UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

for the quarterly period ended June 30, 2011.

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 or other jurisdiction of incorporation of organization)	(I.R.S. Employer Identification No.)
1200 Trinity Drive, Los Alamos, New Mexico 87544
(Address of principal executive offices)
(505) 662-5171
(Registrant’s telephone number, including Area Code)

Indicate by check mark 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 [ X ] No [ ]

Indicate by check mark whether the registrant is a large accelerated filed, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “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 Exchange 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 August 5, 2011.

TRINITY CAPITAL CORPORATION AND SUBSIDIARIES

PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosures About Market Risk
Item 4.	Controls and Procedures
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings
Item 1A.	Risk Factors
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.	Defaults Upon Senior Securities
Item 4.	[Removed and Reserved]
Item 5.	Other Information
Item 6.	Exhibits
	SIGNATURES
	CERTIFICATIONS

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

TRINITY CAPITAL CORPORATION & SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

June 30, 2011 and December 31, 2010

(Amounts in thousands, except share data)

	June 30, 2011		December 31, 2010
	(Unaudited)
ASSETS
Cash and due from banks	$	21,603	$	16,765
Interest-bearing deposits with banks		95,159		89,316
Federal funds sold and securities purchased under resell agreements		25,389		110
Cash and cash equivalents		142,151		106,191
Investment securities available for sale		143,269		162,591
Investment securities held to maturity, at amortized cost (fair value of $11,216 at June 30, 2011 and $10,951 at December 31, 2010)		10,945		11,107
Other investments		8,696		9,335
Loans held for sale		3,482		25,080
Loans (net of allowance for loan losses of $27,543 at June 30, 2011 and $28,722 at December 31, 2010)		1,168,284		1,161,216
Premises and equipment, net		29,453		30,264
Leased property under capital leases, net		2,211		2,211
Accrued interest receivable		6,292		6,736
Mortgage servicing rights, net		7,857		7,960
Other intangible assets		220		546
Other real estate owned		13,976		21,860
Prepaid expenses		4,693		6,076
Net deferred tax assets		5,706		5,587
Other assets		5,638		8,682
Total assets	$	1,552,873	$	1,565,442

(Continued on following page)

TRINITY CAPITAL CORPORATION & SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

June 30, 2011 and December 31, 2010

(Amounts in thousands, except share and per share data)

(Continued from prior page)

	June 30, 2011			December 31, 2010
	(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits:
Noninterest-bearing	$	129,407		$	109,891
Interest-bearing		1,218,349			1,248,454
Total deposits		1,347,756			1,358,345
Short-term borrowings		10,000			1,152
Long-term borrowings		22,300			32,300
Long-term capital lease obligations		2,211			2,211
Junior subordinated debt owed to unconsolidated trusts		37,116			37,116
Accrued interest payable		2,473			4,873
Other liabilities		5,442			5,990
Total liabilities		1,427,298			1,441,987
Stock owned by Employee Stock Ownership Plan (ESOP) participants; 651,914 shares and 628,914 shares at June 30, 2011 and December 31, 2010, respectively, at fair value	$	10,757		$	6,132
Commitments and contingencies (Note 12)
Stockholders' equity
Preferred stock, no par, authorized 1,000,000 shares
Series A, 5% cumulative perpetual, 35,539 shares issued and outstanding at June 30, 2011 and December 31, 2010, $1,000 liquidation value per share, at amortized cost	$	33,913		$	33,808
Series B, 9% cumulative perpetual, 1,777 shares issued and outstanding at June 30, 2011 and December 31, 2010, $1,000 liquidation value per share, at amortized cost		2,028			2,044
Common stock, no par, authorized 20,000,000 shares; issued 6,856,800 shares, shares outstanding 6,449,726 at June 30, 2011 and December 31, 2010		6,836			6,836
Additional paid-in capital		1,937			1,899
Retained earnings		80,164			83,018
Accumulated other comprehensive gain		914			692
Total stockholders' equity before treasury stock		125,792			128,297
Treasury stock, at cost, 407,074 shares at June 30, 2011 and December 31, 2010		(10,974	)		(10,974	)
Total stockholders' equity		114,818			117,323
Total liabilities and stockholders' equity	$	1,552,873		$	1,565,442

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

TRINITY CAPITAL CORPORATION & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three and Six Months Ended June 30, 2011 and 2010

(Amounts in thousands except per share data)

(Unaudited)

