10-Q

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 September 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 6,449,726 shares of common stock, no par value, outstanding as of November 5, 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

September 30, 2010 and December 31, 2009

(Amounts in thousands, except share data)

	September 30, 2010		December 31, 2009
	(Unaudited)
ASSETS
Cash and due from banks	$	17,542	$	18,761
Interest-bearing deposits with banks		149,092		188,114
Federal funds sold and securities purchased under resell agreements		113		620
Cash and cash equivalents		166,747		207,495
Investment securities available for sale		151,489		136,756
Investment securities held to maturity, at amortized cost (fair value of $12,010 at September 30, 2010 and $10,808 at  December 31, 2009)		11,188		11,436
Other investments		9,697		9,568
Loans (net of allowance for loan losses of $28,844 at September 30, 2010 and $24,504 at December 31, 2009)		1,159,044		1,215,282
Loans held for sale		17,857		9,245
Premises and equipment, net		30,589		31,949
Leased property under capital leases, net		2,211		2,211
Accrued interest receivable		6,834		6,840
Mortgage servicing rights, net		6,361		7,647
Other intangible assets		483		830
Other real estate owned		19,667		16,750
Prepaid expenses		6,626		8,648
Net deferred tax assets		6,349		4,979
Other assets		7,243		7,105
Total assets	$	1,602,385	$	1,676,741

(Continued on following page)

TRINITY CAPITAL CORPORATION & SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

September 30, 2010 and December 31, 2009

(Amounts in thousands, except share data)

(Continued from prior page)

	September 30, 2010			December 31, 2009
	(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits:
Noninterest-bearing	$	104,934		$	87,238
Interest-bearing		1,292,968			1,381,207
Total deposits		1,397,902			1,468,445
Short-term borrowings		1,163			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		5,237			5,038
Other liabilities		4,947			7,536
Total liabilities		1,480,876			1,553,839
Stock owned by Employee Stock Ownership Plan (ESOP) participants; 628,914 shares and 627,030 shares at September 30, 2010 and December 31, 2009, respectively, at fair value	$	6,289		$	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 September 30, 2010 and December 31, 2009, $1,000.00 liquidation value, at amortized cost		33,755			33,597
Series B, 9% cumulative perpetual, 1,777 shares issued and outstanding at September 30, 2010 and December 31, 2009, $1,000.00 liquidation value, at amortized cost		2,053			2,077
Common stock, no par, authorized 20,000,000 shares; issued 6,856,800 shares, shares outstanding 6,449,726 and 6,440,784 at September 30, 2010 and December 31, 2009, respectively		6,836			6,836
Additional paid-in capital		1,863			1,869
Retained earnings		81,007			77,054
Accumulated other comprehensive income		680			142
Total stockholders' equity before treasury stock		126,194			121,575
Treasury stock, at cost, 407,074 shares and 416,016 shares at September 30, 2010 and December 31, 2009, respectively		(10,974	)		(11,214	)
Total stockholders' equity		115,220			110,361
Total liabilities and stockholders' equity	$	1,602,385		$	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 Nine Months Ended September 30, 2010 and 2009

(Amounts in thousands except share and per share data)

(Unaudited)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009
Interest income:
Loans, including fees	$	17,963	$	17,758	$	51,873	$	55,748
Investment securities:
Taxable		747		960		2,156		2,104
Nontaxable		285		280		882		760
Federal funds sold		-		-		-		1
Other interest-bearing deposits		74		107		254		193
Investment in unconsolidated trusts		21		26		62		68
Total interest income		19,090		19,131		55,227		58,874
Interest expense:
Deposits		3,281		4,953		10,849		14,886
Short-term borrowings		18		250		251		502
Long-term borrowings		253		120		634		644
Long-term capital lease obligations		67		67		201		201
Junior subordinated debt owed to unconsolidated trusts		694		689		2,061		2,095
Total interest expense		4,313		6,079		13,996		18,328
Net interest income		14,777		13,052		41,231		40,546
Provision for loan losses		500		4,000		15,858		20,793
Net interest income after provision for loan losses		14,277		9,052		25,373		19,753
Other income:
Mortgage loan servicing fees		659		643		1,959		1,865
Trust fees		442		383		1,253		1,088
Loan and other fees		759		704		2,229		2,023
Service charges on deposits		372		424		1,213		1,284
Gain on sale of loans		1,590		1,553		3,068		7,048
Gain on sale of securities		-		208		47		942
Title insurance premiums		308		256		770		1,121
Other operating income		198		68		309		323
Total other income		4,328		4,239		10,848		15,694

(Continued on following page)

TRINITY CAPITAL CORPORATION & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three and Nine Months Ended September 30, 2010 and 2009

(Amounts in thousands except share and per share data)

(Unaudited)

(Continued from prior page)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010			2009
Other expenses:
Salaries and employee benefits	$	5,152	$	4,967	$	15,321		$	14,669
Occupancy		1,089		811		3,094			2,424
Data processing		686		718		2,119			2,042
Marketing		306		310		1,037			1,198
Amortization and valuation of mortgage servicing rights		1,304		909		2,587			1,796
Amortization and valuation of other intangible assets		110		67		332			200
Supplies		102		93		311			445
Loss on sale of other real estate owned		1,938		86		3,423			617
Postage		164		142		486			426
Bankcard and ATM network fees		361		371		859			1,025
Legal, professional and accounting fees		896		724		2,222			1,705
FDIC insurance premiums		638		477		2,470			1,661
Collection expenses		446		85		1,274			376
Other		16		1,093		1,335			2,405
Total other expense		13,208		10,853		36,870			30,989
Income (loss) before provision for (benefit from) income taxes		5,397		2,438		(649	)		4,458
Provision for (benefit from) Income taxes		1,947		1,116		59			1,709
Net income (loss)	$	3,450	$	1,322	$	(708	)	$	2,749
Dividends and discount accretion on preferred shares		532		529		1,589			1,081
Net income (loss) available to common shareholders	$	2,918	$	793	$	(2,297	)	$	1,668
Basic earnings (loss) per common share	$	0.45	$	0.12	$	(0.36	)	$	0.26
Diluted earnings (loss) per common share	$	0.45	$	0.12	$	(0.36	)	$	0.26

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

TRINITY CAPITAL CORPORATION & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Nine Months Ended September 30, 2010 and 2009

(Amounts in thousands)

(Unaudited)

	Nine Months Ended September 30,
	2010			2009
Cash Flows From Operating Activities
Net (loss) income	$	(708	)	$	2,749
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		2,283			1,880
Net amortization of:
Mortgage servicing rights		1,280			1,928
Other intangible assets		347			200
Premium and discounts on investment securities, net		641			(56	)
Junior subordinated debt owed to unconsolidated trusts issuance costs		10			10
Provision for loan losses		15,858			20,793
Change in mortgage servicing rights valuation allowance, net		1,307			(132	)
Loss on disposal of premises and equipment		9			3
Gain on sale of investment securities		(47	)		(942	)
Federal Home Loan Bank (FHLB) stock dividends received		(7	)		(5	)
Loss on venture capital investments		99			286
Gain on sale of loans		(3,068	)		(7,048	)
Loss on disposal of other real estate owned		1,762			347
Write-down of value of other real estate owned		1,692			283
Decrease (increase) in other assets		238			(3,125	)
(Decrease) increase in other liabilities		(1,139	)		564
Stock options and stock appreciation rights expenses		109			110
Tax benefit recognized for exercise of stock options		-			(10	)
Net cash provided by operating activities before originations and gross sales of loans		20,666			17,835
Gross sales of loans held for sale		128,261			347,487
Origination of loans held for sale		(135,106	)		(343,449	)
Net cash provided by operating activities		13,821			21,873

 (Continued on following page)

TRINITY CAPITAL CORPORATION & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Nine Months Ended September 30, 2010 and 2009

(Amounts in thousands)

(Unaudited)

(Continued from prior page)

