other-than-temporary.

The amortized cost and fair value of investment securities, as of June 30, 2010, by contractual maturity are shown below. Maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties.

	Available for Sale				Held to Maturity				Other Investments
	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(In thousands)
One year or less	$	6,740	$	6,753	$	-	$	-	$	100	$	100
One to five years		93,766		94,109		-		-		-		-
Five to ten years		35,849		36,143		1,416		1,149		-		-
Over ten years		45,762		45,664		9,855		10,275		1,116		1,116
Equity investments with no stated maturity		-		-		-		-		8,181		8,181
	$	182,117	$	182,669	$	11,271	$	11,424	$	9,397	$	9,397

Securities with carrying amounts of $31.5 million and $49.5 million at June 30, 2010 and December 31, 2009, respectively, were pledged as collateral on public deposits and for other purposes as required or permitted by law.

Note 6. Loans

Loans consisted of:

	June 30,			December 31,
	2010			2009
	(In thousands)
Commercial	$	135,111		$	137,684
Commercial real estate		429,500			452,235
Residential real estate		414,389			399,588
Construction real estate		158,663			194,179
Installment and other		52,501			58,456
Total loans		1,190,164			1,242,142
Unearned income		(2,117	)		(2,356	)
Gross loans		1,188,047			1,239,786
Allowance for loan losses		(29,658	)		(24,504	)
Net loans	$	1,158,389		$	1,215,282

Loans are made to individuals as well as commercial and tax exempt entities.  Specific loan terms vary as to interest rate, repayment and collateral requirements based on the type of loan requested and the credit worthiness of the prospective borrower.  Credit risk tends to be geographically concentrated, in that the majority of loan customers are located in the markets serviced by the Bank.

Non-performing loans as of June 30, 2010 and December 31, 2009, were as follows:

	At June 30, 2010		At December 31, 2009
	(In thousands)
Non-accruing loans	$	52,010	$	65,035
Total non-performing loans		52,010		65,035

There were no loans past due more than 90 days and still accruing interest as of June 30, 2010 or December 31, 2009.  The reduction in interest income associated with loans on non-accrual status was $1.4 million and $1.5 million for the three months ending June 30, 2010 and, 2009, respectively. The reduction in interest income associated with loans on non-accrual status was $2.7 million and $2.3 million for the six months ending June 30, 2010 and, 2009, respectively.

Information about impaired loans as of June 30, 2010 and December 31, 2009 is as follows:

	June 30,		December 31,
	2010		2009
	(In thousands)
Loans for which there was a related allowance for loan losses	$	4,843	$	-
Other impaired loans		52,020		67,736
Total impaired loans	$	56,863	$	67,736
Related allowance for loan losses	$	529	$	-

Total troubled debt restructures, both those in accrual and non-accrual status, were $8.4 million and $13.8 million as of June 30, 2010 and December 31, 2009, respectively.

Activity in the allowance for loan losses was as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
	2010			2009			2010			2009
	(Dollars in thousands)
Balance at beginning of period	$	24,822		$	17,963		$	24,504		$	15,230
Provision for loan losses		11,101			12,632			15,358			16,793
Total charge-offs		(6,406	)		(5,791	)		(10,465	)		(7,310	)
Total recoveries		141			60			261			151
Net charge-offs		(6,265	)		(5,731	)		(10,204	)		(7,159	)
Balance at end of period	$	29,658		$	24,864		$	29,658		$	24,864

Note 7. Other Real Estate Owned

Other real estate owned consists of property acquired due to foreclosure on real estate loans. Total other real estate owned consisted of:

	At June 30, 2010		At December 31, 2009
	(In thousands)
Construction real estate	$	15,310	$	12,782
Residential real estate		7,078		3,337
Commercial real estate		7,125		631
Total	$	29,513	$	16,750

Note 8. Stock Option Plan

The Company’s 1998 Stock Option Plan (“1998 Plan”) and Trinity Capital Corporation 2005 Stock Incentive Plan (“2005 Plan”) were created for the benefit of key management and select employees. Under the 1998 Plan, 400,000 shares (as adjusted for the stock split of December 19, 2002) from shares held in treasury or authorized but unissued common stock are reserved for granting options. Under the 2005 Plan, 500,000 shares from shares held in treasury or authorized but unissued common stock are reserved for granting stock-based incentive awards. Both of these plans were approved by the Company’s shareholders. The Board of Directors determine vesting and pricing of the awards. All stock options granted through December 31, 2005 were granted at or above the market value of the stock at the date of the grant, with the exception of the July 1998 stock option grant which was granted at $0.25 below the last reported sale price on the date of grant. All stock options vest in equal amounts over a three year period and must be exercised within ten years of the date of grant. Stock appreciation rights granted after December 31, 2005 were also granted at or above the market value of the stock at the date of the grant, with the exception of the January 1, 2006 stock appreciation right grants which were approved on December 15, 2005 and granted at the December 31, 2005 closing price to take advantage of accounting changes favorable to Trinity. All stock appreciation rights vest and mature at five years.

The Company is required by ASC Topic 718, "Compensation" to recognize compensation expense for share-based compensation. The Company uses the Black-Scholes model to value the stock options and stock appreciation rights on the date of the grant, and recognizes this expense over the remaining vesting term for the stock options or stock appreciation rights. Key assumptions used in this valuation method (detailed below) are the volatility of the Company’s stock price, a risk-free rate of return (using the U.S. Treasury yield curve) based on the expected term from grant date to exercise date and an annual dividend rate based upon the current market price. Expected term from grant date is based upon the historical time from grant to exercise experienced by the Company. Because share-based compensation vesting in the current periods was granted on a variety of dates, the assumptions are presented as weighted averages in those assumptions.

There were no stock incentives granted during the three or six months ended June 30, 2010 or 2009.

A summary of stock option and stock appreciation right activity under the 1998 Plan and the 2005 Plan as of June 30, 2010, and changes during the year is presented below:

	Shares		Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term, in years		Aggregate Intrinsic Value (in thousands)
Outstanding at January 1, 2010		412,500	$	27.03
Granted		-		-
Exercised		-		-
Forfeited or expired		-		-
Outstanding at June 30, 2010		412,500	$	27.03		2.32	$	1,729
Exercisable at June 30, 2010		229,000	$	26.77		3.09	$	995

There were no stock options exercised during the three months ended June 30, 2010.  During the three months ended June 30, 2009, Steve W. Wells exercised 14,000 non-qualified stock options at $20.00 per share. The total intrinsic value of options exercised during the six months ended June 30, 2009 was $52 thousand.

As of June 30, 2010, there was $184 thousand of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the 2005 Plan. There was no unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the 1998 plan. That cost is expected to be recognized over a weighted-average vesting period of 1.6 years. During the three month period ended June 30, 2010, we expensed $36 thousand for stock appreciation rights that will vest in 2011 and 2012. During the six month period ended June 30, 2010, we expensed $72 thousand for stock appreciation rights that will vest in 2011 and 2012.

Note 9. Short-Term Borrowings

The Company had Federal Home Loan Bank (FHLB) advances with maturity dates of less than one year of $1.2 million as of June 30, 2010 and $20.0 million as of December 31, 2009. As of June 30, 2010, the advances had a fixed interest rate of 6.03%.

Note 10. Long-Term Borrowings

The Company had FHLB advances with maturity dates greater than one year of $32.3 million as of June 30, 2010 and $13.5 million as of December 31, 2009. As of June 30, 2010, long-term borrowings consisted of the following advances:

Maturity Date	Rate			Principal due	Amount
(Dollars in thousands)
03/23/2015		3.05	%	At maturity	$	20,000
04/27/2021		6.34		At maturity		2,300
					$	22,300

Note 11. Long-term Capital Lease Obligations

The Company is leasing land in Santa Fe and has built a Bank office on the site. In July of 2009, Trinity sold the improvements to the Bank and entered into a sublease with the Bank. The construction of the office was completed in October of 2009, and the new office opened on October 19, 2009. The ground lease has an 8 year term, expiring in 2014, and contains an option to purchase the land for a price certain at the termination of the initial term of the lease. The ground lease is classified as a capital lease. The Company also holds a note and mortgage on this land, and the interest payments received on the note are approximately equal to the payments made on the lease. The principal due on the note at maturity (simultaneous with the lease maturity) will largely offset the option purchase price. Lease payments for each of the three month periods ended June 30, 2010 and 2009 were $46 thousand. Lease payments for each of the six month periods ended June 30, 2010 and 2009 were $92 thousand.

Note 12. Junior Subordinated Debt Owed to Unconsolidated Trusts

The following table presents details on the junior subordinated debt owed to unconsolidated trusts as of June 30, 2010.

	Trust I			Trust III		Trust IV			Trust V
	(Dollars in thousands)
Date of Issue	March 23, 2000			May 11, 2004		June 29, 2005			September 21, 2006
Amount of trust preferred securities issued	$	10,000		$	6,000	$	10,000		$	10,000
Rate on trust preferred securities		10.875	%	3.24% (variable)			6.88	%		6.83	%
Maturity	March 8, 2030			September 8, 2034		November 23, 2035			December 15, 2036
Date of first redemption	March 8, 2010			September 8, 2009		August 23, 2010			September 15, 2011
Common equity securities issued	$	310		$	186	$	310		$	310
Junior subordinated deferrable interest debentures owed	$	10,310		$	6,186	$	10,310		$	10,310
Rate on junior subordinated deferrable interest debentures		10.875	%	3.24% (variable)			6.88	%		6.83	%

On the dates of issue indicated above, the Trusts, being Delaware statutory business trusts, issued trust preferred securities (the “trust preferred securities”) in the amount and at the rate indicated above. These securities represent preferred beneficial interests in the assets of the Trusts. The trust preferred securities will mature on the dates indicated, and are redeemable in whole or in part at the option of Trinity at any time after the date of first redemption indicated above, with the approval of the Federal Reserve Board and in whole at any time upon the occurrence of certain events affecting their tax or regulatory capital treatment. The Trusts also issued common equity securities to Trinity in the amounts indicated above. The Trusts used the proceeds of the offering of the trust preferred securities to purchase junior subordinated deferrable interest debentures (the “debentures”) issued by Trinity, which have terms substantially similar to the trust preferred securities. Trinity has the right to defer payments of interest on the debentures at any time or from time to time for a period of up to ten consecutive semi-annual periods with respect to each interest payment deferred. Under the terms of the debentures, under certain circumstances of default or if Trinity has elected to defer interest on the debentures, Trinity may not, with certain exceptions, declare or pay any dividends or distributions on its capital stock or purchase or acquire any of its capital stock. Trinity used the majority of the proceeds from the sale of the debentures to add to Tier 1 and Tier 2 capital in order to support its growth and to purchase treasury stock.

Trinity owns all of the outstanding common securities of the Trusts. The Trusts are considered variable interest entities (VIEs) under ASC Topic 810, "Consolidation." Because Trinity is not the primary beneficiary of the Trusts, the financial statements of the Trusts are not included in the consolidated financial statements of the Company.

In March 2005, the Board of Governors of the Federal Reserve System issued a final rule allowing bank holding companies to continue to include qualifying trust preferred securities in their Tier 1 Capital for regulatory capital purposes, subject to a 25% limitation to all core (Tier I) capital elements, net of goodwill less any associated deferred tax liability. The final rule provides a five-year transition period, ending March 31, 2009, for application of the aforementioned quantitative limitation. In April 2009, this five-year transition period was extended. As of June 30, 2010, 100% of the trust preferred securities noted in the table above qualified as Tier 1 capital under the final rule adopted in March 2005.

Payments of distributions on the trust preferred securities and payments on redemption of the trust preferred securities are guaranteed by Trinity on a limited basis. Trinity also entered into an agreement as to expenses and liabilities with the Trusts pursuant to which it agreed, on a subordinated basis, to pay any costs, expenses or liabilities of the Trusts other than those arising under the trust preferred securities. The obligations of Trinity under the junior subordinated debentures, the related indenture, the trust agreement establishing the Trusts, the guarantee and the agreement as to expenses and liabilities, in the aggregate, constitute a full and unconditional guarantee by Trinity of the Trusts’ obligations under the trust preferred securities.

Issuance costs of $615 thousand related to Trust I and Trust III were deferred and are being amortized over the period until mandatory redemption of the securities in March 2030 and September 2034, respectively. During each of the three month periods ended June 30, 2010 and 2009, $3 thousand of these issuance costs were amortized. During each of the six month periods ended June 30, 2010 and 2009, $7 thousand of these issuance costs were amortized. Unamortized issuance costs were $280 thousand and $276 thousand at June 30, 2010 and December 31, 2009, respectively. There were no issuance costs associated with the other trust preferred security issues.