	Three Months Ended June 30,				Six Months Ended June 30,
	2011		2010		2011		2010
Interest income:
Loans, including fees	$	15,976	$	16,638	$	31,773	$	33,910
Investment securities:
Taxable		675		776		1,138		1,409
Nontaxable		283		299		564		597
Federal funds sold		7		-		7		-
Other interest-bearing deposits		80		75		134		180
Investment in unconsolidated trusts		18		21		40		41
Total interest income		17,039		17,809		33,656		36,137
Interest expense:
Deposits		2,200		3,605		4,553		7,568
Short-term borrowings		64		17		104		233
Long-term borrowings		189		253		403		381
Long-term capital lease obligations		67		67		134		134
Junior subordinated debt owed to unconsolidated trusts		685		684		1,408		1,367
Total interest expense		3,205		4,626		6,602		9,683
Net interest income		13,834		13,183		27,054		26,454
Provision for loan losses		2,129		11,101		3,579		15,358
Net interest income after provision for loan losses		11,705		2,082		23,475		11,096
Other income:
Mortgage loan servicing fees		665		654		1,332		1,300
Trust fees		501		456		961		811
Loan and other fees		849		804		1,601		1,470
Service charges on deposits		429		433		812		841
Net gain on sale of loans		459		758		1,739		1,478
Net gain on sale of securities		25		-		196		47
Title insurance premiums		141		274		305		462
Other operating income		105		85		212		111
Total other income		3,174		3,464		7,158		6,520

 (Continued on following page)

TRINITY CAPITAL CORPORATION & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three and Six Months Ended June 30, 2011 and 2010

(Amounts in thousands except per share data)

(Unaudited)

(Continued from prior page)

	Three Months Ended June 30,					Six Months Ended June 30,
	2011		2010			2011		2010
Other expenses:
Salaries and employee benefits	$	5,457	$	5,091		$	10,958	$	10,169
Occupancy		951		1,028			1,885		2,005
Data processing		932		709			1,720		1,433
Marketing		313		375			768		731
Amortization and valuation of mortgage servicing rights		501		974			804		1,283
Amortization and valuation of other intangible assets		163		97			326		222
Supplies		145		118			506		209
Loss on sale of other real estate owned		1,673		1,053			2,331		1,485
Postage		180		161			357		322
Bankcard and ATM network fees		374		335			717		498
Legal, professional and accounting fees		925		573			1,650		1,326
FDIC insurance premiums		748		934			1,509		1,832
Collection expenses		547		448			981		828
Other		754		781			1,781		1,319
Total other expense		13,663		12,677			26,293		23,662
Income (loss) before provision (benefit) for income taxes		1,216		(7,131	)		4,340		(6,046	)
Provision (benefit) for income taxes		447		(2,537	)		1,485		(1,888	)
Net income (Loss)	$	769	$	(4,594	)	$	2,855	$	(4,158	)
Dividends and discount accretion on preferred shares		542		528			1,084		1,057
Net income (Loss) available to common shareholders	$	227	$	(5,122	)	$	1,771	$	(5,215	)
Basic earnings (loss) per common share	$	0.03	$	(0.80	)	$	0.27	$	(0.81	)
Diluted earnings (loss) per common share	$	0.03	$	(0.80	)	$	0.27	$	(0.81	)

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

TRINITY CAPITAL CORPORATION & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Six Months Ended June 30, 2011 and 2010

(Amounts in thousands)

(Unaudited)

	Six Months Ended June 30,
	2011			2010
Cash Flows From Operating Activities
Net income (Loss)	$	2,855		$	(4,158	)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,526			1,551
Net amortization of:
Mortgage servicing rights		756			924
Other intangible assets		326			236
Premium and discounts on investment securities, net		928			308
Junior subordinated debt owed to unconsolidated trusts issuance costs		7			7
Provision for loan losses		3,579			15,358
Change in mortgage servicing rights valuation allowance		48			359
Loss on disposal of premises and equipment		-			9
Net gain on sale of investment securities		(196	)		(47	)
Federal Home Loan Bank (FHLB) stock dividends received		(5	)		(5	)
Loss on venture capital investments		354			98
Net gain on sale of loans		(1,739	)		(1,478	)
Loss on disposal of other real estate owned		847			424
Write-down of value of other real estate owned		1,546			1,079
Decrease (increase) in other assets		4,619			(2,167	)
Decrease in other liabilities		(1,967	)		(1,414	)
Stock options and stock appreciation rights expenses		38			72
Net cash provided by operating activities before originations and gross sales of loans held for sale		13,522			11,156
Gross sales of loans held for sale		71,343			67,237
Origination of loans held for sale		(48,707	)		(65,142	)
Net cash provided by operating activities		36,158			13,251

(Continued on following page)

TRINITY CAPITAL CORPORATION & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Six Months Ended June 30, 2011 and 2010

(Amounts in thousands)

(Unaudited)

(Continued from prior page)