	Nine Months Ended September 30,
	2010			2009
Cash Flows From Investing Activities
Proceeds from maturities and paydowns of investment securities, available for sale	$	101,830		$	8,842
Proceeds from maturities and paydowns of investment securities, held to maturity		248			180
Proceeds from maturities and paydowns of investment securities, other		171			378
Proceeds from sale of investment securities, available for sale		3,422			45,004
Purchase of investment securities available for sale		(119,769	)		(54,389	)
Purchase of investment securities other		(392	)		(2,617	)
Proceeds from sale of other real estate owned		13,497			4,715
Loans funded, net of repayments		20,512			(20,997	)
Purchases of loans		-			(1,101	)
Purchases of premises and equipment		(932	)		(9,207	)
Net cash provided by (used in) investing activities		18,587			(29,192	)
Cash Flows From Financing Activities
Net (decrease) increase in demand deposits, NOW accounts and savings accounts		(22,801	)		16,048
Net (decrease) increase in time deposits		(47,742	)		108,306
Proceeds from issuances of borrowings		20,000			30,000
Repayment of borrowings		(20,030	)		(20,029	)
Purchase of treasury stock		(8	)		(473	)
Issuance of common stock for stock option plan		134			290
Issuance of preferred stock		-			35,539
Common shares dividend payments		(1,739	)		(5,157	)
Preferred shares dividend payments		(970	)		(743	)
Tax benefit recognized for exercise of stock options		-			10
Net cash (used in) provided by financing activities		(73,156	)		163,791
Net (decrease) increase in cash and cash equivalents		(40,748	)		156,472
Cash and cash equivalents:
Beginning of period		207,495			25,262
End of period	$	166,747		$	181,734
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest	$	13,797		$	18,750
Income taxes		510			5,150
Non-cash investing and financing activities:
Transfers from loans to other real estate owned		19,868			12,019
Dividends declared, not yet paid		730			247
Change in unrealized gain on investment securities, net of taxes		538			(10	)

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. As of September 30, 2010, all assets have been transferred to the Bank. 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.  In September of 2010, the Bank joined Southwest Medical Technologies, LLC ("SWMT") as a 20% member.  Participation in this entity is part of the Bank's venture capital investments. This entity is owned by the Bank (20%), Southwest Medical Ventures, Inc. (60%), New Mexico Co-Investment Fund II, L.P. (20%).  SWMT is focused on assisting new medical and life science technologies identify investment and financing opportunities.  The Bank’s capital investment will be $250 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 nine months ended September 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 Income (Loss)

Comprehensive (loss) income includes net income (loss), 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 September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
	(Unaudited; in thousands)
Net income (loss)	$	3,450		$	1,322		$	(708	)	$	2,749
Securities available for sale:
Net change in unrealized gains		494			2,131			810			930
Related income tax expense		(173	)		(856	)		(221	)		(359	)
Net securities gains reclassified into earnings		-			(208	)		(47	)		(942	)
Related income tax benefit		-			95			(4	)		361
Net effect on other comprehensive income for the period		321			1,162			538			(10	)
Comprehensive income (loss)	$	3,771		$	2,484		$	(170	)	$	2,739

Note 3. Earnings (Loss) Per Share Data

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
	(Unaudited; in thousands, except share and per share data)
Net income (loss)	$	3,450		$	1,322		$	(708	)	$	2,749
Dividends and discount accretion on preferred shares		532			529			1,589			1,081
Net income (loss) available to common shareholders	$	2,918		$	793		$	(2,297	)	$	1,668
Weighted average common shares issued		6,856,800			6,856,800			6,856,800			6,856,800
LESS: Weighted average treasury stock shares		(407,013	)		(416,017	)		(412,667	)		(411,358	)
Weighted average common shares outstanding, net		6,449,787			6,440,783			6,444,133			6,445,442
Basic earnings (loss) per common share	$	0.45		$	0.12		$	(0.36	)	$	0.26
Weighted average dilutive shares from stock option plan		-			10,455			-			8,776
Weighted average common shares outstanding including derivative shares		6,449,787			6,451,238			6,444,133			6,454,218
Diluted earnings (loss) per common share	$	0.45		$	0.12		$	(0.36	)	$	0.26

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 315,500 as of September 30, 2010 and September 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 operations 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)
September 30, 2010
U.S. Government sponsored agencies	$	52,706	$	282	$	-		$	52,988
States and political subdivisions		20,279		806		-			21,085
Residential mortgage-backed securities		77,458		991		(1,033	)		77,416
Totals	$	150,443	$	2,079	$	(1,033	)	$	151,489
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)
September 30, 2010
States and political subdivisions	$	11,188	$	1,063	$	(241	)	$	12,010
Totals	$	11,188	$	1,063	$	(241	)	$	12,010
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)
September 30, 2010
Non-marketable equity securities (including FRB and FHLB stock)	$	8,581	$	-	$	-	$	8,581
Investment in unconsolidated trusts		1,116		-		-		1,116
Totals	$	9,697	$	-	$	-	$	9,697
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 September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009
	(In thousands)
Gross realized gains	$	-	$	208	$	47	$	942
Gross realized losses		-		-		-		-
Net gains	$	-	$	208	$	47	$	942

A summary of unrealized loss information for investment securities, categorized by security type, at September 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)
September 30, 2010
Residential mortgage-backed securities	$	40,238	$	(1,033	)	$	-	$	-		$	40,238	$	(1,033	)
Totals	$	40,238	$	(1,033	)	$	-	$	-		$	40,238	$	(1,033	)
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)
September 30, 2010
States and political subdivisions	$	-	$	-		$	1,133	$	(241	)	$	1,133	$	(241	)
Totals	$	-	$	-		$	1,133	$	(241	)	$	1,133	$	(241	)
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 September 30, 2010, $42.6 million in debt securities (representing a total of 29 different securities) had unrealized losses with aggregate depreciation of 3.0% of the Company’s amortized cost basis. Of these securities, $1.1 million (representing a single security) had a continuous unrealized loss position for twelve months or longer with an aggregate depreciation of 17.5%. 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 September 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	$	14,497	$	14,597	$	-	$	-	$	100	$	100
One to five years		52,351		52,854		-		-		-		-
Five to ten years		34,008		34,401		1,376		1,133		-		-
Over ten years		49,587		49,637		9,812		10,877		1,116		1,116
Equity investments with no stated maturity		-		-		-		-		8,481		8,481
	$	150,443	$	151,489	$	11,188	$	12,010	$	9,697	$	9,697

Securities with carrying amounts of $49.2 million and $49.5 million at September 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:

	September 30,			December 31,
	2010			2009
	(In thousands)
Commercial	$	142,240		$	137,684
Commercial real estate		415,355			452,235
Residential real estate		409,886			399,588
Construction real estate		170,730			194,179
Installment and other		51,843			58,456
Total loans		1,190,054			1,242,142
Unearned income		(2,166	)		(2,356	)
Gross loans		1,187,888			1,239,786
Allowance for loan losses		(28,844	)		(24,504	)
Net loans	$	1,159,044		$	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 September 30, 2010 and December 31, 2009, were as follows:

	At September 30, 2010		At December 31, 2009
	(In thousands)
Non-accruing loans	$	52,797	$	65,035
Total non-performing loans		52,797		65,035

There were no loans past due more than 90 days and still accruing interest as of September 30, 2010 or December 31, 2009.  The reduction in interest income associated with loans on non-accrual status was $1.2 million and $1.6 million for the three months ending September 30, 2010 and, 2009, respectively. The reduction in interest income associated with loans on non-accrual status was $3.9 million for each of the nine months ending September 30, 2010 and, 2009.

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

	September 30,		December 31,
	2010		2009
	(In thousands)
Loans for which there was a related allowance for loan losses	$	5,194	$	-
Other impaired loans		53,449		67,736
Total impaired loans	$	58,643	$	67,736
Average monthly balance of impaired loans	$	63,241	$	51,884
Related allowance for loan losses		515		-

Total troubled debt restructures, both those in accrual and non-accrual status, were $6.8 million and $13.8 million as of September 30, 2010 and December 31, 2009, respectively.