Dividends accrued and unpaid to securities holders totaled $478 thousand on both June 30, 2010 and December 31, 2009.

Under the terms of the securities purchase agreement between the Company and the U.S. Treasury pursuant to which the Company issued its Series A Preferred Stock as part of the TARP Capital Purchase Program, prior to the earlier of (i) March 27, 2012 and (ii) the date on which all of the shares of the Series A and Series B Preferred Stock have been redeemed by us or transferred by Treasury to third parties, we may not redeem our trust preferred securities (or the related junior subordinated notes), without the consent of Treasury.

Note 13. Commitments, Contingencies and Off-Balance Sheet Activities

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

The Company’s exposure to credit loss is represented by the contractual amount of these credit-related commitments. The Company follows the same credit policies in making credit-related commitments as it does for on-balance-sheet instruments.

At June 30, 2010 and December 31, 2009, the following credit-related commitments were outstanding:

	Contract Amount
	June 30, 2010		December 31, 2009
	(In thousands)
Unfunded commitments under lines of credit	$	153,342	$	155,535
Commercial and standby letters of credit		18,667		14,628

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require a payment of a fee. The commitments for equity lines of credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if deemed necessary by the Bank, is based on management’s credit evaluation of the customer. Unfunded commitments under commercial lines of credit, revolving credit lines and overdraft protection agreements are commitments for possible future extensions of credit to existing customers. Overdraft protection agreements are uncollateralized, but most other unfunded commitments have collateral. These unfunded lines of credit usually do not contain a specified maturity date and may not necessarily be drawn upon to the total extent to which the Bank is committed.

Commercial and standby letters of credit are conditional credit-related commitments issued by the Bank to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. Essentially all letters of credit issued have expiration dates within one year. The credit risk involved in issuing letters of credit is the same as that involved in extending loans to customers. The Bank generally holds collateral supporting those credit-related commitments, if deemed necessary. In the event the customer does not perform in accordance with the terms of the agreement with the third party, the Bank would be required to fund the credit-related commitment. The maximum potential amount of future payments the Bank could be required to make is represented by the contractual amount shown in the summary above. If the credit-related commitment is funded, the Bank would be entitled to seek recovery from the customer. At June 30, 2010 and December 31, 2009, no amounts have been recorded as liabilities for the Company’s potential obligations under these credit-related commitments. The fair value of these credit-related commitments is approximately equal to the fees collected when granting these letters of credit. These fees collected were $26 thousand as of June 30, 2010 and $24 thousand December 31, 2009, respectively, and are included in “other liabilities” on the Company’s balance sheet.

Concentrations of credit risk: The majority of the loans, commitments to extend credit, and standby letters of credit have been granted to customers in Los Alamos, Santa Fe and surrounding communities. Although the Bank has a diversified loan portfolio, a substantial portion of its loans are made to businesses and individuals associated with, or employed by, Los Alamos National Laboratory (“the Laboratory”). The ability of such borrowers to honor their contracts is predominately dependent upon the continued operation and funding of the Laboratory. Investments in securities issued by state and political subdivisions involve governmental entities within the state of New Mexico. The distribution of commitments to extend credit approximates the distribution of loans outstanding. Standby letters of credit are granted primarily to commercial borrowers. 

Note 14. Preferred Equity Issues

On March 27, 2009, the Company issued two series of preferred shares to the Treasury under the Capital Purchase Program (“CPP”). Below is a table disclosing the information on these two series:

	Number of shares issued	Dividend rate	Liquidation value per share		Original cost, in thousands
Series A cumulative perpetual preferred shares	35,539	5 % for the first 5 years, thereafter 9%	$	1,000	$	33,437
Series B cumulative perpetual preferred shares	1,777	9%		1,000		2,102

Dividends are paid quarterly to Treasury, and the amount of any unpaid dividends outstanding at the end of the quarter is an outstanding liability in “other liabilities” on the balance sheet. The amount of dividends accrued and unpaid as of June 30, 2010 and December 31, 2009 was $242 thousand for each period.

The difference between the liquidation value of the preferred shares and the original cost is accreted (for Series B) or amortized (for Series A) over 10 years. The net difference of this amortization and accretion is posted directly to capital. During both of the three month periods ended June 30, 2010 and June 30, 2009, a net amount of $44 thousand was accreted to equity. During the six month period ended June 30, 2010 and June 30, 2009, a net amount of $89 thousand and $46 thousand was accreted to equity, respectively.

Both the dividends and net accretion on the preferred shares reduce the amount of net income available to common shareholders. During the three months ended June 30, 2010 and June 30, 2009, the total of these two amounts was $528 thousand and $529 thousand, respectively.  During the six months ended June 30, 2010 and June 30, 2009, the total of these two amounts was $1.1 million and $552 thousand, respectively.

Note 15. Litigation

Trinity, the Bank, Title Guaranty, Cottonwood, FNM Investment Fund IV, FNM Investor Series IV, TCC Advisors and TCC Funds were not involved in any pending legal proceedings, other than routine legal proceedings occurring in the normal course of business, which, in the opinion of management, in the aggregate, would be considered material to the Company's consolidated financial condition. 

See also Note 18, “Subsequent Event” in these financial statements for a ruling in favor of the Bank that will materially affect the third quarter financial results.

Note 16. Derivative Financial Instruments

In the normal course of business, the Bank uses a variety of financial instruments to service the financial needs of customers and to reduce its exposure to fluctuations in interest rates.  Derivative instruments that the Bank uses as part of its interest rate risk management strategy include mandatory forward delivery commitments and rate lock commitments.

As a result of using over-the-counter derivative instruments, the Bank has potential exposure to credit loss in the event of nonperformance by the counterparties.  The Bank manages this credit risk by selecting only well established, financially strong counterparties, spreading the credit risk amongst many such counterparties and by placing contractual limits on the amount of unsecured credit risk from any single counterparty.  The Bank’s exposure to credit risk in the event of default by counterparty is the current cost of replacing the contracts net of any available margins retained by the Bank.  However, if the borrower defaults on the commitment the Bank requires the borrower to cover these costs.

The Company’s derivative instruments outstanding at June 30, 2010, include commitments to fund loans held for sale.  The interest rate lock commitment was valued at fair market value at inception.  The rate locks will continue to be adjusted for changes in value resulting from changes in market interest rates.

The Company originates single-family residential loans for sale pursuant to programs with the Federal National Mortgage Association (“FNMA”).  At the time the interest rate is locked in by the borrower, the Bank concurrently enters into a forward loan sale agreement with respect to the sale of such loan at a set price in an effort to manage the interest rate risk inherent in the locked loan commitment.  Any change in the fair value of the loan commitment after the borrower locks in the interest rate is substantially offset by the corresponding change in the fair value of the forward loan sale agreement related to such loan.  The period from the time the borrower locks in the interest rate to the time the Bank funds the loan and sells it to FNMA is generally 60 days.  The fair value of each instrument will rise or fall in response to changes in market interest rates subsequent to the dates the interest rate locks and forward loan sale agreements are entered into.  In the event that interest rates rise after the Bank enters into an interest rate lock, the fair value of the loan commitment will decline.  However, the fair value of the forward loan sale agreement related to such loan commitment should increase by substantially the same amount, effectively eliminating the Company’s interest rate and price risk.

 At June 30, 2010, the Company had notional amounts of $8.2 million in contracts with customers and $20.8 million in contracts with FNMA for interest rate lock commitments outstanding related to loans being originated for sale.  The related fair values of these commitments were an asset of $228 thousand and a liability of $158 thousand as of June 30, 2010.

Note 17. Fair Value Measurements

ASC Topic 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.

ASC Topic 820 requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert expected future amounts, such as cash flows or earnings, to a single present value amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity's own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, ASC Topic 820 establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

· Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

· Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

· Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.

In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use observable market-based parameters as inputs. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality, the Company's creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. Our valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances that caused the transfer, which generally coincides with the Company’s monthly and/or quarterly valuation process.

Financial Instruments Recorded at Fair Value on a Recurring Basis

Securities Available for Sale. The fair values of securities available for sale are determined by quoted prices in active markets, when available. If quoted market prices are not available, the fair value is determined by a matrix pricing, which is a mathematical technique, widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities.

Derivatives. Derivative assets and liabilities represent interest rate contracts between the Company and loan customers, and between the Company and outside parties to whom we have made a commitment to sell residential mortgage loans at a set interest rate. These are valued based upon the differential between the interest rates upon the inception of the contract and the current market interest rates for similar products. Changes in market value are recorded in current earnings. 

The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of June 30, 2010 and December 31, 2009, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (in thousands):

June 30, 2010	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(In thousands)
Financial Assets:
Investment securities available for sale:
Government sponsored agencies	$	85,281	$	-	$	85,281	$	-
States and political subdivisions		27,056		-		27,056		-
Residential mortgage-backed securities		70,332		-		70,332		-
Interest rate lock commitments, mandatory forward delivery commitments and pair offs		228		-		228		-
Financial Liabilities:
Interest rate lock commitments, mandatory forward delivery commitments and pair offs	$	158	$	-	$	158	$	-
Off-balance-sheet instruments:
Loan commitments and standby letters of credit	$	26	$	-	$	26	$	-
December 31, 2009
Financial Assets:
Investment securities available for sale:
Government sponsored agencies	$	68,382	$	-	$	68,382	$	-
States and political subdivisions		26,519		-		26,519		-
Residential mortgage-backed securities		41,855		-		41,855		-
Interest rate lock commitments, mandatory forward delivery commitments and pair offs		251		-		251		-
Financial Liabilities:
Interest rate lock commitments, mandatory forward delivery commitments and pair offs	$	1	$	-	$	1	$	-
Off-balance-sheet instruments:
Loan commitments and standby letters of credit	$	24	$	-	$	24	$	-

There were no financial assets measured at fair value on a recurring basis for which the Company used significant unobservable inputs (Level 3) during the periods presented in these financial statements.

Financial Instruments Recorded at Fair Value on a Nonrecurring Basis

The Company may be required, from time to time, to measure certain financial assets and financial liabilities at fair value on a nonrecurring basis in accordance with U.S. generally accepted accounting principles. These include assets that are measured at the lower of cost or market value that were recognized at fair value below cost at the end of the period.

Impaired Loans.Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired.  Once a loan is identified as impaired, management measures the amount of that impairment in accordance with ASC Topic 310.  The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows.  Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans.  At June 30, 2010, substantially all of the total impaired loans were evaluated based on the fair value of the collateral.  In accordance with ASC Topic 820, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy.  Collateral values are estimated using Level 3 inputs based on customized discounting criteria.  For a majority of impaired loans, the Company obtains a current independent appraisal of loan collateral.  Other valuation techniques are used as well, including internal valuations, comparable property analysis and contractual sales information.  For substantially all impaired loans with an appraisal more than 6 months old, the Company further discounts market prices by 10% to 30% and in some cases, up to an additional 50%.  This discount is based on our evaluation of related market conditions and is in addition to a reduction in value for potential sales costs and discounting that has been incorporated in the independent appraisal.

Loans held for sale. Loans held for sale are valued based upon open market quotes obtained from the Federal National Mortgage Association (FNMA). Market pricing is based upon mortgage loans with similar terms and interest rates. The change in market value (up to the amortized value of the loans held for sale) is recorded as an adjustment to the loans held for sale valuation allowance, with the offset being recorded as an addition or a reduction to current earnings.

Mortgage Servicing Rights. Mortgage servicing rights (MSRs) are valued based upon the value of MSRs that are traded on the open market and a current market value for each risk tranche in our portfolio is assigned. We then compare that market value to the current amortized book value for each tranche. The change in market value (up to the amortized value of the MSR) is recorded as an adjustment to the MSR valuation allowance, with the offset being recorded as an addition or a reduction to current earnings. Only the tranches deemed impaired are included in the following table.

Non-Financial Assets and Non-Financial Liabilities Recorded at Fair Value

Application of ASC Topic 820 to non-financial assets and non-financial liabilities became effective January 1, 2009. The Company has no non-financial assets or non-financial liabilities measured at fair value on a recurring basis. Certain non-financial assets and non-financial liabilities measured at fair value on a non-recurring basis include foreclosed assets.

Other Real Estate and Other Repossessed Assets (Foreclosed Assets). Foreclosed assets, upon initial recognition, are measured and reported at fair value through a charge-off to the allowance for possible loan losses based upon the fair value of the foreclosed asset. The fair value of foreclosed assets, upon initial recognition, are estimated using Level 3 inputs based on customized discounting criteria.