	Six Months Ended June 30,
	2011			2010
Cash Flows From Investing Activities
Proceeds from maturities and paydowns of investment securities, available for sale	$	41,080		$	50,146
Proceeds from maturities and paydowns of investment securities, held to maturity		162			165
Proceeds from maturities and paydowns of investment securities, other		470			171
Proceeds from sale of investment securities, available for sale		7,090			3,422
Purchase of investment securities, available for sale		(29,232	)		(99,426	)
Purchase of investment securities, other		(180	)		(93	)
Proceeds from sale of other real estate owned		3,493			5,063
Loans funded, net of repayments		(7,449	)		22,206
Purchases of loans		(1,200	)		-
Purchases of premises and equipment		(715	)		(669	)
Net cash provided by investing activities		13,519			(19,015	)
Cash Flows From Financing Activities
Net increase (decrease) in demand deposits, NOW accounts and savings accounts		47,732			(99,001	)
Net (decrease) increase in time deposits		(58,321	)		(7,008	)
Proceeds from issuances of borrowings		-			20,000
Repayment of borrowings		(1,152	)		(20,020	)
Issuance of common stock		-			134
Common shares dividend payments		-			(1,739	)
Preferred shares dividend payments		(1,976	)		(970	)
Net cash (used in)  financing activities		(13,717	)		(108,604	)
Net increase (decrease) in cash and cash equivalents		35,960			(114,368	)
Cash and cash equivalents:
Beginning of period		106,191			207,495
End of period	$	142,151		$	93,127
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest	$	9,002		$	10,077
Income taxes	$	355		$	72
Non-cash investing and financing activities:
Transfers from loans to other real estate owned	$	3,402		$	19,329
Sales of other real estate owned financed by loans	$	5,400		$	-
Dividends declared, not yet paid	$	242		$	242
Change in unrealized gain on investment securities, net of taxes	$	222		$	217

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).  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, reaching 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 consolidated financial statements.  In October 2008, the Bank purchased the assets of Allocca & Brunett, Inc., an investment advisory company in Santa Fe, New Mexico.  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 initial value of these tax credits was $1.9 million.  As of June 30, 2011 and December 31, 2010, the unamortized amount of the new market tax credit was $1.3 million and $1.5 million, respectively, and is included in “other investments” on the consolidated balance sheet.  The initial amount of the loan was $5.2 million.  As of June 30, 2011 and December 31, 2011, the current outstanding loan amount was $5.2 million and is included in “loans, net” on the consolidated 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 Center, in Santa Fe, New Mexico.  The size of the initial investment was $322 thousand.  As of June 30, 2011, the total investment was $524 thousand and is included in “other investments” on the consolidated balance sheet.  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%), and 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 total capital investment is expected to be $250 thousand.  As of June 30, 2011, the investment in SWMT was $67 thousand and is included in “other investments” on the consolidated balance sheet. 

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 consolidated financial position, results of operations and cash flows for the interim periods have been made.  The results of operations for the three and six months ended June 30, 2011, 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, 2010 audited financial statements in its Form 10-K, filed with the SEC on March 10, 2011.

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 (loss) or stockholders’ equity.

Note 2. Comprehensive Income

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
	(Unaudited; In thousands)
Net income (loss)	$	769		$	(4,594	)	$	2,855		$	(4,158	)
Securities available for sale:
Net unrealized gains arising during the period		422			711			544			316
Related income tax (expense)		(152	)		(220	)		(191	)		(67	)
Net securities gains reclassified into earnings		(25	)		-			(196	)		(47	)
Related income tax benefit		9			-			65			15
Net effect on other comprehensive income for the period		254			491			222			217
Comprehensive income (loss)	$	1,023		$	(4,103	)	$	3,077		$	(3,941	)

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 June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
	(In thousands, except share and per share data)
Net income (loss)	$	769		$	(4,594	)	$	2,855		$	(4,158	)
Dividends and discount accretion on preferred shares		542			528			1,084			1,057
Net income (loss) available to common shareholders	$	227		$	(5,122	)	$	1,771		$	(5,215	)
Weighted average common shares issued		6,856,800			6,856,800			6,856,800			6,856,800
LESS: Weighted average treasury stock shares		(411,258	)		(415,071	)		(411,258	)		(415,541	)
Weighted average common shares outstanding, net		6,445,542			6,441,729			6,445,542			6,441,259
Basic earnings (loss) per common share	$	0.03		$	(0.80	)	$	0.27		$	(0.81	)
Weighted average common shares outstanding including dilutive shares		6,445,542			6,441,729			6,445,542			6,441,259
Diluted earnings (loss) per common share	$	0.03		$	(0.80	)	$	0.27		$	(0.81	)

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 price.  The total number of shares excluded was 304,000 and 412,500 as of June 30, 2011 and June 30, 2010, respectively.

Note 4. Recent Accounting Pronouncements and Regulatory Developments

ASU No. 2010-20, “Receivables (Topic 310) - Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.”  ASU 2010-20 requires entities to provide disclosures designed to facilitate financial statement users’ evaluation of (i) the nature of credit risk inherent in the entity’s portfolio of financing receivables, (ii) how that risk is analyzed and assessed in arriving at the allowance for credit losses and (iii) the changes and reasons for those changes in the allowance for credit losses.  Disclosures must be disaggregated by portfolio segment, the level at which an entity develops and documents a systematic method for determining its allowance for credit losses, and class of financing receivable, which is generally a disaggregation of portfolio segment.  The required disclosures include, among other things, a rollforward of the allowance for credit losses as well as information about modified, impaired, non-accrual and past due loans and credit quality indicators.  ASU 2010-20 became effective for the Company’s financial statements as of December 31, 2010, as it relates to disclosures required as of the end of a reporting period.  Disclosures that relate to activity during a reporting period became effective for the Corporation’s financial statements beginning on January 1, 2011.  ASU 2011-01, “Receivables (Topic 310) - Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20,” temporarily deferred the effective date for disclosures related to troubled debt restructurings to coincide with the effective date of the then proposed ASU 2011-02, “Receivables (Topic 310) - A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring,” which is further discussed below.