Activity in the allowance for loan losses was as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
	(Dollars in thousands)
Balance at beginning of period	$	29,658		$	24,864		$	24,504		$	15,230
Provision for loan losses		500			4,000			15,858			20,793
Total charge-offs		(4,504	)		(4,167	)		(14,969	)		(11,477	)
Total recoveries		3,190			181			3,451			332
Net charge-offs		(1,314	)		(3,986	)		(11,518	)		(11,145	)
Balance at end of period	$	28,844		$	24,878		$	28,844		$	24,878

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 September 30, 2010		At December 31, 2009
	(In thousands)
Construction property	$	12,880	$	12,782
Residential real estate		3,291		3,337
Commercial real estate		3,496		631
Total	$	19,667	$	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. No stock options were granted after December 31, 2008. 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 nine months ended September 30, 2010 or 2009.

A summary of stock option and stock appreciation right activity under the 1998 Plan and the 2005 Plan as of September 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 September 30, 2010		412,500	$	27.03		2.07	$	1,729
Exercisable at September 30, 2010		229,000	$	26.77		2.84	$	995

There were no stock options exercised during the three months ended September 30, 2010 or 2009.  The total intrinsic value of options exercised during the nine months ended September 30, 2009 was $52 thousand; no stock options were exercised in the nine month period ended September 30, 2010.

As of September 30, 2010, there was $147 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 1.1 years. During the three month period ended September 30, 2010, we expensed $37 thousand for stock appreciation rights that will vest in 2011 and 2012. During the nine month period ended September 30, 2010, we expensed $109 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 September 30, 2010 and $20.0 million as of December 31, 2009. As of September 30, 2010, the advances had a fixed interest rate of 6.03%.

Note 10. Long-Term Borrowings

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

Maturity Date	Rate			Principal due	Amount
(Dollars in thousands)
01/26/2012		2.57	%	At maturity	$	10,000
03/23/2015		3.05		At maturity		20,000
04/27/2021		6.34		At maturity		2,300
					$	32,300

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 September 30, 2010 and 2009 were $46 thousand. Lease payments for each of the nine month periods ended September 30, 2010 and 2009 were $139 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 September 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 September 30, 2010 and 2009, $3 thousand of these issuance costs were amortized. During each of the nine month periods ended September 30, 2010 and 2009, $10 thousand of these issuance costs were amortized. Unamortized issuance costs were $273 thousand and $283 thousand at September 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 $1.2 million on September 30, 2010 and $478 thousand on 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 and Series B 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.

On August 13, 2010, 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 indicates the interest payments deferred:

·   August 23, 2010, $177,332.00 for Trinity Capital Trust IV

·   September 8, 2010, $560,606.25 for Trinity Capital Trust I

·   September 8, 2010, $51,192.42 for Trinity Capital Trust III

·   September 15, 2010, $176,043.25 for Trinity Capital Trust V

On November 8, 2010, 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, as due on the following dates and in the following amounts:

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

·   December 8, 2010, $44,953.20 for Trinity Capital Trust III

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

·   February 23, 2011, $172,000.00 for Trinity Capital Trust IV

·   March 8, 2011, $543,750.00 for Trinity Capital Trust I

·   March 8, 2011, $44,953.20 for Trinity Capital Trust III

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 (as discussed in Note 14 below) are in arrears.

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

	Contract Amount
	September 30, 2010		December 31, 2009
	(In thousands)
Unfunded commitments under lines of credit	$	169,371	$	155,535
Commercial and standby letters of credit		16,391		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 September 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 $23 thousand as of September 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 were $730 thousand and $242 thousand as of September 30, 2010 and December 31, 2009, respectively.

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 September 30, 2010 and September 30, 2009, a net amount of $44 thousand was accreted to equity. During the nine month periods ended September 30, 2010 and September 30, 2009, a net amount of $133 thousand and $91 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 September 30, 2010 and September 30, 2009, the total of these two amounts was $532 thousand and $529 thousand, respectively.  During the nine months ended September 30, 2010 and September 30, 2009, the total of these two amounts was $1.6 million and $1.1 million, 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, which was due for the quarterly period ending on August 16, 2010. On November 8, 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, which are due for the quarterly periods ending on November 15, 2010 and February 15, 2011. The dividend payments would normally be paid in the amount of $444,237.50 for Series A Preferred Stock and $39,982.50 for Series B Preferred Stock for each of the quarterly periods. Both Series A and Series B Preferred Stock were issued under the Treasury's Capital Purchase Plan.

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 (as discussed in Note 12 above) and the Preferred Stock are in arrears.

Note 15. Litigation

Trinity, the Bank, Title Guaranty, Cottonwood, FNM Investment Fund IV, FNM Investor Series IV, TCC Advisors, SWMT 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. 

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 September 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 September 30, 2010, the Company had notional amounts of $25.5 million in contracts with customers and $43.3 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 $703 thousand and a liability of $31 thousand as of September 30, 2010. At December 31, 2009 the Company had notional amounts of $5.0 million in contracts with customers and $14.3 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 $251 thousand and a liability of $1 thousand as of December 31, 2009.

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 September 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):

September 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:
U.S. Government sponsored agencies	$	52,988	$	-	$	52,988	$	-
States and political subdivisions		21,085		-		21,085		-
Residential mortgage-backed securities		77,416		-		77,416		-
Interest rate lock commitments, mandatory forward delivery commitments and pair offs		703		-		703		-
Financial Liabilities:
Interest rate lock commitments, mandatory forward delivery commitments and pair offs	$	31	$	-	$	31	$	-
Off-balance-sheet instruments:
Loan commitments and standby letters of credit	$	23	$	-	$	23	$	-
December 31, 2009
Financial Assets:
Investment securities available for sale:
U.S. 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 September 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 third 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 $539 thousand and $25.0 million (utilizing Level 3 valuation inputs) during the three months ended September 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 $146 thousand and $3.7 million, during the three months ended September 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 $10.9 million and $2.0 million in foreclosed assets were remeasured at fair value during the nine months ended September 30, 2010 and the year ended December 31, 2009, respectively, resulting in a charge of $1.7 million and $283 thousand to current earnings, respectively.

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

September 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	$	7,056	$	-	$	-	$	7,056
Loans held for sale		-		-		-		-
Mortgage servicing rights		6,305		-		-		6,305
Non-Financial Assets:
Foreclosed assets		10,959		-		-		10,959
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:

	September 30, 2010				December 31, 2009
	Carrying amount		Fair value		Carrying amount		Fair value
	(In thousands)
Financial assets:
Cash and due from banks	$	17,542	$	17,542	$	18,761	$	18,761
Interest-bearing deposits with banks		149,092		149,092		188,114		188,114
Federal funds sold and securities purchased under resell agreements		113		113		620		620
Investments:
Available for sale		151,489		151,489		136,756		136,756
Held to maturity		11,188		12,010		11,436		10,808
Other investments		9,697		9,697		9,568		9,568
Loans, net		1,159,044		1,173,657		1,215,282		1,203,138
Loans held for sale		17,857		18,256		9,245		9,268
Accrued interest receivable		6,834		6,834		6,840		6,840
Mortgage servicing rights		6,361		6,464		7,647		8,754
Derivative financial instruments		703		703		251		251
Financial liabilities:
Non-interest bearing deposits	$	104,934	$	104,934	$	87,238	$	87,238
Interest bearing deposits		1,292,968		1,298,554		1,381,207		1,385,968
Short-term borrowings		1,163		1,182		20,000		20,182
Long-term borrowings		32,300		35,489		13,493		14,620
Junior subordinated debt owed to unconsolidated trusts		37,116		18,451		37,116		18,118
Accrued interest payable		5,237		5,237		5,038		5,038
Derivative financial instruments		31		31		1		1
Off-balance sheet instruments:
Standby letters of credit	$	23	$	23	$	24	$	24

Note 18. Subsequent Events

On November 8, 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, which are due for the quarterly periods ending on November 15, 2010 and February 15, 2011. The dividend payments would normally be paid in the amount of $444,237.50 for Series A Preferred Stock and $39,982.50 for Series B Preferred Stock for each of the quarterly periods. Both Series A and Series B Preferred Stock were issued under the Treasury's Capital Purchase Plan.