During the second quarter of 2010 and the year ended December 31, 2009, certain foreclosed assets, upon initial recognition, were remeasured and reported at fair value through a charge-off to the allowance for loan losses based upon the fair value of the foreclosed asset, less estimated costs of disposal. The fair value of foreclosed asset, upon initial recognition, is estimated using Level 2 inputs based on observable market data or Level 3 inputs based on customized discounting criteria. Foreclosed assets measured at fair value (less estimated disposal costs) upon initial recognition totaled $19.3 million and $25.0 million (utilizing Level 3 valuation inputs) during the three months ended June 30, 2010 and the year ended December 31, 2009, respectively. In connection with the measurement and initial recognition of the foregoing foreclosed assets, the Company recognized charge-offs of the allowance for loan losses totaling $1.2 million and $3.7 million, during the three months ended June 30, 2010 and the year ended December 31, 2009, respectively. Other than foreclosed assets measured at fair value (less estimated disposal costs) upon initial recognition, a total of $4.9 million and $2.0 million in foreclosed assets were remeasured at fair value during the six months ended June 30, 2010 and the year ended December 31, 2009, respectively, resulting in a charge of $1.1 million and $283 thousand to current earnings, respectively.

Assets measured at fair value on a nonrecurring basis as of June 30, 2010 and December 31, 2009 are included in the table below (in thousands):

June 30, 2010	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(In thousands)
Financial Assets:
Impaired loans	$	11,321	$	-	$	-	$	11,321
Loans held for sale		-		-		-		-
Mortgage servicing rights		5,746		-		-		5,746
Non-Financial Assets:
Foreclosed assets		29,513		-		-		29,513
December 31, 2009
Financial Assets:
Impaired loans	$	14,954	$	-	$	-	$	14,954
Loans held for sale		3,522		-		3,522		-
Mortgage servicing rights		3,049		-		-		3,049
Non-Financial Assets:
Foreclosed assets		16,750		-		-		16,750

ASC Topic 825 requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis.  The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring or non-recurring basis are discussed above.  The estimated fair value approximates carrying value for cash and cash equivalents and accrued interest.  The methodologies for other financial assets and financial liabilities are discussed below:

The following methods and assumptions were used by the Company in estimating the fair values of its other financial instruments:

Cash and due from banks and interest bearing deposits with banks: The carrying amounts reported in the balance sheet approximate fair value.

Non-marketable securities, including FHLB and FRB Stock: The carrying amounts reported in the balance sheet approximate fair value.

Federal funds sold and securities purchased under resell agreements: The carrying amounts reported in the balance sheet approximate fair value.

Loans: Most commercial loans and some real estate mortgage loans are made on a variable rate basis.  For those variable-rate loans that reprice frequently with no significant change in credit risk, fair values are based on carrying values.  The fair values for fixed rate and all other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers with similar credit quality.

Non-interest bearing deposits: The fair values disclosed are equal to their balance sheet carrying amounts, which represent the amount payable on demand.

Interest bearing deposits: The fair values disclosed for deposits with no defined maturities are equal to their carrying amounts, which represent the amounts payable on demand.  The carrying amounts for variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date.  Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on similar certificates to a schedule of aggregated expected monthly maturities on time deposits.

Short-term borrowings: The carrying amounts of federal funds purchased, borrowings under repurchase agreements and other short-term borrowings with maturities of 90 days or less approximate their fair values.  The fair value of short-term borrowings greater than 90 days is based on the discounted value of contractual cash flows.

Long-term borrowings: The fair values of the Company's long-term borrowings (other than deposits) are estimated using discounted cash flow analyses, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements.

Junior subordinated notes issued to capital trusts: The fair values of the Company’s junior subordinated notes issued to capital trusts are estimated based on the quoted market prices, when available, of the related trust preferred security instruments, or are estimated based on the quoted market prices of comparable trust preferred securities.

Off-balance-sheet instruments: Fair values for the Company's off-balance-sheet lending commitments in the form of letters of credit are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements.

Accrued interest: The carrying amounts reported in the balance sheet approximate fair value.

The estimated fair values of financial instruments are as follows:

	June 30, 2010				December 31, 2009
	Carrying amount		Fair value		Carrying amount		Fair value
	(In thousands)
Financial assets:
Cash and due from banks	$	20,424	$	20,424	$	18,761	$	18,761
Interest-bearing deposits with banks		72,591		72,591		188,114		188,114
Federal funds sold and securities purchased under resell agreements		112		112		620		620
Investments:
Available for sale		182,669		182,669		136,756		136,756
Held to maturity		11,271		11,424		11,436		10,808
Other investments		9,397		9,397		9,568		9,568
Loans, net		1,158,389		1,174,179		1,215,282		1,203,138
Loans held for sale		7,948		8,101		9,245		9,268
Accrued interest receivable		7,232		7,232		6,840		6,840
Mortgage servicing rights		7,044		7,152		7,647		8,754
Derivative financial instruments		228		228		251		251
Financial liabilities:
Non-interest bearing deposits	$	85,896	$	85,896	$	87,238	$	87,238
Interest bearing deposits		1,276,540		1,281,501		1,381,207		1,385,968
Short-term borrowings		1,173		1,208		20,000		20,182
Long-term borrowings		32,300		34,153		13,493		14,620
Junior subordinated debt owed to unconsolidated trusts		37,116		18,339		37,116		18,118
Accrued interest payable		4,644		4,644		5,038		5,038
Derivative financial instruments		158		158		1		1
Off-balance sheet instruments:
Standby letters of credit	$	26	$	26	$	24	$	24

Note 18. Subsequent Events

On July 29, 2010, a settlement was approved by the United States Bankruptcy Court regarding a dispute between a customer of the Bank and the New Mexico Department of Transportation, the majority of the proceeds of which will be paid directly to the Bank.  The appeal period on the Court's order expired on August 9, 2010 with no appeals filed.  Under the settlement agreement, all payments due to the Bank must be received by August 31, 2010.

During the third quarter $7.3 million will be received by the Bank and will affect the Company’s financials by decreasing non-performing loans by $2.1 million, applying a recovery to the allowance for loan and lease losses of $2.9 million and applying $1.3 million to interest income.  The remaining $1.0 million will be paid to other claimants.

On August 13, 2010, the Company elected to exercise the option to defer the payment of dividends on the Preferred Stock issues, as provided by the agreements under which the stock was issued. The dividend payments would normally be paid on August 15, 2010, in the amount of $444,237.50 for Series A Preferred Stock and $39,982.50 for Series B Preferred Stock. Both Series A and Series B Preferred Stock were issued under the Treasury's Capital Purchase Plan.

In addition, the Company elected to exercise the option to defer the payment of interest on Trust Preferred Securities issues, as provided by the agreements under which the Trust Preferred Securities were issued.

The following schedule of interest payments are deferred under the agreements:

·   August 23, 2010, $172,000.00 for Trinity Capital Trust IV

·   September 8, 2010, $543,750.00 for Trinity Capital Trust I

·   September 8, 2010, $49,656.08 for Trinity Capital III

·   September 15, 2010, $170,750.00 for Trinity Capital Trust V

The deferral of distributions on the Trust Preferred Securities will continue to accrue as interest expense payable by the Company and the dividends on the Preferred Stock will continue to accrue as dividends payable. Further, the Company is prohibited from declaring or paying any dividends on its common stock while distributions and dividend payments on the Trust Preferred Securities and the Preferred Stock are in arrears.

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

This discussion is intended to focus on certain financial information regarding the Company and is written to provide the reader with a more thorough understanding of its financial statements. The following discussion and analysis of the Company’s financial position and results of operations should be read in conjunction with the information set forth in Item 3, Quantitative and Qualitative Disclosures about Market Risk and the annual audited consolidated financial statements filed on Form 10-K for the year ended December 31, 2009, as amended.

This report contains certain financial information determined by methods other than in accordance with GAAP. These measures include net operating income before provision for loan losses, income taxes and dividends and discount accretion on preferred shares; net interest margin on a fully tax-equivalent basis and net interest income on a fully tax-equivalent basis. Management uses these non-GAAP measures in its analysis of the Company’s performance. Net operating income before provision for loan losses, income taxes and dividends and discount accretion on preferred shares represent net income on the core operations of the Company. The tax-equivalent adjustment to net interest margin and net interest income recognizes the income tax savings when comparing taxable and tax-exempt assets and adjusting for federal and state exemption of interest income and certain other permanent income tax differences. Management believes that it is a standard practice in the banking industry to present net interest income and net interest margin on a fully tax-equivalent basis, and accordingly believes the presentation of the financial measures may be useful for peer comparison purposes. This disclosure should not be viewed as a substitute for the results determined to be in accordance with GAAP, nor is it necessarily comparable to non-GAAP performance measures that may be presented by other companies. Reconciliations of net interest income on a fully tax-equivalent basis to net interest income and net interest margin on a fully tax-equivalent basis to net interest margin are contained in tables under “Net Interest Income.”

Special Note Concerning Forward-Looking Statements

This document (including information incorporated by reference) contains, and future oral and written statements of the Company and its management may contain, forward-looking statements, 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 be based upon beliefs, expectations and assumptions of the Company’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” or other similar expressions. Additionally, all statements in this document, including forward-looking statements, speak only as of the date they are made, and the Company undertakes no obligation to update any statement in light of new information or future events.

The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. The factors, which could have a material adverse effect on the operations and future prospects of the Company and its subsidiaries are detailed in the “Risk Factors” section included under Item 1A of Part I of the Company’s Form 10-K for the year ended December 31, 2009, as amended. In addition to the risk factors described in that section, there are other factors that may impact any public company, including ours, which could have a material adverse effect on the operations and future prospects of the Company and its subsidiaries. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.

Recent Legislation Impacting the Financial Services Industry

On July 21 2010, sweeping financial regulatory reform legislation entitled the “Dodd-Frank Wall Street Reform and Consumer Protection Act” (the “Dodd-Frank Act”) was signed into law. The Dodd-Frank Act implements far-reaching changes across the financial regulatory landscape, including provisions that, among other things:

·   Create a Financial Services Oversight Council to identify emerging systemic risks and improve interagency cooperation;

·   Centralize responsibility for consumer financial protection by creating a new agency, the Consumer Financial Protection Bureau, responsible for implementing, examining and enforcing compliance with federal consumer financial laws;

·   Establish strengthened capital standards for banks and bank holding companies, and disallow trust preferred securities from being included in a bank’s Tier 1 capital determination (subject to a grandfather provision for existing trust preferred securities);

·   Contain a series of provisions covering mortgage loan original standards affecting, among other things, originator compensation, minimum repayment standards and pre-payments;

·   Require financial holding companies, such as the Company, to be well-capitalized and well-managed as of July 21, 2011. Bank holding companies and banks must also be both well-capitalized and well-managed in order to acquire banks located outside their home state;

·   Grant the Federal Reserve the power to regulate debit card interchange fees;

·   Implement corporate governance revisions, including with regard to executive compensation and proxy access by shareholders, that apply to all public companies, not just financial institutions;

·   Make permanent the $250 thousand limit for federal deposit insurance and increase the cash limit of Securities Investor Protection Corporation protection from $100 thousand to $250 thousand and provide unlimited federal deposit insurance until January 1, 2013 for non-interest bearing demand transaction accounts at all insured depository institutions;

·   Repeal the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts; and

·   Increase the authority of the Federal Reserve to examine the Company and its nonbank subsidiaries.

Many aspects of the Dodd-Frank Act are subject to rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact on the Company, its customers or the financial industry more generally. Provisions in the legislation that affect deposit insurance assessments, payment of interest on demand deposits and interchange fees could increase the costs associated with deposits as well as place limitations on certain revenues those deposits may generate. Provisions in the legislation that revoke the Tier 1 capital treatment of trust preferred securities and otherwise require revisions to the capital requirements of the Company and the Bank could require them to seek other sources of capital in the future.

Critical Accounting Policies

Allowance for Loan Losses: The allowance for loan losses is that amount which, in management’s judgment, is considered appropriate to provide for probable losses in the loan portfolio. In analyzing the adequacy of the allowance for loan losses, management uses a comprehensive loan grading system to determine risk potential in the portfolio, and considers the results of periodic internal and external loan reviews. Historical loss experience factors and specific reserves for impaired loans, combined with other considerations, such as delinquency, non-accrual, trends on criticized and classified loans, economic conditions, concentrations of credit risk, and experience and abilities of lending personnel, are also considered in analyzing the adequacy of the allowance. Management uses a systematic methodology, which is applied at least quarterly, to determine the amount of allowance for loan losses and the resultant provisions for loan losses it considers adequate to provide for anticipated loan losses. This methodology includes a periodic detailed analysis of the loan portfolio, a systematic loan grading system and a periodic review of the summary of the allowance for loan and lease loss balance. In the event that different assumptions or conditions were to prevail, and depending upon the severity of such changes, the possibility of materially different financial condition or results of operations is a reasonable likelihood.