ASU No. 2011-02, “Receivables (Topic 310) - A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring.”  ASU 2011-02 clarifies which loan modifications constitute troubled debt restructurings and is intended to assist creditors in determining whether a modification of the terms of a receivable meets the criteria to be considered a troubled debt restructuring, both for purposes of recording an impairment loss and for disclosure of troubled debt restructurings.  In evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude, under the guidance clarified by ASU 2011-02, that both of the following exist: (a) the restructuring constitutes a concession; and (b) the debtor is experiencing financial difficulties.  ASU 2011-02 will be effective for the Company on July 1, 2011, and applies retrospectively to restructurings occurring on or after January 1, 2011.  Adoption of ASU 2011-02 is not expected to have a significant impact on the Company’s financial statements.

ASU No. 2011-03, “Transfers and Servicing (Topic 860) - Reconsideration of Effective Control for Repurchase Agreements.”  ASU 2011-03 is intended to improve financial reporting of repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity.  ASU 2011-03 removes from the assessment of effective control (i) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and (ii) the collateral maintenance guidance related to that criterion.  ASU 2011-03 will be effective for the Company on January 1, 2012 and is not expected to have a significant impact on the Company’s financial statements.

ASU 2011-04, “Fair Value Measurement (Topic 820) - Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRSs.”  ASU 2011-04 amends Topic 820, “Fair Value Measurements and Disclosures,” to converge the fair value measurement guidance in U.S. generally accepted accounting principles and International Financial Reporting Standards.  ASU 2011-04 clarifies the application of existing fair value measurement requirements, changes certain principles in Topic 820 and requires additional fair value disclosures.  ASU 2011-04 is effective for annual periods beginning after December 15, 2011, and is not expected to have a significant impact on the Company’s financial statements.

ASU 2011-05, “Comprehensive Income (Topic 220) - Presentation of Comprehensive Income.”  ASU 2011-05 amends Topic 220, “Comprehensive Income,” to require that all non-owner changes in stockholders’ equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements.  Additionally, ASU 2011-05 requires entities to present, on the face of the financial statements, reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement or statements where the components of net income and the components of other comprehensive income are presented.  The option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity was eliminated.  ASU 2011-05 is effective for annual periods beginning after December 15, 2011, and is not expected to have a significant impact on the Company’s financial statements.

Note 5. Investment Securities

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

AVAILABLE FOR SALE	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In thousands)
June 30, 2011
U.S. Government sponsored agencies	$	50,784	$	222	$	(1	)	$	51,005
States and political subdivisions		22,433		729		-			23,162
Residential mortgage-backed securities		68,619		819		(336	)		69,102
Totals	$	141,836	$	1,770	$	(337	)	$	143,269
December 31, 2010
U.S. Government sponsored agencies	$	42,551	$	184	$	-		$	42,735
States and political subdivisions		20,263		402		(81	)		20,584
Residential mortgage-backed securities		98,692		1,194		(614	)		99,272
Totals	$	161,506	$	1,780	$	(695	)	$	162,591

HELD TO MATURITY	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In thousands)
June 30, 2011
States and political subdivisions	$	10,945	$	491	$	(220	)	$	11,216
Totals	$	10,945	$	491	$	(220	)	$	11,216
December 31, 2010
States and political subdivisions	$	11,107	$	91	$	(247	)	$	10,951
Totals	$	11,107	$	91	$	(247	)	$	10,951

OTHER INVESTMENTS	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(In thousands)
June 30, 2011
Non-marketable equity securities (including FRB and FHLB stock)	$	7,580	$	-	$	-	$	7,580
Investment in unconsolidated trusts		1,116		-		-		1,116
Totals	$	8,696	$	-	$	-	$	8,696
December 31, 2010
Non-marketable equity securities (including FRB and FHLB stock)	$	8,219	$	-	$	-	$	8,219
Investment in unconsolidated trusts		1,116		-		-		1,116
Totals	$	9,335	$	-	$	-	$	9,335

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

	Three Months Ended June 30,					Six Months Ended June 30,
	2011			2010		2011			2010
	(In thousands)					(In thousands)
Gross realized gains	$	28		$	-	$	202		$	47
Gross realized losses		(3	)		-		(6	)		-
Net gains	$	25		$	-	$	196		$	47

A summary of unrealized loss information for investment securities, categorized by security type, at June 30, 2011 and December 31, 2010, is as follows:

	Less than 12 Months					12 Months or Longer					Total
AVAILABLE FOR SALE	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(In thousands)
June 30, 2011
U.S. Government sponsored agencies	$	2,500	$	(1	)	$	-	$	-		$	2,500	$	(1	)
Residential mortgage-backed securities		26,194		(215	)		7,236		(121	)		33,430		(336	)
Totals	$	28,694	$	(216	)	$	7,236	$	(121	)	$	35,930	$	(337	)
December 31, 2010
States and political subdivisions	$	3,682	$	(81	)	$	-	$	-		$	3,682	$	(81	)
Residential mortgage-backed securities		38,796		(614	)		-		-			38,796		(614	)
Totals	$	42,478	$	(695	)	$	-	$	-		$	42,478	$	(695	)

	Less than 12 Months				12 Months or Longer					Total
HELD TO MATURITY	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(In thousands)
June 30, 2011
States and political subdivisions	$	-	$	-	$	1,040	$	(220	)	$	1,040	$	(220	)
Totals	$	-	$	-	$	1,040	$	(220	)	$	1,040	$	(220	)
December 31, 2010
States and political subdivisions	$	-	$	-	$	1,089	$	(247	)	$	1,089	$	(247	)
Totals	$	-	$	-	$	1,089	$	(247	)	$	1,089	$	(247	)

At June 30, 2011, $37.5 million in amortized cost of debt securities (representing a total of 34 different securities) had unrealized losses with aggregate depreciation of 1.5% of the Company’s amortized cost basis.  Of these securities, $8.6 million (representing 12 securities) had a continuous unrealized loss position for twelve months or longer with an aggregate depreciation of 4.0%.  The unrealized losses relate principally to the general change in interest rates and illiquidity, and not credit quality, that has occurred since the securities purchase dates, and such unrecognized losses or gains will continue to vary with general interest rate level fluctuations in the future.  As management does not intend to sell the securities, and it is unlikely that the Company will be required to sell the securities before their anticipated recovery, no declines are deemed to be other-than-temporary.

The amortized cost and fair value of investment securities, as of June 30, 2011, 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	$	18,905	$	18,942	$	-	$	-	$	150	$	150
One to five years		49,502		49,967		-		-		-		-
Five to ten years		26,396		26,800		1,260		1,040		-		-
Over ten years		47,033		47,560		9,685		10,176		1,116		1,116
Equity investments with no stated maturity		-		-		-		-		7,430		7,430
	$	141,836	$	143,269	$	10,945	$	11,216	$	8,696	$	8,696

Securities with carrying amounts of $30.1 million and $36.9 million at June 30, 2011 and December 31, 2010, respectively, were pledged as collateral on public deposits and for other purposes as required or permitted by law.

Note 6. Loans

Loans consisted of:

	June 30,			December 31,
	2011			2010
	(In thousands)
Commercial	$	157,072		$	149,987
Commercial real estate		433,148			425,172
Residential real estate		397,860			400,713
Construction real estate		163,159			164,721
Installment and other		46,894			51,632
Total loans		1,198,133			1,192,225
Unearned income		(2,306	)		(2,287	)
Gross loans		1,195,827			1,189,938
Allowance for loan losses		(27,543	)		(28,722	)
Net loans	$	1,168,284		$	1,161,216

Loan Origination/Risk Management. The Company has certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk.  Management and the board of directors reviews and approves these policies and procedures on a regular basis.  A reporting system supplements the review process by providing management with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies and non-performing and potential problem loans.

Commercial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and prudently expand its business.  Underwriting standards are designed to promote relationship banking rather than transactional banking.  Once it is determined that the borrower’s management possesses sound ethics and solid business acumen, the Company’s management examines current and projected cash flows to determine the ability of the borrower to repay their obligations as agreed.  Commercial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower.  The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value.  Most commercial and industrial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis.  In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

Commercial real estate loans are subject to underwriting standards and processes similar to commercial non-real estate loans, in addition to those of other real estate loans.  These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate.  Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally largely dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan.  Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy.  The properties securing the Company’s commercial real estate portfolio are geographically concentrated in the markets in which the Company operates.  Management monitors and evaluates commercial real estate loans based on collateral, location and risk grade criteria.  The Company also utilizes third-party sources to provide insight and guidance about economic conditions and trends affecting market areas it serves.  In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans.  At June 30, 2011 and December 31, 2010, approximately 27.0% and 29.3%, respectively, of the outstanding principal balance of the Company’s commercial real estate loans were secured by owner-occupied properties.

With respect to loans to developers and builders that are secured by non-owner occupied properties that the Company may originate from time to time, the Company generally requires the borrower to have had an existing relationship with the Company and have a proven record of success.  Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analysis of absorption and lease rates and financial analysis of the developers and property owners.  Construction loans are generally based upon estimates of costs and value associated with the complete project.  These estimates may be inaccurate.  Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project.  Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained.  These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing.