In addition, on November 8, 2010, 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, as due on the following dates and in the following amounts:

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

·   December 8, 2010, $44,953.20 for Trinity Capital Trust III

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

·   February 23, 2011, $172,000.00 for Trinity Capital Trust IV

·   March 8, 2011, $543,750.00 for Trinity Capital Trust I

·   March 8, 2011, $44,953.20 for Trinity Capital Trust III

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 for bank of Trinity's size);

·   Contain a series of provisions covering mortgage loan origination 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 third quarter of 2010, the Company experienced some improvement in its asset quality 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 third 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.

Mortgage Servicing Right (MSR) Assets: Servicing residential mortgage loans for third-party investors represents a significant business activity of the Bank. As of September 30, 2010, mortgage loans serviced for others totaled $1.0 billion. The net carrying amount of the MSRs on these loans total $6.4 million as of September 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 September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
	(In thousands)
Balance at beginning of period	$	8,281		$	8,305		$	8,525		$	6,908
Servicing rights originated and capitalized		621			877			1,301			3,563
Amortization		(356	)		(639	)		(1,280	)		(1,928	)
	$	8,546		$	8,543		$	8,546		$	8,543

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
	(In thousands)
Balance at beginning of period	$	(1,237	)	$	(1,235	)	$	(878	)	$	(1,637	)
Aggregate reductions credited to operations		-			-			332			1,250
Aggregate additions charged to operations		(948	)		(270	)		(1,639	)		(1,118	)
	$	(2,185	)	$	(1,505	)	$	(2,185	)	$	(1,505	)

The fair values of the MSRs were $6.5 million and $8.8 million on September 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 September 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 September 30, 2010 and December 31, 2009:

	September 30, 2010			December 31, 2009
Prepayment Standard Assumption (PSA) speed		341.67	%		232.00	%
Discount rate		10.75			10.76
Earnings rate		1.52			2.75

Overview

The Company moved from a net loss to net income from the second quarter of 2010 to the third quarter of 2010. Net income available to common shareholders increased by $8.0 million from the quarter ended June 30, 2010 to the quarter ended September 30, 2010, moving from a net loss of $(5.1) million to net income of $2.9 million. In addition, the Company’s net income available to common shareholders increased $2.1 million from the third quarter of 2009 to the third quarter of 2010, moving from net income of $793 thousand to net income of $2.9 million. The increase in net income available to common shareholders from the third quarter of 2009 was primarily due to a decrease in provision for loan losses and an increase in net interest income. The decrease in provision for loan losses was due to a large recovery that increased the balance of the allowance for loan losses and other factors indicated in the allowance for loan loss analysis. The increase in net interest income was due to an increase in the net interest margin, as the interest expense on liabilities decreased more sharply than the interest income on assets. Total assets decreased by $74.4 million from December 31, 2009 to September 30, 2010, mainly due to decreases in net loans and cash and cash equivalents. 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 September 30, 2010 and November 9, 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 provision for income taxes, provision for loan losses and dividends and discount accretion on preferred shares of $5.9 million during the third quarter of 2010, compared to net operating income of $6.4 million during the same period in 2009. This represented a decrease of $541 million (8.4%). Net income available to common shareholders for the third quarter of 2010 increased to $2.9 million or $0.45 diluted income per share, compared to net income of $793 thousand or $0.12 diluted earnings per share for the same period in 2009, an increase of $2.1 million (268.0%) in net income available to common shareholders and an increase in earnings per share of $0.33 (275.0%). This increase in net income available to common shareholders was primarily due to a decrease in provision for loan losses of $3.5 million (87.5%) and an increase in net interest income of $1.7 million (13.2%). The decrease in provision for loan losses was due to a large recovery on a previously charged-off loan that increased the balance of the allowance for loan losses and other factors that were considered in the allowance for loan loss analysis. The increase in net interest income was due to an increase in the net interest margin, as the interest expense on liabilities decreased more sharply than the interest income on assets. Non-interest expense also increased $2.4 million (21.7%), primarily due to an increase in the loss on sale of other real estate owned of $1.9 million and an increase in the amortization and valuation of mortgage servicing rights of $395 thousand. The increase in loss on sale of other real estate owned was due to a higher volume of write-downs and sales of other real estate owned during 2010 compared to 2009. 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. There was also an increase in non-interest income of $89 thousand (2.1%).  Provision for income taxes increased $831 thousand (74.5%) due to higher pre-tax income.

The Company experienced net operating income before provision for income taxes, provision for loan losses and dividends and discount accretion on preferred shares of $15.2 million during the first nine months of 2010, compared to net operating income of $25.3 million during the same period in 2009. This represented a decrease of $10.1 million (39.8%). Net income available to common shareholders for the first nine months of 2010 decreased to a loss of $(2.3) million or $(0.36) diluted (loss) per share, compared to income of $1.7 million or $0.26 diluted earnings per share for the same period in 2009, a decrease of $4.0 million (237.7%) in net income available to common shareholders and a decrease in earnings per share of $0.62 (238.5%). This decrease in net income was primarily due to an increase in non-interest expense of $5.9 million (19.0%) and a decrease in non-interest income of $4.8 million (30.9%).The increase in non-interest expense was primarily due to an increase in loss on sale of other real estate owned of $2.8 million, an increase in collection expenses of $898 thousand and an increase in FDIC insurance premiums of $809 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 collection expenses was directly related to the increase in activity in collecting and disposing of non-performing assets. 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 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 nine months of 2009. There was also a drop in gain on sale of securities of $895 thousand due to a lower value of securities sold in 2010 compared to 2009. Provision for loan losses decreased $4.9 million (23.7%) due to a large recovery on a previously charged-off loan that increased the balance of the allowance for loan losses and other factors that were considered in the allowance for loan loss analysis. There was also an increase in net interest income of $685 thousand (1.7%).  Provision for income taxes decreased $1.7 million (96.5%) due to lower pre-tax income.  In addition, dividends and discount accretion on preferred shares increased $508 thousand (47.0%) 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 September 30,
	2010							2009
	Average Balance		Interest		Yield/Rate			Average Balance		Interest		Yield/Rate
	(Dollars in thousands)
Interest-earning Assets:
Loans(1)	$	1,192,390	$	17,963		5.98	%	$	1,249,540	$	17,758		5.64	%
Taxable investment securities		152,808		747		1.94			84,581		960		4.50
Investment securities exempt from federal income taxes (2)		33,429		463		5.49			36,010		446		4.91
Federal funds sold		167		-		-			473		-		-
Other interest-bearing deposits		116,035		74		0.25			151,758		107		0.28
Investment in unconsolidated trust subsidiaries		1,116		21		7.47			1,116		26		9.24
Total interest-earning assets		1,495,945		19,268		5.11			1,523,478		19,297		5.03
Non-interest-earning assets		87,968							64,730
Total assets	$	1,583,913						$	1,588,208
Interest-bearing Liabilities:
Deposits:
NOW deposits	$	120,871	$	60		0.20	%	$	110,161	$	102		0.37	%
Money market deposits		205,822		110		0.21			187,555		185		0.39
Savings deposits		352,050		251		0.28			349,147		370		0.42
Time deposits over $100,000		394,767		1,850		1.86			423,492		2,922		2.74
Time deposits under $100,000		216,511		1,010		1.85			213,648		1,374		2.55
Short-term borrowings, including ESOP borrowings under 1 year		1,166		18		6.12			26,315		250		3.77
Long-term borrowings, including ESOP borrowings over 1 year		32,300		253		3.11			13,507		120		3.52
Long-term capital lease obligations		2,211		67		12.02			2,211		67		12.02
Junior subordinated debt owed to unconsolidated trusts		37,116		694		7.42			37,116		689		7.36
Total interest-bearing liabilities		1,362,814		4,313		1.26			1,363,152		6,079		1.77
Demand deposits--non-interest-bearing		49,447							40,200
Other non-interest-bearing liabilities		50,835							59,477
Stockholders' equity, including stock owned by ESOP		120,817							125,379
Total liabilities and stockholders equity	$	1,583,913						$	1,588,208
Net interest income on a fully tax-equivalent basis/interest rate spread(3)			$	14,955		3.85	%			$	13,218		3.26	%
Net interest margin on a fully tax-equivalent basis(4)						3.97	%						3.44	%
Net interest margin(4)						3.92	%						3.40	%