Three methods are used to evaluate the adequacy of the allowance for loan losses: (1) specific identification, based on management’s assessment of loans in our portfolio and the probability that a charge-off will occur in the upcoming quarter; (2) losses probable in the loan portfolio besides those specifically identified, based upon a migration analysis of the percentage of loans currently performing that have probable losses; and (3) qualitative adjustments based on management’s assessment of certain risks such as delinquency trends, watch-list and classified trends, changes in concentrations, economic trends, industry trends, non-accrual trends, exceptions and loan-to-value guidelines, management and staff changes and policy or procedure changes.

While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions. In addition, as an integral part of their examination process regulatory agencies periodically review our allowance for loan losses and may require us to make additions to the allowance based on their evaluation of information available at the time of their examinations.

During the second quarter of 2010, the Company experienced some improvement when compared to the prior year's deterioration in asset quality, as measured by non-performing assets and classified loans to those that are still performing. Management remains concerned about possible losses in its real estate loan portfolio. Management deemed the allocations during the second quarter of 2010 to be a necessary and prudent step to reserve against probable losses. Management will continue to closely monitor asset quality in general, and real estate loan quality in particular, and is committed to act aggressively to minimize further losses.

See also Note 18, “Subsequent Event”, in Part I, “Financial Information”--Item 1, “Financial Statements” in this Form 10-Q, for a ruling in favor of the Bank that will materially affect the third quarter financial results.

Mortgage Servicing Right (MSR) Assets: Servicing residential mortgage loans for third-party investors represents a significant business activity of the Bank. As of June 30, 2010, mortgage loans serviced for others totaled $1.0 billion. The net carrying amount of the MSRs on these loans total $7.0 million as of June 30, 2010. The expected and actual rates of mortgage loan prepayments are the most significant factors driving the value of MSRs. Increases in mortgage loan prepayments reduce estimated future net servicing cash flows because the life of the underlying loan is reduced. In determining the fair value of the MSRs, mortgage interest rates, which are used to determine prepayment rates and discount rates, are held constant over the estimated life of the portfolio. Fair values of the MSRs are calculated on a monthly basis. The values are based upon current market conditions and assumptions, which incorporate the expected life of the loans, estimated costs to service the loans, servicing fees to be received and other factors. MSRs are carried at the lower of the initial capitalized amount, net of accumulated amortization, or fair value.

An analysis of changes in mortgage servicing rights assets follows:

	Three Months Ended						Six Months Ended
	June 30,
	2010			2009			2010			2009
	(In thousands)
Balance at beginning of period	$	8,330		$	7,746		$	8,525		$	6,908
Servicing rights originated and capitalized		373			1,206			680			2,686
Amortization		(422	)		(647	)		(924	)		(1,289	)
	$	8,281		$	8,305		$	8,281		$	8,305

Below is an analysis of changes in the mortgage servicing right assets valuation allowance:

	Three Months Ended						Six Months Ended
	June 30,
	2010			2009			2010			2009
	(In thousands)
Balance at beginning of period	$	(685	)	$	(1,981	)	$	(878	)	$	(1,637	)
Aggregate reductions credited to operations		-			746			332			1,250
Aggregate additions charged to operations		(552	)		-			(691	)		(848	)
	$	(1,237	)	$	(1,235	)	$	(1,237	)	$	(1,235	)

The fair values of the MSRs were $7.2 million and $8.8 million on June 30, 2010 and December 31, 2009, respectively.

The primary risk characteristics of the underlying loans used to stratify the servicing assets for the purposes of measuring impairment are interest rate and original term.

Our valuation allowance is used to recognize impairments of our MSRs. An MSR is considered impaired when the market value of the MSR is below the amortized book value of the MSR. The MSRs are accounted by risk tranche, with the interest rate and term of the underlying loan being the primary strata used in distinguishing the tranches. Each tranche is evaluated separately for impairment.

We have our MSRs analyzed for impairment on a monthly basis. The underlying loans on all serviced loans are analyzed and, based upon the value of MSRs that are traded on the open market, a current market value for each risk tranche in our portfolio is assigned. We then compare that market value to the current amortized book value for each tranche. The change in market value (up to the amortized value of the MSR) is recorded as an adjustment to the MSR valuation allowance, with the offset being recorded as an addition or a reduction to income.

The impairment is analyzed for other than temporary impairment on a quarterly basis. The MSRs would be considered other than temporarily impaired if there is likelihood that the impairment would not be recovered before the expected maturity of the asset. If the underlying mortgage loans have been amortized at a rate greater than the amortization of the MSR, the MSR may be other than temporarily impaired. As of June 30, 2010, none of the MSRs were considered other than temporarily impaired.

The following assumptions were used to calculate the market value of the MSRs as of June 30, 2010 and December 31, 2009:

	June 30, 2010			December 31, 2009
Prepayment Standard Assumption (PSA) speed		308.33	%		232.00	%
Discount rate		10.75			10.76
Earnings rate		2.05			2.75

Overview

The Company’s net (loss) available to common shareholders increased by $5.0 million from the quarter ended March 31, 2010 to the quarter ended June 30, 2010, moving from a net loss of $(93) thousand to a net loss of $(5.1) million. In addition, the Company’s net (loss) available to common shareholders increased $2.8 million from the second quarter of 2009 to the second quarter of 2010, moving from net loss of $(2.3) million to a net loss of $(5.1) million. The increase in net (loss) available to common shareholders from the second quarter of 2009 was primarily due to an increase in non-interest expense and a decrease in non-interest income. The increase in non-interest expense was primarily due to an increase in the amortization and valuation of mortgage servicing rights and an increase in the loss on sale of other real estate owned. The decrease in non-interest income was primarily due to the large mortgage refinance activity that took place in the second quarter of 2009 which was not experienced in the second quarter of 2010.  Total assets decreased by $113.9 million from December 31, 2009 to June 30, 2010, mainly due to decreases in cash and cash equivalents and net loans. These decreases were partially offset by an increase in investment securities. The decrease in assets was largely due to a decreased loan demand and planned as part of a move to enhance capital ratios.

Regulatory Proceedings Against the Bank.  As previously disclosed, the Bank and the OCC entered into a written agreement (the “Agreement”) on January 26, 2010.   The Agreement contains, among other things, directives for the Bank to take specific actions, within time frames specified therein, to address risk management and capital matters that, in the view of the OCC, may impact the Bank’s overall safety and soundness.  Specifically, the Bank is required to, among other things: (i) continue to develop, implement and ensure adherence to written programs designed to reduce the level of credit risk in the Bank’s loan portfolio; (ii) review, revise and ensure adherence to a written capital program; (iii) comply with its approved capital program, which calls for maintaining higher than the regulatory minimum capital ratios; and (iv) obtain prior OCC approval before paying dividends.

At June 30, 2010 and August 16, 2010, the Bank believed that it has fully addressed the provisions of the Agreement.  The Bank will continue taking the necessary actions to satisfy all requirements in the Agreement.  A copy of the Agreement was filed as Exhibit 99-1 to the Company’s Current Report on Form 8-K filed on February 1, 2010 with the SEC.  The filing is available on the SEC’s website and the Company’s website.

Results of Operations

General. The Company experienced net operating income before income taxes, provision for loan losses and dividends and discount accretion on preferred shares of $4.0 million during the second quarter of 2010, compared to net operating income of $9.4 million during the same period in 2009. This represented a decrease of $5.5 million (57.9%). Net (loss) available to common shareholders for the second quarter of 2010 increased to a loss of $(5.1) million or $(0.80) diluted (loss) per share, compared to a loss of $(2.3) million or $(0.36) diluted earnings (loss) per share for the same period in 2009, an increase of $2.8 million (119.5%) in net income available to common shareholders and a decrease in earnings per share of $0.44 (122.2%). This increase in net (loss) was primarily due to an increase in the non-interest expense of $3.0 million (31.4%) and a decrease in non-interest income of $1.5 million (30.2%). The increase in non-interest expense was primarily due to an increase in the amortization and valuation of mortgage servicing rights of $1.1 million and an increase in loss on sale of other real estate owned of $740 thousand. The increase in the amortization and valuation of mortgage servicing rights was due to a lower interest rate environment in 2010, resulting in a higher valuation allowance.  The increase in loss on sale of other real estate owned was due to a higher volume of sales of foreclosed property in 2010, as well as an increase in the write-down of this real estate prior to disposal, due to lower appraised values on the real estate. The decrease in non-interest income was primarily due to a decrease in the gain on sale of loans of $1.7 million, due to a drop in mortgage loan refinance activity from high levels during the second quarter of 2009. There was also a decrease in net interest income of $939 thousand (6.6%) and a decrease in the provision for loan losses of $1.5 million (12.1%).  Provision (benefit) for income taxes decreased $1.1 million (82.3%) due to lower pre-tax income.

The Company experienced net operating income before income taxes, provision for loan losses and dividends and discount accretion on preferred shares of $9.3 million during the first six months of 2010, compared to net operating income of $18.8 million during the same period in 2009. This represented a decrease of $9.5 million (50.5%). Net income (loss) available to common shareholders for the first six months of 2010 decreased to a loss of $(5.2) million or $(0.81) diluted (loss) per share, compared to income of $875 thousand or $0.14 diluted earnings per share for the same period in 2009, a decrease of $6.1 million (696.0%) in net income available to common shareholders and a decrease in earnings per share of $0.95 (678.6%). This decrease in net income was primarily due to a decrease in the non-interest income of $4.9 million (43.1%) and an increase in non-interest income of $3.5 million (17.5%). The decrease in non-interest income was primarily due to a decrease in the gain on sale of loans of $4.0 million, due to a drop in mortgage loan refinance activity from high levels during the first six months of 2009.  The increase in non-interest expense was primarily due to an increase in loss on sale of other real estate owned of $954 thousand, an increase in FDIC insurance premiums of $648 thousand, an increase in collection expenses of $537 thousand and an increase in salaries and employee benefits of $467 thousand. The increase in loss on sale of other real estate owned was due to a higher volume of sale of foreclosed property in 2010, as well as an increase in the write-down of this real estate prior to disposal, due to lower appraised values on the real estate. The increase in FDIC insurance premiums was due to both an increase in the base assessment rate experienced industry-wide and an increase in the expense due to a change in the Bank's risk profile related to the Bank's Agreement with the OCC. The increase in collection expenses was directly related to the increase in activity in collecting and disposing of non-performing assets. The increase in salaries and employee benefits was primarily due to increases in staff related to the Bank’s newest office in Santa Fe, which opened in October 2009. There was also a decrease in net interest income of $1.0 million (3.8%) and a decrease in the provision for loan losses of $1.4 million (8.5%).  Provision (benefit) for income taxes decreased $2.5 million (418.4%) due to lower pre-tax income.  In addition, dividends and discount accretion on preferred shares increased $505 thousand (91.5%) between the two periods, as these preferred shares were not issued until near the end of the first quarter of 2009.

The profitability of the Company’s operations depends primarily on its net interest income, which is the difference between total interest earned on interest-earning assets and total interest paid on interest-bearing liabilities. The Company’s net income is also affected by its provision for loan losses as well as other income and other expenses. The provision for loan losses reflects the amount management believes to be adequate to cover probable credit losses in the loan portfolio. Non-interest income or other income consists of mortgage loan servicing fees, trust fees, loan and other fees, service charges on deposits, gain on sale of loans, gain on sale of securities, title insurance premiums and other operating income. Other expenses include salaries and employee benefits, occupancy expenses, data processing expenses, marketing, amortization and valuation of mortgage servicing rights, amortization and valuation of other intangible assets, supplies expense, loss on other real estate owned, postage, bankcard and ATM network fees, legal, professional and accounting fees, FDIC insurance premiums, collection expenses and other expenses.

The amount of net interest income is affected by changes in the volume and mix of interest-earning assets, the level of interest rates earned on those assets, the volume and mix of interest-bearing liabilities, and the level of interest rates paid on those interest-bearing liabilities. The provision for loan losses is dependent on changes in the loan portfolio and management’s assessment of the collectability of the loan portfolio, as well as economic and market conditions. Other income and other expenses are impacted by growth of operations and growth in the number of accounts through both acquisitions and core banking business growth. Growth in operations affects other expenses as a result of additional employees, branch facilities and promotional marketing expenses. Growth in the number of accounts affects other income including service fees as well as other expenses such as computer services, supplies, postage, telecommunications and other miscellaneous expenses.