The Company originates consumer loans utilizing a credit scoring analysis to supplement the underwriting process.  To monitor and manage consumer loan risk, policies and procedures are developed and modified, as needed, jointly by line and staff personnel.  This activity, coupled with relatively small loan amounts that are spread across many individual borrowers, minimizes risk.  Additionally, trend and outlook reports are reviewed by management on a regular basis.  Underwriting standards for residential real estate and home equity loans are heavily influenced by statutory requirements, which include, but are not limited to, maximum loan-to-value levels, debt-to-income levels, collection remedies, the number of such loans a borrower can have at one time and documentation requirements.

The Company maintains an independent loan review department that reviews and validates the credit risk program on a periodic basis.  Results of these reviews are presented to management.  The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Company’s policies and procedures.  In addition, the Company utilizes a third-party to periodically review loans to supplement the Company’s internal review process.

Non-performing Loans. Non-performing loans include (i) loans accounted for on a non-accrual basis and (ii) accruing loans contractually past due 90 days or more as to interest and principal.  Management reviews the loan portfolio for problem loans on an ongoing basis.  During the ordinary course of business, management may become aware of borrowers who may not be able to meet the contractual requirements of loan agreements.  Such loans are placed under close supervision with consideration given to placing the loan on a non-accrual status, increasing the allowance for loan losses, and (if appropriate) partial or full charge-off.  After a loan is placed on non-accrual status, any interest previously accrued, but not yet collected, is reversed against current income.  When payments are received on non-accrual loans, such payments will be applied to principal and any interest portion included in the payments are not included in income, but rather are applied to the principal balance of the loan.  Loans will not be placed back on accrual status unless all back interest and principal payments are made.  Our policy is to place loans 90 days past due on non-accrual status.  An exception is made when management believes a loan is well secured and in the process of collection.

The following changes in the Bank’s credit policy were made during the second quarter of 2011:

·   Language governing the Bank’s compliance with the Secure and Fair Enforcement for Mortgage Licensing act of 2008 (“SAFE” Act);

·   Clarification on conditions for the renewal of working capital and seasonal lines of credit, and renewal of Commercial Real Estate loans;

·   Clarification on the definition of lines of credit;

·   Minimum participation levels set for the Bank to participate in a loan where it is not the lead bank;

·   Underwriting standards clarified for art dealer/galleries and motion picture production/distribution loans;

·   Clarification on the basis for determining repair and maintenance reserves, if required, for commercial real estate loans;

·   Establishes the Internal Loan Committee’s discretion to require shorter amortization periods on raw land loans;

·   Additional standards established for obtaining and reviewing appraisals on real estate loans, and establishing relationships with appraisers;

·   Expansion of policy governing troubled debt restructures (“TDRs”);

·   Update of Addendum governing the Home Affordable Modification Program (“HAMP”)

The following table presents the contractual aging of the recorded investment in current and past due loans by class of loans as of June 30, 2011 and December 31, 2010, including non-performing loans:

	Current		30-59 Days Past Due		60-89 Days Past Due		Loans past due 90 days or more		Total Past Due		Total
June 30, 2011:	(In thousands)
Commercial	$	153,797	$	267	$	103	$	2,905	$	3,275	$	157,072
Commercial real estate		410,806		3,824		-		18,518		22,342		433,148
Residential real estate		383,205		1,063		-		13,592		14,655		397,860
Construction real estate		143,209		485		-		19,465		19,950		163,159
Installment and other		43,120		96		340		3,338		3,774		46,894
Total loans	$	1,134,137	$	5,735	$	443	$	57,818	$	63,996	$	1,198,133
Nonperforming loan classification	$	-	$	-	$	-	$	57,818	$	57,818	$	57,818
December 31, 2010:
Commercial	$	146,875	$	759	$	83	$	2,270	$	3,112	$	149,987
Commercial real estate		405,393		808		-		18,971		19,779		425,172
Residential real estate		388,898		2,422		1,038		8,355		11,815		400,713
Construction real estate		141,126		717		9,628		13,250		23,595		164,721
Installment and other		47,974		156		38		3,464		3,658		51,632
Total loans	$	1,130,266	$	4,862	$	10,787	$	46,310	$	61,959	$	1,192,225
Nonperforming loan classification	$	1,772	$	600	$	1,286	$	46,310	$	48,196	$	49,968

 The following table presents the recorded investment in nonaccrual loans and loans past due ninety days or more and still accruing by class of loans as of June 30, 2011 and December 31, 2010:

	June 30, 2011				December 31, 2010
	Nonaccrual		Loans past due 90 days or more and still accruing interest		Nonaccrual		Loans past due 90 days or more and still accruing interest
	(In thousands)
Commercial	$	2,905	$	-	$	2,598	$	-
Commercial real estate		18,518		-		19,419		-
Residential real estate		13,592		-		10,951		-
Construction real estate		19,466		-		13,908		-
Installment and other		3,337		-		3,092		-
Total	$	57,818	$	-	$	49,968	$	-