(1) Average loans include non-accrual loans of $53.2 million and $64.8 million for September 30, 2010 and 2009, respectively. Interest income includes loan origination fees of $504 thousand and $528 thousand for the three months ended September 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 third quarter of 2010, net interest income on a fully tax-equivalent basis increased $1.7 million (13.1%) compared to the third quarter of 2009, increasing from $13.2 million in 2009 to $15.0 million in 2010. The increase in net interest income on a fully tax-equivalent basis resulted from a decrease in interest expense of $1.8 million (29.1%), which was partially offset by a decrease in interest income on a fully tax-equivalent basis of $29 thousand (0.2%). Interest expense decreased mainly due to a decrease in the cost on interest-bearing liabilities of 51 basis points, which accounted for a decrease in interest expense of $1.4 million. There was also a decrease in average interest-bearing liabilities $338 thousand (0.0%), which accounted for a decrease of $321 thousand in interest expense. Interest income on a fully tax-equivalent basis decreased due to a decrease in average interest-earning assets of $27.5 million (1.8%), which accounted for a $375 thousand decrease. This was partially offset by an increase in the yield on interest-earning assets of 8 basis points, accounting for an increase in $346 thousand in interest income on a fully tax-equivalent basis. The net interest margin expressed on a fully tax-equivalent basis increased 53 basis points to 3.97% for the quarter ended September 30, 2010 from 3.44% for the quarter ended September 30, 2009.

	Nine Months Ended September 30,
	2010							2009
	Average Balance		Interest		Yield/Rate			Average Balance		Interest		Yield/Rate
	(Dollars in thousands)
Interest-earning Assets:
Loans(1)	$	1,212,815	$	51,873		5.72	%	$	1,251,785	$	55,748		5.95	%
Taxable investment securities		136,238		2,156		2.12			74,860		2,104		3.76
Investment securities exempt from federal income taxes (2)		36,124		1,428		5.29			29,609		1,214		5.48
Federal funds sold		266		-		-			1,018		1		0.13
Other interest-bearing deposits		124,507		254		0.27			109,563		193		0.24
Investment in unconsolidated trust subsidiaries		1,116		62		7.43			1,116		68		8.15
Total interest-earning assets		1,511,066		55,773		4.93			1,467,951		59,328		5.40
Non-interest-earning assets		87,239							60,966
Total assets	$	1,598,305						$	1,528,917
Interest-bearing Liabilities:
Deposits:
NOW deposits	$	114,394	$	198		0.23		$	108,650	$	339		0.42	%
Money market deposits		207,891		373		0.24			191,498		635		0.44
Savings deposits		358,118		759		0.28			329,700		1,031		0.42
Time deposits over $100,000		401,514		6,322		2.11			386,755		8,550		2.96
Time deposits under $100,000		215,885		3,197		1.98			210,584		4,331		2.75
Short-term borrowings, including ESOP borrowings under 1 year		7,041		251		4.77			28,717		502		2.34
Long-term borrowings, including ESOP borrowings over 1 year		26,448		634		3.20			18,461		644		4.66
Long-term capital lease obligations		2,211		201		12.15			2,211		201		12.15
Junior subordinated debt owed to unconsolidated trusts		37,116		2,061		7.42			37,116		2,095		7.55
Total interest-bearing liabilities		1,370,618		13,996		1.37			1,313,692		18,328		1.87
Demand deposits--non-interest-bearing	$	47,173						$	43,421
Other non-interest-bearing liabilities		58,556							51,739
Stockholders' equity, including stock owned by ESOP		121,958							120,065
Total liabilities and stockholders equity	$	1,598,305						$	1,528,917
Net interest income on a fully tax-equivalent basis/interest rate spread(3)			$	41,777		3.57	%			$	41,000		3.54	%
Net interest margin on a fully tax-equivalent basis(4)						3.70	%						3.73	%
Net interest margin(4)						3.65	%						3.69	%

(1)	Average loans include non-accrual loans of $61.7 million and $48.1 million for September 30, 2010 and 2009, respectively. Interest income includes loan origination fees of $1.0 million and $2.4 million for the nine months ended September 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 nine months of 2010, net interest income on a fully tax-equivalent basis increased $777 thousand (1.9%) compared to the first nine months of 2009, increasing from $41.0 million in 2009 to $41.8 million in 2010. The increase in net interest income on a fully tax-equivalent basis resulted from a decrease in interest expense of $4.3 million (23.6%), which was partially offset by a decrease in interest income on a fully tax-equivalent basis of $3.6 million (6.0%). Interest expense decreased mainly due to a decrease in the cost on interest-bearing liabilities of 50 basis points, which accounted for a decrease in interest expense of $4.6 million. This was partially offset by an increase in average interest-bearing liabilities of $56.9 million (4.3%), which accounted for an increase of $255 thousand in interest expense. Interest income on a fully tax-equivalent basis decreased due to a decrease in the yield on interest-earning assets of 47 basis points, which decrease interest income on a fully tax-equivalent basis of $3.4 million. There was also an increase in average interest-earning assets of $43.1 million (2.9%), though in this increase there was a decrease in higher-yielding assets (loans), while lower-yielding assets (investment securities and interest-bearing deposits with other banks) increased. This had the effect of a lower earning asset mix, which accounted for a decrease of $186 thousand in interest income on a fully tax-equivalent basis. The net interest margin expressed on a fully tax-equivalent basis decreased 3 basis points to 3.70% for the nine months ended September 30, 2010 from 3.73% for the nine months ended September 30, 2009.

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009
	(In thousands)
Net interest income	$	14,777	$	13,052	$	41,231	$	40,546
Tax-equivalent adjustment to net interest income		178		166		546		454
Net interest income, fully tax-equivalent basis	$	14,955	$	13,218	$	41,777	$	41,000

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 September 30,									Nine Months Ended September 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	$	(833	)	$	1,038		$	205		$	(1,706	)	$	(2,169	)	$	(3,875	)
Taxable investment securities		516			(729	)		(213	)		1,233			(1,181	)		52
Investment securities exempt from federal income taxes(1)		(34	)		51			17			259			(45	)		214
Federal funds sold		-			-			-			-			(1	)		(1	)
Other interest bearing deposits		(24	)		(9	)		(33	)		28			33			61
Investment in unconsolidated trust subsidiaries		-			(5	)		(5	)		-			(6	)		(6	)
Total (decrease) increase in interest income	$	(375	)	$	346		$	(29	)	$	(186	)	$	(3,369	)	$	(3,555	)
Interest-bearing Liabilities:
Now deposits	$	9		$	(51	)	$	(42	)	$	17		$	(158	)	$	(141	)
Money market deposits		17			(92	)		(75	)		50			(312	)		(262	)
Savings deposits		3			(122	)		(119	)		83			(355	)		(272	)
Time deposits over $100,000		(187	)		(885	)		(1,072	)		315			(2,543	)		(2,228	)
Time deposits under $100,000		18			(382	)		(364	)		106			(1,240	)		(1,134	)
Short-term borrowings, including ESOP borrowings under 1 year		(329	)		97			(232	)		(545	)		294			(251	)
Long-term borrowings, including ESOP borrowings over 1 year		149			(16	)		133			228			(238	)		(10	)
Long-term capital lease obligations		-			-			-			-			-			-
Junior subordinated debt owed to unconsolidated trusts		-			5			5			-			(34	)		(34	)
Total (decrease) increase in interest expense	$	(320	)	$	(1,446	)	$	(1,766	)	$	254		$	(4,586	)	$	(4,332	)
(Decrease) increase in net interest income	$	(54	)	$	1,792		$	1,737		$	(440	)	$	1,217		$	777

____________________

(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 nine months ended September 30, 2010 and 2009 were as follows:

	Three Months Ended September 30,							Nine Months Ended September 30,
	2010		2009		Net difference			2010		2009		Net difference
	(In thousands)
Other income:
Mortgage loan servicing fees	$	659	$	643	$	16		$	1,959	$	1,865	$	94
Trust fees		442		383		59			1,253		1,088		165
Loan and other fees		759		704		55			2,229		2,023		206
Service charges on deposits		372		424		(52	)		1,213		1,284		(71	)
Gain on sale of loans		1,590		1,553		37			3,068		7,048		(3,980	)
Gain on sale of securities		-		208		(208	)		47		942		(895	)
Title insurance premiums		308		256		52			770		1,121		(351	)
Other operating income		198		68		130			309		323		(14	)
	$	4,328	$	4,239	$	89		$	10,848	$	15,694	$	(4,846	)

In the third quarter of 2010, other income increased from the third quarter of 2009 by $89 thousand (2.1%) from $4.2 million to $4.3 million. Other operating income increased $130 thousand (191.2%) from 2009 to 2010. This was mainly due to revenue from the operation of the Santa Fe Equestrian Center, which we are operating following our foreclosure of the underlying loan on March 31, 2010, of $89 thousand in the third quarter of 2010; there was no such income in the third quarter of 2009. Trust fees increased $59 thousand (15.4%) due to an increase in trust and investment services accounts and associated fees on those accounts. Loan and other fees increased $55 thousand (7.8%) mainly due to an increase in ATM fee income. Title insurance premiums increased $52 thousand (20.3%) due to an increase of title insurance activity in the third quarter of 2010 compared to 2009 due to an increase in refinance volume. These increases were partially offset by a decrease in the gain on sale of securities of $208 thousand (100.0%), as there were no sales of securities in the third quarter of 2010 whereas there were sales in 2009. In addition, service charges on deposits decreased $52 thousand (12.3%) primarily due to a decrease in overdraft fees due to a lower volume of customer overdrafts.

In the first nine months of 2010, other income decreased from the first nine months of 2009 by $4.8 million (30.9%) from $15.7 million to $10.8 million. Gain on sale of loans decreased $4.0 million (56.5%) from 2009 to 2010 due to a lower volume of loans sold between the two periods. Gain on sale of securities decreased $895 thousand (95.0%) due to the volume of securities sold was lower in the first nine months of 2010 than in the same period in 2009. Title insurance premiums decreased $351 thousand (31.3%) due to a lower volume of policies written in the first nine months 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 (though refinance volume did increase during the third quarter of 2010, this was not enough to make up for the much lower volume during the first two quarters). These decreases were partially offset by increases in loan and other fees of $206 thousand (10.2%), primarily due to an increase in ATM fee income.  In addition, trust fees increased $165 thousand (15.2%) due to an increase in trust and investment services accounts and associated fees on those accounts.

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

	Three Months Ended September 30,							Nine Months Ended September 30,
	2010		2009		Net difference			2010		2009		Net difference
	(In thousands)
Other expenses:
Salaries and employee benefits	$	5,152	$	4,967	$	185		$	15,321	$	14,669	$	652
Occupancy		1,089		811		278			3,094		2,424		670
Data processing		686		718		(32	)		2,119		2,042		77
Marketing		306		310		(4	)		1,037		1,198		(161	)
Amortization and valuation of mortgage servicing rights		1,304		909		395			2,587		1,796		791
Amortization and valuation of other intangible assets		110		67		43			332		200		132
Supplies		102		93		9			311		445		(134	)
Loss on sale of other real estate owned		1,938		86		1,852			3,423		617		2,806
Postage		164		142		22			486		426		60
Bankcard and ATM network fees		361		371		(10	)		859		1,025		(166	)
Legal, professional and accounting fees		896		724		172			2,222		1,705		517
FDIC insurance premiums		638		477		161			2,470		1,661		809
Collection expenses		446		85		361			1,274		376		898
Other		16		1,093		(1,077	)		1,335		2,405		(1,070	)
	$	13,208	$	10,853	$	2,355		$	36,870	$	30,989	$	5,881

For the third quarter of 2010, other expenses increased $2.3 million (21.7%) to $13.2 million in 2010 from $10.9 million in the third quarter of 2009. Loss on sale of other real estate owned increased $1.9 million (2,153.5%) due to a higher volume of foreclosed assets sold and otherwise written down in value during the first nine months of 2010 than compared to the same period in 2009. Amortization and valuation of mortgage servicing rights increased $395 thousand (43.5%) between the two periods due to a higher valuation allowance on the mortgage servicing rights due to a lower interest rate environment. Collection expenses increased $361 thousand (424.7%) due to the higher volume of collection efforts during the third quarter of 2010 compared to the same period in 2009. In addition, other operating expenses decreased $1.1 million (44.5%) mainly due to a decrease in the expenses associated with interest rate lock contracts of $986 thousand. The interest rate lock contracts expense decreased due to a higher market value of these contracts at the end of the third quarter in 2010 than the comparable period in 2009.

For the first nine months of 2010, other expenses increased $5.9 million (19.0%) to $36.9 million in 2010 from $31.0 million in the first nine months of 2009. Loss on sale of other real estate owned increased $2.8 million (454.8%) due to a higher volume of foreclosed assets sold during the first nine months of 2010 than compared to the same period in 2009. Collection expenses increased $898 thousand (238.8%) due to the higher volume of collection efforts during the first nine months of 2010 compared to the same period in 2009. FDIC insurance premiums increased $809 thousand (48.7%), 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. Amortization and valuation of mortgage servicing rights increased $791 thousand (44.0%) between the two periods due to a higher valuation allowance on the mortgage servicing rights due to a lower interest rate environment. In addition, other operating expenses decreased $1.1 million (98.5%) mainly due to a decrease in the expenses associated with interest rate lock contracts of $570 thousand and a decrease in the provision for unfunded loans of $459 thousand. The interest rate lock contracts expense decreased due to a higher market value of these contracts at the end of the third quarter in 2010 than the comparable period in 2009. The provision for unfunded loans declined as the exposure to the losses on these lines was deemed unchanged from the same period in 2009, and therefore no additional provision was required.

Income Taxes. In the third quarter of 2010, provision for income tax expense increased $831 thousand (74.5%) from the third quarter of 2009, increasing from $1.1 million in 2009 to $1.9 million in 2010. This was due to greater pretax earnings in the third quarter of 2010 compared to the third quarter of 2009. The effective tax rate decreased from 45.8% to 36.1% 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 earnings in 2009 than in 2010.

In the first nine months of 2010, provision for income tax expense decreased $1.7 million (96.5%) from the first nine months of 2009, decreasing from $1.7 million in 2009 to $59 thousand in 2010. This was due to a pretax loss position in the first nine months of 2010 compared to the first nine months of 2009. The effective tax rate decreased from 38.3% to (9.1%) between the two periods. This negative tax rate, resulting from a tax expense while having book pre-tax earnings, was mainly due to permanent and temporary tax differences representing a much larger percentage of pretax earnings for the period in 2010 than in 2009. These differences included certain passed adjustments that, while immaterial, have an impact on the effective tax rate. These passed adjustments will be reflected during the fourth quarter of 2010.

Financial Condition

General. Total assets at September 30, 2010 were $1.6 billion, a decrease of $74.4 million (4.4%) from December 31, 2009. Net loans decreased $56.2 million (4.6%), mainly due to a decrease in new loan activity and demand, while existing loans that matured were paid off.  Cash and cash equivalents decreased $40.7 million (19.6%) during the first nine months of 2010. Total investment securities increased $14.6 million (9.3%) 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 $70.5 million (4.8%).  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 $73.0 million (4.7%) during the first nine months of 2010, largely due to this decrease in total deposits.  Stockholders' equity (including stock owned by the Employee Stock Ownership Plan) decreased by $1.4 million (1.1%) 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 September 30, 2010				At December 31, 2009				At September 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	$	52,706	$	52,988	$	68,502	$	68,382	$	48,058	$	49,606
States and political subdivisions		20,279		21,085		26,112		26,519		26,144		26,741
Residential mortgage-backed securities		77,458		77,416		41,906		41,855		28,001		28,189
Total securities available for sale	$	150,443	$	151,489	$	136,520	$	136,756	$	102,203	$	104,536
Securities Held to Maturity
States and political subdivisions	$	11,188	$	12,010	$	11,436	$	10,808	$	8,747	$	9,032
Total securities held to maturity	$	11,188	$	12,010	$	11,436	$	10,808	$	8,747	$	9,032
Other securities:
Non-marketable equity securities (including FRB and FHLB stock)	$	8,581	$	8,581	$	8,452	$	8,452	$	6,485	$	6,485
Investment in unconsolidated trusts		1,116		1,116		1,116		1,116		1,116		1,116
Total other securities	$	9,697	$	9,697	$	9,568	$	9,568	$	7,601	$	7,601