Net Interest Income. The following tables present, for the periods indicated, the total dollar amount of interest income from average interest earning assets and the resultant yields, as well as the interest expense on average interest bearing liabilities, and the resultant costs, expressed both in dollars and rates:

	Three Months Ended June 30,
	2010							2009
	Average Balance		Interest		Yield/Rate			Average Balance		Interest		Yield/Rate
	(Dollars in thousands)
Interest-earning Assets:
Loans(1)	$	1,210,503	$	16,638		5.51	%	$	1,217,988	$	18,998		6.26	%
Taxable investment securities		139,192		776		2.24			75,643		946		5.02
Investment securities exempt from federal income taxes (2)		37,497		482		5.16			30,526		419		5.51
Federal funds sold		124		-		-			346		-		-
Other interest-bearing deposits		119,150		75		0.25			138,123		77		0.22
Investment in unconsolidated trust subsidiaries		1,116		21		7.55			1,116		21		7.55
Total interest-earning assets		1,507,582		17,992		4.79			1,463,742		20,461		5.61
Non-interest-earning assets		86,698							98,278
Total assets	$	1,594,280						$	1,562,020
Interest-bearing Liabilities:
Deposits:
NOW deposits	$	119,828	$	67		0.22	%	$	108,534	$	116		0.43	%
Money market deposits		206,264		126		0.25			190,510		276		0.58
Savings deposits		351,323		241		0.28			319,512		281		0.35
Time deposits over $100,000		418,263		2,115		2.03			393,183		2,915		2.97
Time deposits under $100,000		215,821		1,056		1.96			206,515		1,429		2.78
Short-term borrowings, including ESOP borrowings under 1 year		1,215		17		5.61			39,566		189		1.92
Long-term borrowings, including ESOP borrowings over 1 year		32,300		253		3.14			12,889		213		6.63
Long-term capital lease obligations		2,211		67		12.15			2,211		67		12.15
Junior subordinated debt owed to unconsolidated trusts		37,116		684		7.39			37,116		697		7.53
Total interest-bearing liabilities		1,384,341		4,626		1.34			1,310,036		6,183		1.89
Demand deposits--non-interest-bearing		46,231							40,432
Other non-interest-bearing liabilities		41,863							82,675
Stockholders' equity, including stock owned by ESOP		121,845							128,877
Total liabilities and stockholders equity	$	1,594,280						$	1,562,020
Net interest income on a fully tax-equivalent basis/interest rate Spread(3)			$	13,366		3.45	%			$	14,278		3.71	%
Net interest margin on a fully tax-equivalent basis(4)						3.56	%						3.91	%
Net interest margin(4)						3.51	%						3.87	%

 (1) Average loans include non-accrual loans of $64.4 million and $41.4 million for June 30, 2010 and 2009, respectively. Interest income includes loan origination fees of $456 thousand and $954 thousand for the three months ended June 30, 2010 and 2009, respectively.

(2) Non-taxable investment income is presented on a fully tax-equivalent basis, adjusting for federal and state exemption of interest income and certain other permanent tax differences.

(3) Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities and is presented on a fully tax-equivalent basis.

(4) Net interest margin represents net interest income as a percentage of average interest-earning assets.

For the second quarter of 2010, net interest income on a fully tax-equivalent basis decreased $912 thousand (6.4%) compared to the second quarter of 2009, dropping from $14.3 million in 2009 to $13.4 million in 2010. The decrease in net interest income on a fully tax-equivalent basis resulted from a decrease in interest income on a fully tax-equivalent basis of $2.5 million (12.1%), which was partially offset by a decrease in interest expense of $1.6 million (25.2%). Interest income on a fully tax-equivalent basis decreased mainly due to a decrease in the yield on interest-earning assets of 82 basis points, which accounted for a decrease in interest income on a fully tax-equivalent basis of $3.0 million. This was partially offset by an increase in average interest-earning assets of $43.8 million (3.0%), which accounted for an increase of $493 thousand in interest income on a fully tax-equivalent basis. Interest expense decreased due to a decrease in the cost of interest-bearing liabilities of 55 basis points, which accounted for a $1.7 million decrease. This was partially offset by an increase in average total interest-bearing liabilities of $74.3 million (5.7%), accounting for an increase in $190 thousand in interest expense. The net interest margin expressed on a fully tax-equivalent basis decreased 35 basis points to 3.56% for the quarter ended June 30, 2010 from 3.91% for the quarter ended June 30, 2009.

	Six Months Ended June 30,
	2010							2009
	Average Balance		Interest		Yield/Rate			Average Balance		Interest		Yield/Rate
	(Dollars in thousands)
Interest-earning Assets:
Loans(1)	$	1,223,197	$	33,910		5.59	%	$	1,250,334	$	37,990		6.13	%
Taxable investment securities		127,817		1,409		2.22			69,919		1,144		3.30
Investment securities exempt from federal income taxes (2)		37,494		963		5.18			26,356		767		5.87
Federal funds sold		316		-		-			1,295		1		0.16
Other interest-bearing deposits		128,813		180		0.28			88,115		86		0.20
Investment in unconsolidated trust subsidiaries		1,116		41		7.41			1,116		42		7.59
Total interest-earning assets		1,518,753		36,503		4.85			1,437,135		40,030		5.62
Non-interest-earning assets		86,867							57,875
Total assets	$	1,605,620						$	1,495,010
Interest-bearing Liabilities:
Deposits:
NOW deposits	$	111,102	$	137		0.25		$	107,881	$	237		0.44	%
Money market deposits		208,942		263		0.25			193,502		450		0.47
Savings deposits		361,203		508		0.28			319,816		661		0.42
Time deposits over $100,000		408,576		4,473		2.21			366,812		5,627		3.09
Time deposits under $100,000		215,567		2,187		2.05			209,027		2,958		2.85
Short-term borrowings, including ESOP borrowings under 1 year		10,028		233		4.69			29,938		252		1.70
Long-term borrowings, including ESOP borrowings over 1 year		23,473		381		3.27			20,980		524		5.04
Long-term capital lease obligations		2,211		134		12.22			2,211		134		12.22
Junior subordinated debt owed to unconsolidated trusts		37,116		1,367		7.43			37,116		1,406		7.64
Total interest-bearing liabilities		1,378,218		9,683		1.42			1,287,283		12,249	��	1.92
Demand deposits--non-interest-bearing	$	46,017						$	45,058
Other non-interest-bearing liabilities		58,847							45,156
Stockholders' equity, including stock owned by ESOP		122,538							117,513
Total liabilities and stockholders equity	$	1,605,620						$	1,495,010
Net interest income on a fully tax-equivalent basis/interest rate Spread(3)			$	26,820		3.43	%			$	27,781		3.70	%
Net interest margin on a fully tax-equivalent basis(4)						3.56	%						3.90	%
Net interest margin(4)						3.51	%						3.86	%

(1)	Average loans include non-accrual loans of $66.1 million and $39.4 million for June 30, 2010 and 2009, respectively. Interest income includes loan origination fees of $920 thousand and $1.9 million for the six months ended June 30, 2010 and 2009, respectively.
(2)	Non-taxable investment income is presented on a fully tax-equivalent basis, adjusting for federal and state exemption of interest income and certain other permanent tax differences.

(3) Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities and is presented on a fully tax-equivalent basis.

(4) Net interest margin represents net interest income as a percentage of average interest-earning assets.

For the first six months of 2010, net interest income on a fully tax-equivalent basis decreased $961 thousand (3.5%) compared to the first six months of 2009, dropping from $27.8 million in 2009 to $26.8 million in 2010. The decrease in net interest income on a fully tax-equivalent basis resulted from a decrease in interest income on a fully tax-equivalent basis of $3.5 million (8.8%), which was partially offset by a decrease in interest expense of $2.6 million (20.9%). Interest income on a fully tax-equivalent basis decreased mainly due to a decrease in the yield on interest-earning assets of 77 basis points, which accounted for a decrease in interest income on a fully tax-equivalent basis of $3.8 million. This was partially offset by an increase in average interest-earning assets of $81.6 million (5.7%), which accounted for an increase of $257 thousand in interest income on a fully tax-equivalent basis. Interest expense decreased due to a decrease in the cost of interest-bearing liabilities of 50 basis points, which accounted for a $3.2 million decrease. This was partially offset by an increase in average total interest-bearing liabilities of $90.9 million (7.1%), accounting for an increase in $605 thousand in interest expense. The net interest margin expressed on a fully tax-equivalent basis decreased 34 basis points to 3.56% for the quarter ended June 30, 2010 from 3.90% for the quarter ended June 30, 2009.

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

	Three Months Ended				Six Months Ended
	June 30,
	2010		2009		2010		2009
	(In thousands)
Net interest income	$	13,183	$	14,122	$	26,454	$	27,494
Tax-equivalent adjustment to net interest income		183		156		366		287
Net interest income, fully tax-equivalent basis	$	13,366	$	14,278	$	26,820	$	27,781

Volume, Mix and Rate Analysis of Net Interest Income. The following tables present the extent to which changes in volume, changes in interest rates, and changes in the interest rates times the changes in volume of interest-earning assets and interest-bearing liabilities have affected the Company’s interest income and interest expense during the periods indicated. Information is provided on changes in each category due to (i) changes attributable to changes in volume (change in volume times the prior period interest rate), (ii) changes attributable to changes in interest rate (changes in rate times the prior period volume) and (iii) changes attributable to changes in rate/volume (changes in interest rate times changes in volume). Changes attributable to the combined impact of volume and rate have been allocated proportionally to the changes due to volume and the changes due to rate.

	Three Months Ended June 30,									Six Months Ended June 30,
	2010 Compared to 2009									2010 Compared to 2009
	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	$	(116	)	$	(2,244	)	$	(2,360	)	$	(811	)	$	(3,269	)	$	(4,080	)
Taxable investment securities		530			(700	)		(170	)		725			(460	)		265
Investment securities exempt from federal income taxes(1)		91			(28	)		63			294			(98	)		196
Federal funds sold		-			-			-			(1	)		(1	)		(1	)
Other interest bearing deposits		(12	)		10			(2	)		49			45			94
Investment in unconsolidated trust subsidiaries		-			-			-			-			(1	)		(1	)
Total increase (decrease) in interest income	$	493		$	(2,962	)	$	(2,469	)	$	257		$	(3,784	)	$	(3,527	)
Interest-bearing Liabilities:
Now deposits	$	11		$	(60	)	$	(49	)	$	7		$	(107	)	$	(100	)
Money market deposits		21			(171	)		(150	)		34			(221	)		(187	)
Savings deposits		26			(66	)		(40	)		78			(231	)		(153	)
Time deposits over $100,000		176			(976	)		(800	)		589			(1,743	)		(1,154	)
Time deposits under $100,000		61			(434	)		(373	)		90			(861	)		(771	)
Short-term borrowings, including ESOP borrowings under 1 year		(302	)		130			(172	)		(249	)		230			(19	)
Long-term borrowings, including ESOP borrowings over 1 year		196			(156	)		40			56			(199	)		(143	)
Long-term capital lease obligations		-			-			-			-			-			-
Junior subordinated debt owed to unconsolidated trusts		-			(13	)		(13	)		-			(39	)		(39	)
Total increase (decrease) in interest expense	$	190		$	(1,747	)	$	(1,557	)	$	605		$	(3,171	)	$	(2,566	)
Increase (decrease) in net interest income	$	303		$	(1,215	)	$	(912	)	$	(348	)	$	(613	)	$	(961	)

____________________

(1) Non-taxable investment income is presented on a fully tax-equivalent basis, adjusting for federal and state exemption of interest income and certain other permanent income tax differences.

Other Income. Changes in other income between the three and six months ended June 30, 2010 and 2009 were as follows:

	Three Months Ended June 30,							Six Months Ended June 30,
	2010		2009		Net difference			2010		2009		Net difference
	(In thousands)
Other income:
Mortgage loan servicing fees	$	654	$	435	$	219		$	1,300	$	1,222	$	78
Trust fees		456		329		127			811		705		106
Loan and other fees		804		706		98			1,470		1,319		151
Service charges on deposits		433		453		(20	)		841		860		(19	)
Gain on sale of loans		758		2,426		(1,668	)		1,478		5,495		(4,017	)
Gain on sale of securities		-		36		(36	)		47		734		(687	)
Title insurance premiums		274		424		(150	)		462		865		(403	)
Other operating income		85		152		(67	)		111		255		(144	)
	$	3,464	$	4,961	$	(1,497	)	$	6,520	$	11,455	$	(4,935	)

In the second quarter of 2010, other income decreased from the second quarter of 2009 by $1.5 million (30.2%) from $5.0 million to $3.5 million. Gain on sale of loans decreased $1.7 million (68.8%) from 2009 to 2010 due to a lower volume of loans sold between the two periods. Title insurance premiums decreased $150 thousand (35.4%) due to a lower volume of policies written in the second quarter of 2010 compared to the same period in 2009. Both the gain on sale of loans and title insurance premiums were influenced by a lower volume of mortgage refinancing business in 2010 compared to 2009. Despite lower interest rates during 2010, refinancing volume declined due to a lower demand from customers who recently refinanced and due to more rigorous underwriting standards required by the secondary mortgage loan market.