The Company utilizes an internal asset classification system as a means of reporting problem and potential problem loans.  Under the Company’s risk rating system, the Company classifies problem and potential problem loans as “Special Mention,” “Substandard,” and “Doubtful”.  Substandard loans include those characterized by the distinct possibility that the Company will sustain some loss if credit deficiencies are not corrected.  Loans classified as Doubtful have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.  Loans that do not currently expose the Company to sufficient risk to warrant classification in one of the aforementioned categories, but possess weaknesses that deserve management’s close attention are deemed to be Special Mention.  Risk ratings are updated any time the situation warrants.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass-rated loans.  Loans listed as not rated are included in groups of homogeneous loans with similar risk and loss characteristics.  The following tables present the risk category of loans by class of loans based on the most recent analysis performed and the contractual aging as of June 30, 2011 and December 31, 2010:

	Pass		Special Mention		Substandard		Doubtful		Total
June 30, 2011:	(In thousands)
Commercial	$	151,798	$	498	$	4,776	$	-	$	157,072
Commercial real estate		393,846		6,926		32,376		-		433,148
Residential real estate		380,576		-		17,284		-		397,860
Construction real estate		135,688		4,871		22,600		-		163,159
Installment and other		43,412		-		3,482		-		46,894
Total	$	1,105,320	$	12,295	$	80,518	$	-	$	1,198,133
December 31, 2010:
Commercial	$	146,162	$	682	$	3,143	$	-	$	149,987
Commercial real estate		394,673		258		30,241		-		425,172
Residential real estate		387,636		151		12,926		-		400,713
Construction real estate		138,624		-		26,097		-		164,721
Installment and other		48,404		-		3,228		-		51,632
Total	$	1,115,499	$	1,091	$	75,635	$	-	$	1,192,225

The following table shows all loans, including non-performing loans, by classification and aging, as of June 30, 2011 and December 31, 2010:

	Pass		Special Mention		Substandard		Doubtful		Total
June 30, 2011:	(In thousands)
Current	$	1,104,361	$	11,161	$	18,615	$	-	$	1,134,137
Past due 30-59 days		619		1,134		3,982		-		5,735
Past due 60-89 days		340		-		103		-		443
Past due 90 days or more		-		-		57,818		-		57,818
Total	$	1,105,320	$	12,295	$	80,518	$	-	$	1,198,133
December 31, 2010:
Current	$	1,111,092	$	1,091	$	18,083	$	-	$	1,130,266
Past due 30-59 days		3,903		-		959		-		4,862
Past due 60-89 days		504		-		10,283		-		10,787
Past due 90 days or more		-		-		46,310		-		46,310
Total	$	1,115,499	$	1,091	$	75,635	$	-	$	1,192,225

The following table presents loans individually evaluated for impairment by class of loans as of June 30, 2011 and December 31, 2010, showing the unpaid principal balance, the recorded investment of the loan (reflecting any loans with partial charge-offs), and the amount of allowance for loan losses specifically allocated for these impaired loans (if any)

	June 30, 2011						December 31, 2010
	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
	(In thousands)
With no related allowance recorded:
Commercial	$	4,473	$	2,433	$	-	$	4,484	$	2,606	$	-
Commercial real estate		18,947		18,518		-		24,442		23,901		-
Residential real estate		15,229		14,133		-		12,381		11,734		-
Construction real estate		21,503		19,465		-		19,124		15,918		-
Installment and other		4,837		3,266		-		4,460		3,117		-
With an allowance recorded:
Commercial		2,418		2,418		82		479		479		15
Commercial real estate		379		379		44		380		380		45
Residential real estate		4,821		4,821		775		3,429		3,429		338
Construction real estate		-		-		-		-		-		-
Installment and other		1,303		1,303		126		461		461		80
Total	$	73,910	$	66,736	$	1,027	$	69,640	$	62,025	$	478

The following table presents loans individually evaluated for impairment by class of loans for the periods shown ending June 30, 2011 and June 30, 2010, showing the average recorded investment and the interest income recognized:

	Three Months Ended								Six Months Ended
	June 30, 2011				June 30, 2010				June 30, 2011				June 30, 2010
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(In thousands)
With no related allowance recorded:
Commercial	$	2,648	$	4	$	4,324	$	1	$	2,691	$	9	$	4,323	$	10
Commercial real estate		19,053		-		25,816		-		20,392		14		25,816		-
Residential real estate		14,457		1		9,976		10		13,861		15		9,978		58
Construction real estate		20,887		354		20,956		-		20,242		357		20,954		6
Installment and other		3,076		4		3,680		3		3,039		10		3,680		8
With an allowance recorded:
Commercial	$	1,766	$	7	$	532	$	8	$	1,284	$	14	$	2,840	$	9
Commercial real estate		379		5		138		2		379		10		293		2
Residential real estate		4,245		36		2,801		42		3,899		70		4,594		51
Construction real estate		-		-		-		-		-		-		10		-
Installment and other		1,233		6		341		4		1,024		11		285		5
Total	$	67,744	$	417	$	68,564	$	70	$	66,811	$	510	$	72,773	$	149

Allowance for Loan Losses: The Company has established an internal policy to estimate the allowance for loan losses.  This policy is periodically reviewed by management and the board of directors.