The Company had a total of $77.5 million in Collateralized Mortgage Obligations (“CMOs”) as of September 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 September 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 September 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 September 30, 2010						At December 31, 2009						At September 30, 2009
	Amount			Percent			Amount			Percent			Amount			Percent
	(Dollars in thousands)
Commercial	$	142,240			11.95	%	$	137,684			11.08	%	$	117,582			9.55	%
Commercial real estate		415,355			34.90			452,235			36.41			442,918			35.95
Residential real estate		409,886			34.44			399,588			32.17			402,776			32.70
Construction real estate		170,730			14.35			194,179			15.63			211,816			17.20
Installment and other		51,843			4.36			58,456			4.71			56,631			4.60
Total loans		1,190,054			100.00			1,242,142			100.00			1,231,723			100.00
Unearned income		(2,166	)					(2,356	)					(2,255	)
Gross loans		1,187,888						1,239,786						1,229,468
Allowance for loan losses		(28,844	)					(24,504	)					(24,878	)
Net loans	$	1,159,044					$	1,215,282					$	1,204,590

Total loans decreased $52.1 million (4.2%) from December 31, 2009 to September 30, 2010, remaining at $1.2 billion. The decrease was primarily in the commercial real estate and construction 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, as amended.

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 September 30, 2010			At December 31, 2009			At September 30, 2009
	(Dollars in thousands)
Non-accruing loans	$	52,797		$	65,035		$	68,333
Loans 90 days or more past due, still accruing interest		-			-			-
Total non-performing loans		52,797			65,035			68,333
Other real estate owned		19,667			16,750			9,028
Other repossessed assets		163			406			428
Total non-performing assets	$	72,627		$	82,191		$	77,789
Restructured loans, still accruing interest		5,222			2,513			2,586
Total non-performing loans to total loans		4.44	%		5.24	%		5.55	%
Allowance for loan losses to non-performing loans		54.63	%		37.68	%		36.41	%
Total non-performing assets to total assets		4.53	%		4.90	%		4.91	%

At September 30, 2010, total non-performing assets decreased $9.6 million (11.6%) to $72.6 million from $82.2 million at December 31, 2009, primarily due to a decrease in non-accruing loans of $12.2 million (18.8%), which was partially offset by an increase in other real estate owned of $2.9 million (17.4%). Other real estate owned increased mainly due to an increase in foreclosed commercial real estate properties, with a smaller increase in construction real estate properties. Non-accruing loans decreased mainly due to a decrease in non-accruing commercial real estate loans of $5.8 million and a decrease in non-accruing construction loans of $5.3 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 September 30, 2010, totaled $5.2 million, with a specific portion of the allowance for loan losses allocated to cover these estimated losses of $515 thousand. As of September 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 $6.8 million and $13.8 million as of September 30, 2010 and December 31, 2009, respectively. Those restructured loans considered performing loans totaled $5.2 million and $2.5 million as of September 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 September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
	(Dollars in thousands)
Balance at beginning of period	$	29,658		$	24,864		$	24,504		$	15,230
Provision for loan losses		500			4,000			15,858			20,793
Total charge-offs		(4,504	)		(4,167	)		(14,969	)		(11,477	)
Total recoveries		3,190			181			3,451			332
Net charge-offs		(1,314	)		(3,986	)		(11,518	)		(11,145	)
Balance at end of period	$	28,844		$	24,878		$	28,844		$	24,878
Gross loans at end of period	$	1,187,888		$	1,229,468		$	1,187,888		$	1,229,468
Ratio of allowance to total loans		2.42	%		2.02	%		2.42	%		2.02	%
Ratio of net charge-offs to average loans(1)		0.44	%		1.27	%		1.27	%		1.19	%

____________________

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

Net charge-offs for the three months ended September 30, 2010, totaled $1.3 million, a decrease of $2.7 million (67.0%), from $4.0 million for the three months ended September 30, 2009. The majority of the net charge-offs were construction real estate ($1.3 million), residential real estate ($1.2 million) and commercial real estate ($572 thousand). There was also a large recovery in the commercial non-real estate loan portfolio, making a net recovery of $2.1 million in this category. The decrease in net charge-offs for the third quarter of 2010 compared to the same period in 2009 was primarily due to an increase in net recoveries in the commercial non-real estate portfolio of $3.6 million. The provision for loan losses decreased $3.5 million (87.5%) 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.

Net charge-offs for the nine months ended September 30, 2010, totaled $11.5 million, an increase of $373 thousand (3.3%), from $11.1 million for the nine months ended September 30, 2009. The majority of the net charge-offs were construction real estate ($4.9 million) residential real estate ($4.3 million) installment and other loans ($1.4 million) and commercial real estate ($1.0 million). There was also a large recovery in the commercial non-real estate loan portfolio, making a net recovery of $133 thousand in this category. The increase in net charge-offs for the first nine 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, which was partially offset by a large decrease in net charge-offs in the commercial non-real estate portfolio. The provision for loan losses decreased $4.9 million (23.7%) 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 September 30, 2010					At December 31, 2009					At September 30, 2009
	Amount		Percent			Amount		Percent			Amount		Percent
	(Dollars in thousands)
Commercial	$	5,352		11.95	%	$	4,371		11.08	%	$	5,227		9.55	%
Commercial and residential real estate		11,311		69.34			8,416		68.58			8,519		68.65
Construction real estate		7,604		14.35			8,637		15.63			8,098		17.20
Installment and other		3,581		4.36			3,080		4.71			3,034		4.60
Unallocated		996		N/A			-		N/A			-		N/A
Total	$	28,844		100.00	%	$	24,504		100.00	%	$	24,878		100.00	%

The allowance for loan losses increased $4.0 million (15.9%) from September 30, 2009 to September 30, 2010. This was mainly due to an increase in the allowance allocated to commercial non-real estate and residential and commercial real estate loans as well as an increase in the unallocated portion on the reserve. The Bank 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 and residential real estate loans increased $2.8 million (32.3%) mainly due to an increase in historical loss experience (based on regression analysis) of $2.6 million. In addition, the allocation for installment and other loans increased $537 thousand (17.6%) mainly due to an increase in the allocation for historical loss experience (based on regression analysis) of $403 thousand. The allocation for the construction real estate loan portfolio decreased $520 thousand (6.4%), mainly due to a decrease in the allocation for qualitative factors of $458 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 September 30, 2010 were $58.6 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 $515 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 weaker than anticipated, as the recovery now appears to be less robust and not to get underway until 2011. 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 nine months of 2010 and is expected to remain so for the remainder of the year. The construction sector is expected to see improvement in 2011 with a recovery taking place in 2012.

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.

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 September 30, 2010		At December 31, 2009		At September 30, 2009
	(In thousands)
Performing loans classified as:
Substandard	$	26,879	$	30,648	$	55,090
Doubtful		-		-		-
Total performing adversely classified loans	$	26,879	$	30,648	$	55,090
Special mention loans	$	12,301	$	5,269	$	10,338

Total performing adversely classified assets decreased $28.2 million (51.2%) from September 30, 2009 to September 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 table) loan concentrations, as well as upgrading or payoff of several loan relationships in the construction and commercial real estate loan portfolios. Special mention loans increased $2.0 million (19.0%) between September 30, 2009 and September 30, 2010, primarily due to downgrades of two large credits from pass grades to special mention in the retail business property and office buildings commercial real estate concentrations. Both of these loans are collateralized by real estate, and the loans have personal guarantees and additional collateral. As of September 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 $13.8 million and $21.9 million for the nine months ended September 30, 2010 and September 30, 2009, respectively, a decrease in cash provided of $8.1 million. This decrease was primarily due to an increase in cash used in the origination of loans held for sale of $219.2 million, which was largely offset by a decrease in cash provided by the sale of these loans of $208.3 million. Net cash provided by (used in) investing activities was $18.6 million and $(29.2) million for the nine months ended September 30, 2010 and September 30, 2009, respectively. The $47.8 million increase in cash provided by investing activities was largely due to an increase in the proceeds from the maturities and paydowns of investment securities of $92.8 million and a decrease in cash used in the funding of loans (net of repayments) of $41.5 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 the cash used for the purchase of investment securities of $63.2 million and a decrease in the proceeds from the sale of investment securities of $41.6 million. Net cash (used in) provided by financing activities was $(73.2) million and $163.8 million for the nine months ended September 30, 2010 and September 30, 2009, respectively. The $237.0 million decrease in cash provided by financing activities was mainly due to a decrease in cash provided by net growth of deposits of $194.9 million and a decrease in cash provided by the issuance of preferred stock of $35.5 million.