In the first six months of 2010, other income decreased from the first six months of 2009 by $4.9 million (43.1%) from $11.5 million to $6.5 million. Gain on sale of loans decreased $4.0 million (73.1%) from 2009 to 2010 due to a lower volume of loans sold between the two periods. Gain on sale of securities decreased $687 thousand (93.6%) due to the volume of securities sold was lower in the first six months of 2010 than in the same period in 2009.Title insurance premiums decreased $403 thousand (46.6%) due to a lower volume of policies written in the first six of 2010 compared to the same period in 2009. Both the gain on sale of loans and title insurance premiums were influenced by a lower volume of mortgage refinancing business in 2010 compared to 2009. Despite lower interest rates during 2010, refinancing volume declined due to a lower demand from customers who recently refinanced and due to more rigorous underwriting standards required by the secondary mortgage loan market.

Other Expenses. Changes in other expenses between the three and six months ended June 30, 2010 and 2009 were as follows:

	Three Months Ended June 30,								Six Months Ended June 30,
	2010		2009			Net difference			2010		2009		Net difference
	(In thousands)
Other expenses:
Salaries and employee benefits	$	5,091	$	4,658		$	433		$	10,169	$	9,702	$	467
Occupancy		1,028		789			239			2,005		1,613		392
Data processing		709		693			16			1,433		1,324		109
Marketing		375		440			(65	)		731		888		(157	)
Amortization and valuation of mortgage servicing rights		974		(99	)		1,073			1,283		887		396
Amortization and valuation of other intangible assets		97		10			87			222		133		89
Supplies		118		166			(48	)		209		352		(143	)
Loss on sale of other real estate owned		1,053		313			740			1,485		531		954
Postage		161		117			44			322		284		38
Bankcard and ATM network fees		335		324			11			498		654		(156	)
Legal, professional and accounting fees		573		613			(40	)		1,326		981		345
FDIC insurance premiums		934		937			(3	)		1,832		1,184		648
Collection expenses		448		169			279			828		291		537
Other		781		517			264			1,319		1,312		7
	$	12,677	$	9,647		$	3,030		$	23,662	$	20,136	$	3,526

For the second quarter of 2010, other expenses increased $3.0 million (31.4%) to $12.7 million in 2010 from $9.6 million in the second quarter of 2009. Amortization and valuation of mortgage servicing rights increased $1.1 million (1,083.8%) between the two periods due to a higher valuation allowance on the mortgage servicing rights due to a lower interest rate environment. Loss on sale of other real estate owned increased $740 thousand (179.7%) due to a higher volume of foreclosed assets sold during the first six months of 2010 than compared to the same period in 2009. Salaries and employee benefits increased $433 thousand (9.3%) due to personnel expenses associated with the third office in Santa Fe, which was opened in the fourth quarter of 2009. Collection expenses increased $279 thousand (165.1%) due to the higher volume of collection efforts during the second quarter months of 2010 compared to the same period in 2009.

For the first six months of 2010, other expenses increased $3.5 million (17.5%) to $23.7 million in 2010 from $20.1 million in the second quarter of 2009. Loss on sale of other real estate owned increased $954 thousand (179.7%) due to a higher volume of foreclosed assets sold during the first six months of 2010 than compared to the same period in 2009. FDIC insurance premiums increased $648 thousand (54.7%), reflecting both an increase which was experienced industry-wide as well as a change in the risk profile of the Bank relating to matters set forth in the Agreement with the OCC. Collection expenses increased $537 thousand (184.5%) due to the higher volume of collection efforts during the first six months of 2010 compared to the same period in 2009. Salaries and employee benefits increased $467 thousand (4.8%) due to personnel expenses associated with the third office in Santa Fe, which was opened in the fourth quarter of 2009. Amortization and valuation of mortgage servicing rights increased $396 thousand (44.6%) between the two periods due to a higher valuation allowance on the mortgage servicing rights due to a lower interest rate environment.

Income Taxes. In the second quarter of 2010, provision for income tax expense (benefit) increased $1.1 million (82.3%) from the second quarter of 2009, increasing from a benefit of $1.4 million in 2009 to $2.5 million in 2010. This was due to a greater pretax loss in the second quarter of 2010 compared to the first quarter of 2009. The effective tax rate decreased from 43.6% to 35.6% between the two periods. The main reason for this decrease in effective tax rate was due to the permanent tax differences being a larger percentage of the pretax loss in 2009 than in 2010.

In the first six months of 2010, provision for income tax expense (benefit) decreased $5.6 million (391.4%) from the first six months of 2009, decreasing from an expense of $1.4 million in 2009 to a benefit of $4.2 million in 2010. This was due to a pretax loss position in the first six months of 2010 compared to the first six months of 2009. The effective tax rate increased from 29.4% to 31.2% between the two periods. The main reason for this increase in effective tax rate was due to a decrease in the effective tax rate used to value the deferred tax assets at the beginning of 2010, resulting in a reduction in the current income tax benefit.

Financial Condition

General. Total assets at June 30, 2010 were $1.6 billion, a decrease of $113.9 million (6.8%) from December 31, 2009. Cash and cash equivalents accounted for most of this change, decreasing $114.4 million (55.1%) during the first six months of 2010. Net loans decreased $56.9 million (4.7%), mainly due to a decrease in new loan activity and demand, while existing loans that matured were paid off.  Total investment securities increased $45.6 million (28.9%) as some of the cash and cash equivalents were invested in new securities.  Much of this decrease in total assets corresponded with a decrease in deposits of $106.0 million (7.2%).  This decrease in total deposits was planned, as there was decreased demand for new loans and the return on cash deposited at other institutions and investments did not warrant maintaining the same levels of cash and investments.  Total liabilities decreased $109.2 million (7.0%) during the first six months of 2010, largely due to this decrease in total deposits.  Stockholders' equity (including stock owned by the Employee Stock Ownership Plan) decreased by $4.7 million (3.8%) mainly due to a decrease in retained earnings.

Investment Securities. The primary purposes of the investment portfolio are to provide a source of earnings for the purpose of managing liquidity, to provide collateral to pledge against public deposits and to manage interest rate risk. In managing the portfolio, the Company seeks to obtain the objectives of safety of principal, liquidity, diversification and maximized return on funds. For an additional discussion with respect to these matters, see “Liquidity and Sources of Capital” under Item 2 and “Asset Liability Management” under Item 3 below.

The following tables set forth the amortized cost and fair value of the Company’s securities by accounting classification category and by type of security as indicated:

	At June 30, 2010				At December 31, 2009				At June 30, 2009
	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(In thousands)
Securities Available for Sale:
U.S. Government sponsored agencies	$	85,114	$	85,281	$	68,502	$	68,382	$	46,205	$	47,586
States and political subdivisions		26,550		27,056		26,112		26,519		29,257		29,210
Residential mortgage-backed securities		70,453		70,332		41,906		41,855		32,290		31,366
Total securities available for sale	$	182,117	$	182,669	$	136,520	$	136,756	$	107,752	$	108,162
Securities Held to Maturity
States and political subdivisions	$	11,271	$	11,424	$	11,436	$	10,808	$	8,805	$	8,842
Total securities held to maturity	$	11,271	$	11,424	$	11,436	$	10,808	$	8,805	$	8,842
Other securities:
Non-marketable equity securities (including FRB and FHLB stock)	$	8,281	$	8,281	$	8,452	$	8,452	$	6,722	$	6,722
Investment in unconsolidated trusts		1,116		1,116		1,116		1,116		1,116		1,116
Total other securities	$	9,397	$	9,397	$	9,568	$	9,568	$	7,838	$	7,838

The Company had a total of $70.5 million in Collateralized Mortgage Obligations (“CMOs”) as of June 30, 2010. All of these CMOs were private label issues or issued by U.S. Government-sponsored agencies and were considered “Investment Grade” (rating of “BBB” or higher). At the time of purchase, the ratings of these securities ranged from AAA to Aaa. As of June 30, 2010, the ratings of these securities ranged from AAA to Baa3. At the time of purchase and on a monthly basis, the Company reviews these securities for impairment on an other than temporary basis. As of June 30, 2010, none of these securities were deemed to have other than temporary impairment. The Company continues to closely monitor the performance and ratings of these securities.

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

	At June 30, 2010						At December 31, 2009						At June 30, 2009
	Amount			Percent			Amount			Percent			Amount			Percent
	(Dollars in thousands)
Commercial	$	135,111			11.35	%	$	137,684			11.08	%	$	119,780			9.50	%
Commercial real estate		429,500			36.09			452,235			36.41			433,744			34.40
Residential real estate		414,389			34.82			399,588			32.17			438,715			34.80
Construction real estate		158,663			13.33			194,179			15.63			208,116			16.51
Installment and other		52,501			4.41			58,456			4.71			60,385			4.79
Total loans		1,190,164			100.00			1,242,142			100.00			1,260,740			100.00
Unearned income		(2,117	)					(2,356	)					(2,143	)
Gross loans		1,188,047						1,239,786						1,258,597
Allowance for loan losses		(29,658	)					(24,504	)					(24,864	)
Net loans	$	1,158,389					$	1,215,282					$	1,233,733

Total loans decreased $52.0 million (4.2%) from December 31, 2009 to June 30, 2010, remaining at $1.2 billion. The decrease was primarily in the construction real estate and commercial real estate portfolios, which was partially offset by an increase in the residential real estate portfolio. Specific risks inherent in the large concentrations of real estate loans are discussed in Item 1A of Part I of the Company’s Form 10-K for the year ending December 31, 2009 filed with the SEC on March 16, 2010.

The Bank has been actively reducing its loan concentrations in the commercial real estate and construction real estate categories.  We have adopted as policy certain internal limits on these concentrations, based upon the Bank’s risk profile and the current economic environment. The Bank began this planned reduction in concentrations in 2009 and has agreed to continue its plan in the Agreement with the OCC.

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

	At June 30, 2010			At December 31, 2009			At June 30, 2009
	(Dollars in thousands)
Non-accruing loans	$	52,010		$	65,035		$	60,506
Loans 90 days or more past due, still accruing interest		-			-			-
Total non-performing loans		52,010			65,035			60,506
Other real estate owned		29,513			16,750			7,668
Other repossessed assets		389			406			411
Total non-performing assets	$	81,912		$	82,191		$	68,585
Restructured loans, still accruing interest		4,633			2,513			1,548
Total non-performing loans to total loans		4.37	%		5.24	%		4.80	%
Allowance for loan losses to non-performing loans		57.02	%		37.68	%		41.09	%
Total non-performing assets to total assets		5.24	%		4.90	%		4.38	%

At June 30, 2010, total non-performing assets decreased $279 thousand (0.3%) to $81.9 million from $82.2 million at December 31, 2009, primarily due to a decrease in non-accruing loans of $13.0 million (20%), which was largely offset by an increase in other real estate owned of $12.8 million (76.2%). Other real estate owned increased mainly due to an increase in foreclosed commercial real estate properties, with smaller increases in residential and construction real estate properties. Non-accruing loans decreased mainly due to a decrease in non-accruing construction loans of $10.2 million and a decrease in non-accruing commercial real estate loans of $2.4 million. The majority of the declines in non-accruing loans were due to the loans being transferred to other real estate owned or other repossessed assets at the estimated fair market value of the underlying collateral less estimated selling costs, with any excess being charged to the allowance for loan losses, as a result of the conclusion of the foreclosure or workout process. Loans with specifically identified losses as of June 30, 2010, totaled $4.8 million, with a specific portion of the allowance for loan losses allocated to cover these estimated losses of $529 thousand. As of June 30, 2010, all collateral-dependent impaired loans have been charged down to value of the collateral, as determined by the Bank. For further information, please see discussion in “Critical Accounting Policies –Allowance for Loan Losses” and “Results of Operations—Income Statement Analysis” above.

Restructured loans are defined as those loans whose terms have been modified, because of a deterioration in the financial condition of the borrower, to provide for a reduction of either interest or principal, regardless of whether such loans are secured or unsecured, regardless of whether such credits are guaranteed by the government or others, and regardless of the effective interest rate on such credits. Such a loan is considered restructured until paid in full. However, a loan that is restructured with an interest rate similar to current market interest rates and is in compliance with the modified terms need not be reported as restructured beginning the year after the year in which it was restructured. Total loans which were considered restructured (including both those considered performing and those considered non-performing) were $8.4 million and $13.8 million as of June 30, 2010 and December 31, 2009, respectively. Those restructured loans considered performing loans totaled $4.6 million and $2.5 million as of June 30, 2010 and December 31, 2009, respectively.