The most significant change in deposits from December 31, 2009 to September 30, 2010 occurred in savings deposits (decreasing $62.6 million), with a smaller decrease in time deposits over $100,000 ($50.5 million). The largest increases in deposits were in MMDA accounts ($21.4 million), NOW accounts ($13.2 million), demand deposits ($5.2 million) and time deposits under $100,000 ($2.8 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 September 30, 2010, we had the ability to borrow from the FHLB up to a total of $197.5 million in additional funds. We also may borrow through the Federal Reserve Bank’s discount window up to a total of $101.4 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 September 30, 2010, Trinity’s total risk-based capital ratio was 14.46%, the Tier 1 capital to risk-weighted assets ratio was 13.20%, and the Tier 1 capital to adjusted average assets ratio was 9.85%. 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 September 30, 2010, the Bank’s total risk-based capital ratio was 14.17%, the Tier 1 capital to risk-weighted assets ratio was 12.90%, and the Tier 1 capital to adjusted average assets ratio was 9.63%. 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 September 30, 2010 and December 31, 2009.

At September 30, 2010 and December 31, 2009, Trinity’s book value per common share was $13.29 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, which was due for the quarterly period ending on August 16, 2010. On November 8, 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, which are due for the quarterly periods ending on November 15, 2010 and February 15, 2011. The dividend payments would normally be paid in the amount of $444,237.50 for Series A Preferred Stock and $39,982.50 for Series B Preferred Stock for each of the quarterly periods. Both Series A and Series B Preferred Stock were issued under the Treasury's Capital Purchase Plan.

In addition, on August 13, 2010, 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 indicates the interest payments deferred:

·   August 23, 2010, $177,332.00 for Trinity Capital Trust IV

·   September 8, 2010, $560,606.25 for Trinity Capital Trust I

·   September 8, 2010, $51,192.42 for Trinity Capital Trust III

·   September 15, 2010, $176,043.25 for Trinity Capital Trust V

On November 8, 2010, 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, as due on the following dates and in the following amounts:

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

·   December 8, 2010, $44,953.20 for Trinity Capital Trust III

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

·   February 23, 2011, $172,000.00 for Trinity Capital Trust IV

·   March 8, 2011, $543,750.00 for Trinity Capital Trust I

·   March 8, 2011, $44,953.20 for Trinity Capital Trust III

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 September 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 September 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 September 30, 2010:	0-90 Days			91-365 Days			1-5 Years			Over 5 Years			Total
	(Dollars in thousands)
Interest-earning Assets:
Loans	$	440,008		$	450,434		$	237,689		$	59,757		$	1,187,888
Loans held for sale		17,857			-			-			-			17,857
Investment securities		17,607			29,512			53,564			70,575			171,258
Securities purchased under agreements to resell		113			-			-			-			113
Interest-bearing deposits with banks		142,135			6,957			-			-			149,092
Investment in unconsolidated trusts		186			-			-			930			1,116
Total interest-earning assets	$	617,906		$	486,903		$	291,253		$	131,262		$	1,527,324
Interest-bearing Liabilities:
NOW deposits	$	62,038		$	104,664		$	-		$	-		$	166,702
Money market deposits		75,386			102,988			-			-			178,374
Savings deposits		146,158			228,708			-			-			374,866
Time deposits over $100,000		115,171			201,710			30,677			7,943			355,501
Time deposits under $100,000		62,557			127,742			20,704			6,522			217,525
Short-term borrowings		9			1,154			-			-			1,163
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	$	467,505		$	766,966		$	61,381		$	69,906		$	1,365,758
Rate sensitive assets (RSA)	$	617,906		$	1,104,809		$	1,396,062		$	1,527,324			1,527,324
Rate sensitive liabilities (RSL)		467,505			1,234,471			1,295,852			1,365,758			1,365,758
Cumulative GAP (GAP=RSA-RSL)		150,401			(129,662	)		100,210			161,566			161,566
RSA/Total assets		38.56	%		68.95	%		87.12	%		95.32	%		95.32	%
RSL/Total assets		29.18	%		77.04	%		80.87	%		85.23	%		85.23	%
GAP/Total assets		9.39	%		-8.09	%		6.25	%		10.08	%		10.08	%
GAP/RSA		24.34	%		-11.74	%		7.18	%		10.58	%		10.58	%

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 September 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 September 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	%	$	(8,356	)		(14.96	)%	$	(6,584	)		(11.71	)%
	+1.00			(6,384	)		(11.43	)		(3,329	)		(5.92	)
	(1.00	)		(22	)		(0.04	)		(281	)		(0.50	)
	(2.00	)		(101	)		(0.18	)		(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 September 30, 2010.

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 September 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 September 30, 2010.

Changes in Internal Control over Financial Reporting.

There have been no 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.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

Trinity, the Bank, Title Guaranty, Cottonwood, FNM Investment Fund IV, FNM Investor Series IV, TCC Advisors, SWMT 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. 

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, and our Quarterly Report on Form 10-Q for the period ended June 30, 2010, filed with the Securities and Exchange Commission on August 16, 2010.

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

During the third 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
July 1-July 31, 2010		613	(1)	$	14.00		-	$	-
August 1-August 31, 2010		-			-		-		-
September 1-September 30, 2010		-			-		-		-
		613		$	14.00		-	$	-

____________________

(1) The shares issued during the third quarter of 2010 were issued pursuant to the Employee Stock Ownership Plan liquidity put for shares distributed to former employees.

Item 3. Defaults Upon Senior Securities

None

Item 4. Removed and Reserved

Item 5. Other Information

None

Item 6. Exhibits

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

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

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

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

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: November 9, 2010	By:	/s/ WILLIAM C. ENLOE
		William C. Enloe
		President and Chief Executive Officer
Date: November 9, 2010	By:	/s/ DANIEL R. BARTHOLOMEW
		Daniel R. Bartholomew
		Chief Financial Officer

EX-31.1

Exhibit 31.1

I, William C. Enloe, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Trinity Capital Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-145(e)and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purpose in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting, and;

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:	November 9, 2010	/s/ William C. Enloe
		William C. Enloe
		President and Chief Executive Officer







EX-31.2

Exhibit 31.2

I, Daniel R. Bartholomew, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Trinity Capital Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-145(e)and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purpose in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting, and;

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:	November 9, 2010	/s/ Daniel R. Bartholomew
		Daniel R. Bartholomew
		Chief Financial Officer







EX-32.1

Exhibit 32.1

CERTIFICATION OF CEO PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Trinity Capital Corporation, a New Mexico corporation (“Trinity”), for the period ended September 30, 2010 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), William C. Enloe, as President and Chief Executive Officer of Trinity, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Trinity.

/s/ William C. Enloe

William C. Enloe

President and Chief Executive Officer

November 9, 2010

EX-32.2

Exhibit 32.2

CERTIFICATION OF CFO PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Trinity Capital Corporation, a New Mexico corporation (“Trinity”), for the period ended September 30, 2010 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Daniel R. Bartholomew, as Chief Financial Officer of Trinity, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Trinity.

/s/ Daniel R. Bartholomew

Daniel R. Bartholomew

Chief Financial Officer

November 9, 2010