Allowance for Loan Losses. Management believes the allowance for loan losses accounting policy is critical to the portrayal and understanding of the Company’s financial condition and results of operations. As such, selection and application of this “critical accounting policy” involves judgments, estimates, and uncertainties that are susceptible to change. In the event that different assumptions or conditions were to prevail, and depending upon the severity of such changes, the possibility of materially different financial condition or results of operations is a reasonable likelihood. For further information, please see discussion in “Critical Accounting Policies –Allowance for Loan Losses.”

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2010			2009			2010			2009
	(Dollars in thousands)
Balance at beginning of period	$	24,822		$	17,963		$	24,504		$	15,230
Provision for loan losses		11,101			12,632			15,358			16,793
Total charge-offs		(6,406	)		(5,791	)		(10,465	)		(7,310	)
Total recoveries		141			60			261			151
Net charge-offs		(6,265	)		(5,731	)		(10,204	)		(7,159	)
Balance at end of period	$	29,658		$	24,864		$	29,658		$	24,864
Gross loans at end of period	$	1,188,047		$	1,258,597		$	1,188,047		$	1,258,597
Ratio of allowance to total loans		2.49	%		1.97	%		2.49	%		1.97	%
Ratio of net charge-offs to average loans(1)		2.08	%		1.89	%		1.68	%		1.15	%

____________________

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

Net charge-offs for the three months ended June 30, 2010, totaled $6.3 million, an increase of $534 thousand (9.3%), from $5.7 million for the three months ended June 30, 2009. The majority of the net charge-offs were construction real estate ($3.2 million), residential real estate ($1.7 million) and commercial non-real estate ($690 thousand). The increase in net charge-offs for the second quarter of 2010 compared to the same period in 2009 was primarily due to an increase in net charge-offs in the residential real estate and commercial real estate portfolios. The provision for loan losses decreased $1.5 million (12.1%) based upon management’s estimate of the adequacy of the reserve for loan losses. For further information, please see discussion in “Critical Accounting Policies –Allowance for Loan Losses” and “Results of Operations—Income Statement Analysis” above.

Net charge-offs for the six months ended June 30, 2010, totaled $10.2 million, an increase of $3.0 million (42.5%), from $7.2 million for the six months ended June 30, 2009. The majority of the net charge-offs were construction real estate ($3.6 million) residential real estate ($3.1 million), commercial non-real estate ($2.0 million) and installment and other loans ($984 thousand). The increase in net charge-offs for the first six months of 2010 compared to the same period in 2009 was primarily due to an increase in net charge-offs in the residential real estate and commercial real estate portfolios. The provision for loan losses decreased $1.4 million (8.5%) based upon management’s estimate of the adequacy of the reserve for loan losses. For further information, please see discussion in “Critical Accounting Policies –Allowance for Loan Losses” and “Results of Operations—Income Statement Analysis” above.

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

	At June 30, 2010					At December 31, 2009					At June 30, 2009
	Amount		Percent			Amount		Percent			Amount		Percent
	(Dollars in thousands)
Commercial	$	6,570		11.35	%	$	4,371		11.08	%	$	4,483		9.50	%
Commercial and residential real estate		9,722		70.91			8,416		68.58			7,725		69.20
Construction real estate		6,941		13.33			8,637		15.63			9,146		16.51
Installment and other		3,255		4.41			3,080		4.71			3,510		4.79
Unallocated		3,170		N/A			-		N/A			-		N/A
Total	$	29,658		100.00	%	$	24,504		100.00	%	$	24,864		100.00	%

The allowance for loan losses increased $4.8 million (19.3%) from June 30, 2009 to June 30, 2010. This was mainly due to an increase in the unallocated amount, and an increase in the allowance allocated to commercial non-real estate and residential and commercial real estate loans. The Bank also maintains an unallocated allowance amount to provide for other credit losses inherent in our loan portfolio that may not have been contemplated in the credit loss factors. The unallocated economic factor portion of the allowance represents the overall broad based risks including local and national economic factors, growth and composition of the loan portfolio and regulatory trends that may impact the loan portfolio, representing inherent risks not otherwise captured in other reserve categories. It may be maintained at higher levels during times of deteriorating economic conditions. The allocation for commercial non-real estate loans increased $2.1 million (46.6%) mainly due to an increase in historical loss experience (based on regression analysis) of $2.2 million which was partially offset by a decrease in the allocation for qualitative adjustments of $143 thousand. The allocation for commercial and residential real estate loans increased $2.0 million (25.9%) mainly due to an increase in the allocation for historical loss experience (based on regression analysis) of $2.0 million. In addition, the allocation for construction real estate loans decreased $2.2 million (24.1%), mainly due to a decrease in the allocation for qualitative factors of $2.0 million. Finally, the allocation for installment and other loans decreased $255 thousand (7.3%), mainly due to a decrease in the allocation for qualitative adjustments of $495 thousand, which was partially offset by an increase in historical loss experience (based on regression analysis) of $139 thousand and an increase in the allocation for specific identified loans of $101 thousand. For further information, please see discussion in “Critical Accounting Policies—Allowance for Loan Losses” above.

A loan is considered impaired when, based on current information and events, it is probable that the bank will be unable to collect all amounts due according to the original contractual terms of the loan agreement, including both principal and interest. The impairment amount of the loan is equal to the recorded investment in the loan less the net fair value. The bank generally uses one of three methods to measure impairment; the fair value of the collateral less disposition costs, the present value of expected future cash flows method, or the observable market price of a loan method. The impairment amount above collateral value is normally charged to the allowance for loan and lease losses in the quarter it is identified. Total loans which were deemed to have been impaired as of June 30, 2010 were $56.9 million. Collateral associated with impaired loans identified as collateral-dependent (less estimated selling costs) exceeded this amount. Impaired loans identified as cash-flow dependent had a total of $529 thousand in specific loan allocations in the allowance for loan losses to cover estimated losses in these loans.

The Bank anticipates the volume of outstanding commercial real estate and construction loans to continue to decline in accordance with the Bank’s established policy. Overall, management’s outlook for the New Mexico economy for the remainder of 2010 is expected to be a recession less severe than experienced by much of the country followed by a moderate recovery in advance of other areas of the country. Nonfarm employment growth was a negative 4.1% in 2009, and is at a negative 2.6% in the first half of 2010. Housing construction overall has remained depressed throughout the first half of 2010, but is expected to experience a modest uptick toward the end of 2010.

Additions to the allowance for loan losses, which are charged to earnings through the provision for loan losses, are determined based on a variety of factors, as indicated above. Although the Company believes the allowance for loan losses is sufficient to cover probable losses inherent in the loan portfolio, there can be no assurance that the allowance will prove sufficient to cover actual loan losses.

See also Note 18, “Subsequent Event”, in Part I, “Financial Information”--Item 1 “Financial Statements” in this Form 10-Q, for a ruling in favor of the Bank that will materially affect the third quarter financial results.

Potential Problem Loans. The Company utilizes an internal asset classification system as a means of reporting problem and potential problem assets. At Board of Directors meetings each quarter, a list of total adversely classified assets is presented showing OREO, other repossessed assets, and all loans listed as “Substandard,” “Doubtful” and “Loss.” All non-accrual loans are classed either as “Substandard” or “Doubtful” and are thus included in total adversely classified assets. A separate watch list of loans classified as “Special Mention” is also presented. An asset is classified Substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or by the collateral pledged, if any. Substandard assets have well-defined weaknesses that jeopardize liquidation of the debt and there is a distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Assets classified as Doubtful have all the weaknesses inherent in those classified Substandard, but weaknesses are so pronounced that collection or liquidation is highly questionable and improbable. Assets classified as Loss are those considered uncollectible and viewed as non-bankable assets worthy of charge-off. Special Mention Assets are those that have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Bank’s credit position at some future date.

The Company’s determinations as to the classification of its assets and the amount of its valuation allowances are subject to review by the Bank’s primary regulators, which can order the establishment of additional general or specific loss allowances. The OCC, in conjunction with the other federal banking agencies, has adopted an interagency policy statement on the allowance for loan losses. The policy statement provides guidance for financial institutions on both the responsibilities of management for the assessment and establishment of adequate allowances and guidance for banking agency examiners to use in determining the adequacy of general valuation guidelines. Generally, the policy statement recommends that (i) institutions have effective systems and controls to identify, monitor and address asset quality problems; (ii) management analyze all significant factors that affect the collectability of the portfolio in a reasonable manner; and (iii) management establish acceptable allowance evaluation processes that meet the objectives set forth in the policy statement. Management believes it has established an adequate allowance for probable loan losses. The Company analyzes its process regularly with modifications made as necessary and reports those results quarterly at Board of Directors meetings. However, there can be no assurance that regulators, in reviewing the Company’s loan portfolio, will not request the Company to materially increase its allowance for loan losses. Although management believes that adequate specific and general loan loss allowances have been established, actual losses are dependent upon future events and, as such, further additions to the level of specific and general loan loss allowances may become necessary.

The following table shows the amounts of adversely classified assets and special mention loans (not already counted in non-performing loans above) as of the periods indicated:

	At June 30, 2010		At December 31, 2009		At June 30, 2009
	(In thousands)
Performing loans classified as:
Substandard	$	23,514	$	30,648	$	62,187
Doubtful		-		-		-
Total performing adversely classified loans	$	23,514	$	30,648	$	62,187
Special mention loans	$	699	$	5,269	$	5,418

Total performing adversely classified assets decreased $38.7 million (62.2%) from June 30, 2009 to June 30, 2010. This was primarily due to the foreclosure and subsequent move to other real estate owned of several borrowing relationships in the residential land development, residential construction, and raw land property (all included under “construction real estate” in the preceding tables) loan concentrations, as well as upgrading or payoff of several loan relationships in the construction and commercial real estate loan portfolio. Special mention loans decreased $4.7 million (87.1%) between June 30, 2009 and June 30, 2010, primarily due to downgrades of credits from the special mention grade to substandard in the residential development of infrastructure, construction of speculative housing and residential developed lots concentrations. All of these loans are collateralized by real estate, and in many cases the loans have personal guarantees and additional collateral. As of June 30, 2010, the underlying collateral was deemed adequate such that no impairment was required to be recognized.

Management carefully monitors the adversely classified assets it has in its portfolio. Management believes the increase in classified assets was a result of current national and regional economic difficulties, particularly in the area of real estate sales. Although we do not have direct exposure from subprime mortgages, we have significant concentrations in real estate lending (through construction, residential and commercial loans). Though the New Mexico real estate environment is currently more favorable than many areas of the nation, real estate values have fallen and there are concerns that such values will stagnate or continue to fall within our market areas. As a result, we will continue to closely monitor market conditions, our loan portfolio and make any adjustments to our allowance for loan losses deemed necessary to adequately provide for our exposure in these areas.

Sources of Funds

Liquidity and Sources of Capital

The Company’s cash flows are comprised of three classifications: cash flows from operating activities, cash flows from investing activities and cash flows from financing activities. Net cash provided by operating activities was $13.3 million and $11.0 million for the six months ended June 30, 2010 and June 30, 2009, respectively, an increase in cash provided of $2.2 million. This increase was primarily due to a decrease in cash used in the origination of loans held for sale of $194.8 million, which was largely offset by a decrease in cash provided by the sale of these loans of $198.1 million. Net cash (used in) investing activities was $(19.0) million and $(55.9) million for the six months ended June 30, 2010 and June, 2009, respectively. The $36.9 million decrease in cash used by investing activities was largely due to a decrease in cash used in the funding of loans (net of repayments) of $66.1 million and an increase in cash provided by the maturities and paydowns of investment securities of $47.3 million. The decrease in loan funding was largely driven by a decrease in loan demand as the weakness of the economy continues. These items were partially offset by an increase in cash used in the purchases of investment securities of $44.7 million and a decrease in cash provided by the sale of investment securities of $39.5 million. Net cash (used in) provided by financing activities was $(108.6) million and $144.5 million for the six months ended June 30, 2010 and June 30, 2009, respectively. The $253.1 million decrease in cash provided by financing activities was mainly due to a decrease in cash provided by net growth of deposits of $188.0 million, a decrease in cash provided by the issuance of preferred stock of $35.5 million and a decrease in cash provided by the issuance of borrowings (net of repayments) of $30.0 million.

The most significant change in deposits from December 31, 2009 to June 30, 2010 occurred in savings deposits (decreasing $101.3 million), with smaller decreases in time deposits over $100,000 ($8.6 million), demand deposits ($5.7 million) and NOW accounts ($4.7 million). There were increases in MMDA accounts ($12.7 million) and time deposits under $100,000 ($1.6 million).

In the event that additional short-term liquidity is needed, we have established relationships with several large regional banks to provide short-term borrowings in the form of federal funds purchases. We have borrowed at various points of time $75.0 million for a short period (15 to 60 days) from these banks on a collective basis. Management believes that we will be able to continue to borrow federal funds from our correspondent banks in the future. Additionally, we are a member of the FHLB and, as of June 30, 2010, we had the ability to borrow from the FHLB up to a total of $157.8 million in additional funds. We also may borrow through the Federal Reserve Bank’s discount window up to a total of $104.3 million on a short-term basis. As a contingency plan for significant funding needs, the Asset/Liability Management committee may also consider the sale of investment securities, selling securities under agreement to repurchase, sale of certain loans and/or the temporary curtailment of lending activities.

At June 30, 2010, Trinity’s total risk-based capital ratio was 14.09%, the Tier 1 capital to risk-weighted assets ratio was 12.82%, and the Tier 1 capital to adjusted average assets ratio was 9.59%. At December 31, 2009, Trinity’s total risk-based capital ratio was 14.16%, the Tier 1 capital to risk-weighted assets ratio was 12.90%, and the Tier 1 capital to average assets ratio was 9.58%.

At June 30, 2010, the Bank’s total risk-based capital ratio was 13.72%, the Tier 1 capital to risk-weighted assets ratio was 12.46%, and the Tier 1 capital to adjusted average assets ratio was 9.31%. At December 31, 2009, the Bank’s total risk-based capital ratio was 13.63%, the Tier 1 capital to risk-weighted assets ratio was 12.37%, and the Tier 1 capital to adjusted average assets ratio was 9.18%. The Bank exceeded the general minimum regulatory requirements to be considered “well-capitalized” under Federal Deposit Insurance Corporation regulations at June 30, 2010 and December 31, 2009.

At June 30, 2010 and December 31, 2009, Trinity’s book value per common share was $12.78 and $13.87, respectively.

On August 13, 2010, the Company elected to exercise the option to defer the payment of dividends on the Preferred Stock issues, as provided by the agreements under which the stock was issued. The dividend payments would normally be paid on August 15, 2010, in the amount of $444,237.50 for Series A Preferred Stock and $39,982.50 for Series B Preferred Stock. Both Series A and Series B Preferred Stock were issued under the Treasury's Capital Purchase Plan.

In addition, the Company elected to exercise the option to defer the payment of interest on Trust Preferred Securities issues, as provided by the agreements under which the Trust Preferred Securities were issued.

The following schedule of interest payments are deferred under the agreements:

·   August 23, 2010, $172,000.00 for Trinity Capital Trust IV

·   September 8, 2010, $543,750.00 for Trinity Capital Trust I

·   September 8, 2010, $49,656.08 for Trinity Capital III

·   September 15, 2010, $170,750.00 for Trinity Capital Trust V

The deferral of distributions on the Trust Preferred Securities will continue to accrue as interest expense payable by the Company and the dividends on the Preferred Stock will continue to accrue as dividends payable. Further, the Company is prohibited from declaring or paying any dividends on its common stock while distributions and dividend payments on the Trust Preferred Securities and the Preferred Stock are in arrears.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Asset Liability Management

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

Interest rate risk can also be measured by analyzing the extent to which the repricing of assets and liabilities are mismatched to create an interest sensitivity “gap.” An asset or liability is considered to be interest rate sensitive within a specific time period if it will mature or reprice within that time period. The interest rate sensitivity gap is defined as the difference between the amount of interest earning assets maturing or repricing within a specific time period and the amount of interest bearing liabilities maturing or repricing within that same time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. During a period of rising interest rates, therefore, a negative gap would tend to adversely affect net interest income. Conversely, during a period of falling interest rates, a negative gap position would tend to result in an increase in net interest income. 

The following tables set forth the amounts of interest earning assets and interest bearing liabilities outstanding at June 30, 2010, which we anticipate, based upon certain assumptions, to reprice or mature in each of the future time periods shown. Except as stated below, the amount of assets and liabilities shown which reprice or mature during a particular period were determined based on the earlier of the term to repricing or the term to repayment of the asset or liability. These tables are intended to provide an approximation of the projected repricing of assets and liabilities at June 30, 2010 on the basis of contractual maturities and scheduled rate adjustments within a three-month period and subsequent selected time intervals. The loan amounts in the table reflect principal balances expected to be reinvested and/or repriced as a result of contractual amortization and rate adjustments on adjustable-rate loans. The contractual maturities and amortization of loans and investment securities reflect modest prepayment assumptions. While NOW, money market and savings deposit accounts have adjustable rates, it is assumed that the interest rates on these accounts will not adjust immediately to changes in other interest rates. Therefore, the table is calculated assuming that these accounts will reprice based upon an historical analysis of decay rates of these particular accounts, with repricing assigned to these accounts from 1 to 10 months.

	Time to Maturity or Repricing
As of June 30, 2010:	0-90 Days			91-365 Days			1-5 Years			Over 5 Years			Total
	(Dollars in thousands)
Interest-earning Assets:
Loans	$	497,432		$	394,089		$	262,794		$	33,732		$	1,188,047
Loans held for sale		7,948			-			-			-			7,948
Investment securities		37,851			21,051			89,489			53,830			202,221
Securities purchased under agreements to resell		112			-			-			-			112
Interest-bearing deposits with banks		62,646			-			9,945			-			72,591
Investment in unconsolidated trusts		186			-			-			930			1,116
Total interest-earning assets	$	606,175		$	415,140		$	362,228		$	88,492		$	1,472,035
Interest-bearing Liabilities:
NOW deposits	$	51,409		$	97,404		$	-		$	-		$	148,813
Money market deposits		75,572			102,261			-			-			177,833
Savings deposits		132,679			203,455			-			-			336,134
Time deposits over $100,000		118,468			237,630			36,105			5,223			397,426
Time deposits under $100,000		50,507			140,734			22,673			2,420			216,334
Short-term borrowings		9			1,164			-			-			1,173
Long-term borrowings		-			-			10,000			22,300			32,300
Capital lease obligations		-			-			-			2,211			2,211
Junior subordinated debt owed to unconsolidated trusts		6,186			-			-			30,930			37,116
Total interest-bearing liabilities	$	434,830		$	782,648		$	68,778		$	63,084		$	1,349,340
Rate sensitive assets (RSA)	$	606,175		$	1,021,315		$	1,383,543		$	1,472,035			1,472,035
Rate sensitive liabilities (RSL)		434,830			1,217,478			1,286,256			1,349,340			1,349,340
Cumulative GAP (GAP=RSA-RSL)		171,345			(196,163	)		97,287			122,695			122,695
RSA/Total assets		38.79	%		65.35	%		88.53	%		94.19	%		94.19	%
RSL/Total assets		27.82	%		77.90	%		82.30	%		86.34	%		86.34	%
GAP/Total assets		10.96	%		-12.55	%		6.22	%		7.85	%		7.85	%
GAP/RSA		28.27	%		-19.21	%		7.03	%		8.34	%		8.34	%

Certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types of assets may lag behind changes in market rates. Additionally, in the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating the table. Therefore, we do not rely solely on a gap analysis to manage our interest rate risk, but rather we use what we believe to be the more reliable simulation model relating to changes in net interest income.

Based on simulation modeling at June 30, 2010 and December 31, 2009, our net interest income would change over a one-year time period due to changes in interest rates as follows:

Change in Net Interest Income over One Year Horizon

			At June 30, 2010						At December 31, 2009
Changes in Levels of Interest Rates			Dollar Change			Percent Change			Dollar Change			Percent Change
(Dollars in thousands)
	+2.00	%	$	(9,121	)		(16.78	)%	$	(6,584	)		(11.71	)%
	+1.00			(2,152	)		(3.96	)		(3,329	)		(5.92	)
	(1.00	)		2,011			3.70			(281	)		(0.50	)
	(2.00	)		4,213			7.75			(394	)		(0.70	)

Our simulations used assume the following:

1. Changes in interest rates are immediate.

2. It is our policy that interest rate exposure due to a 2% interest rate rise or fall be limited to 15% of our annual net interest income, as forecasted by the simulation model. As demonstrated by the table above, our interest rate risk exposure was within this policy at June 30, 2010, with the exception of the +2.00% interest rate scenario where it exceeded our policy limit by 1.78%..

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

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

We have established disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to the officers who certify our financial reports and to other members of senior management and the board of directors and to ensure that information that is required to be disclosed in reports we file with the SEC is properly and timely recorded, processed, summarized and reported. A review and evaluation was performed by our management, including the Company’s Chief Executive Officer (the “CEO”) and Chief Financial Officer (the “CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2010 pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934. Based upon and as of the date of that review and evaluation, the CEO and CFO have concluded that our current disclosure controls and procedures were effective as of June 30, 2010.

Changes in Internal Control over Financial Reporting.

The changes to the Company’s internal control over financial reporting during the last fiscal quarter that have affected, or are reasonably likely to affect, its internal control over financial reporting are described in "Evaluation of Disclosure Controls and Procedures" above.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

Trinity, the Bank, Title Guaranty, Cottonwood, FNM Investment Fund IV, FNM Investor Series IV, TCC Advisors and TCC Funds were not involved in any pending legal proceedings, other than routine legal proceedings occurring in the normal course of business, which, in the opinion of management, in the aggregate, would be material to the Company's consolidated financial condition. 

See also Note 18, “Subsequent Event”, in Part I, “Financial Information”--Item 1, “Financial Statements” in this Form 10-Q, for a ruling in favor of the Bank that will materially affect the third quarter financial results.

Item 1A. Risk Factors

In addition to the other information in this Quarterly Report on Form 10-Q, shareholders or prospective investors should carefully consider the risk factors disclosed in Item 1A to Part I of Trinity’s Form 10-K for the year ended December 31, 2009, filed with the Securities and Exchange Commission on March 16, 2010, as amended. In addition, we are subject to the following risk:

Recently enacted financial reform legislation will, among other things, tighten capital standards, create a new Consumer Financial Protection Bureau and result in new regulations that are expected to increase our costs of operations.

On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"). This new law will significantly change the current bank regulatory structure and affect the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new implementing rules and regulations, and to prepare numerous studies and reports for Congress. The federal agencies are given significant discretion in drafting the implementing rules and regulations, and consequently, many of the details and much of the impact of the Dodd-Frank Act may not be known for many months or years.

Among the many requirements in the Dodd-Frank Act for new banking regulations is a requirement for new capital regulations to be adopted within 18 months.  These regulations must be at least as stringent as, and may call for higher levels of capital than, current regulations.  Generally, trust preferred securities will no longer be eligible as Tier 1 capital, but the Company’s currently outstanding trust preferred securities will be grandfathered and its currently outstanding CPP preferred securities will continue to qualify as Tier 1 capital.

Certain provisions of the Dodd-Frank Act are expected to have a near term impact on us.  For example, one year after the date of its enactment, the Dodd-Frank Act eliminates the federal prohibitions on paying interest on demand deposits, thus allowing businesses to have interest bearing checking accounts. Depending on competitive responses, this significant change to existing law could have an adverse impact on our interest expense.

The Dodd-Frank Act also broadens the base for FDIC insurance assessments. Assessments will now be based on the average consolidated total assets less tangible equity capital of a financial institution and are generally expected to increase for institutions having total assets in excess of $10 billion. The Dodd-Frank Act also permanently increases the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor, retroactive to January 1, 2008, and non-interest bearing transaction accounts have unlimited deposit insurance through December 31, 2013.

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

During the second quarter of 2010, we issued the following securities:

Period	(a) Total number of shares issued			(b) Average price paid per share		(c) Total number of shares issued as part of publically announced plans or programs		(d) Maximum approximate dollar value that may yet be issued under the plans or programs
April 1-April 30, 2010		-		$	-		-	$	-
May 1-May 31, 2010		-			-		-		-
June 1-June 30, 2010		9,555	(1)		14.50		-		-
		9,555		$	14.50		-	$	-

____________________

(1) The shares issued during the second quarter of 2010 were issued to the Employee Stock Ownership Plan as a discretionary annual contribution. The shares were issued out of the Company’s treasury stock.

Item 3. Defaults Upon Senior Securities

None

Item 4. Removed and Reserved

Item 5. Other Information

None

Item 6. Exhibits

10.1	Agreement by and between Los Alamos National Bank and the Comptroller of the Currency (incorporated by reference to Exhibit 99.1 to the Company's Form 8-K filed on February 1, 2010)
31.1	Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a)

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

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

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

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned thereunto duly authorized.

	TRINITY CAPITAL CORPORATION
Date: August 16, 2010	By:	/s/ WILLIAM C. ENLOE
		William C. Enloe
		President and Chief Executive Officer
Date: August 16, 2010	By:	/s/ DANIEL R. BARTHOLOMEW
		Daniel R. Bartholomew
		Chief Financial Officer