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 probable loan losses.  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.

Activity in the allowance for loan losses was as follows:

	Commercial			Commercial real estate			Residential real estate			Construction real estate			Installment and other			Unallocated		Total
	(In thousands)
Three months ended:
June 30, 2011:
Beginning balance	$	5,582		$	7,344		$	4,724		$	6,695		$	4,039		$	-	$	28,384
Provision (benefit) for loan losses		214			(52	)		1,352			675			(60	)		-		2,129
Charge-offs		(592	)		(151	)		(1,089	)		(1,216	)		(96	)		-		(3,144	)
Recoveries		3			8			46			97			20			-		174
Net charge-offs		(589	)		(143	)		(1,043	)		(1,119	)		(76	)		-		(2,970	)
Ending balance	$	5,207		$	7,149		$	5,033		$	6,251		$	3,903		$	-	$	27,543
June 30, 2010:
Beginning balance	$	6,047		$	6,077		$	2,713		$	6,695		$	3,290		$	-	$	24,822
Provision (benefit) for loan losses		1,212			870			2,075			3,481			293			3,170		11,101
Charge-offs		(700	)		(361	)		(1,718	)		(3,255	)		(372	)		-		(6,406	)
Recoveries		11			-			66			20			44			-		141
Net charge-offs		(689	)		(361	)		(1,652	)		(3,235	)		(328	)		-		(6,265	)
Ending balance	$	6,570		$	6,586		$	3,136		$	6,941		$	3,255		$	3,170	$	29,658

	Commercial			Commercial real estate			Residential real estate			Construction real estate			Installment and other			Unallocated			Total
	(In thousands)
Six months ended:
June 30, 2011:
Beginning balance	$	5,857		$	7,010		$	4,093		$	7,322		$	4,122		$	318		$	28,722
Provision (benefit) for loan losses		215			513			2,911			123			135			(318	)		3,579
Charge-offs		(878	)		(391	)		(2,194	)		(1,305	)		(398	)		-			(5,166	)
Recoveries		13			17			223			111			44			-			408
Net charge-offs		(865	)		(374	)		(1,971	)		(1,194	)		(354	)		-			(4,758	)
Ending balance	$	5,207		$	7,149		$	5,033		$	6,251		$	3,903		$	-		$	27,543
June 30, 2010:
Beginning balance	$	4,371		$	6,316		$	2,100		$	8,637		$	3,080		$	-		$	24,504
Provision for loan losses		4,176			742			4,181			1,930			1,159			3,170			15,358
Charge-offs		(2,010	)		(472	)		(3,220	)		(3,706	)		(1,057	)		-			(10,465	)
Recoveries		33			0			75			80			73			-			261
Net charge-offs		(1,977	)		(472	)		(3,145	)		(3,626	)		(984	)		-			(10,204	)
Ending balance	$	6,570		$	6,586		$	3,136		$	6,941		$	3,255		$	3,170		$	29,658

Allocation of the allowance for loan losses, disaggregated on the basis of the Company’s impairment methodology, is as follows:

	Commercial		Commercial real estate		Residential real estate		Construction real estate		Installment and other		Unallocated		Total
	(In thousands)
June 30, 2011:
Period-end amount allocated to:
Loans individually evaluated for impairment	$	82	$	44	$	775	$	-	$	126	$	-	$	1,027
Loans collectively evaluated for impairment		5,125		7,105		4,258		6,251		3,777		-		26,516
Ending balance	$	5,207	$	7,149	$	5,033	$	6,251	$	3,903	$	-	$	27,543
Loans:
Individually evaluated for impairment	$	4,851	$	18,897	$	18,954	$	19,465	$	4,569	$	-	$	66,736
Collectively evaluated for impairment		152,221		414,251		378,906		143,694		42,325		-		1,131,397
Total ending loans balance	$	157,072	$	433,148	$	397,860	$	163,159	$	46,894	$	-	$	1,198,133

	Commercial		Commercial real estate		Residential real estate		Construction real estate		Installment and other		Unallocated		Total
	(In thousands)
December 31, 2010:
Period-end amount allocated to:
Loans individually evaluated for impairment	$	15	$	45	$	338	$	-	$	80	$	-	$	478
Loans collectively evaluated for impairment		5,842		6,965		3,754		7,322		4,042		319		28,244
Ending balance	$	5,857	$	7,010	$	4,092	$	7,322	$	4,122	$	319	$	28,722
Loans:
Individually evaluated for impairment	$	3,085	$	24,281	$	15,163	$	15,918	$	3,578	$	-	$	62,025
Collectively evaluated for impairment		146,902		400,891		385,550		148,803		48,054		-		1,130,200
Total ending loans balance	$	149,987	$	425,172	$	400,713	$	164,721	$	51,632	$	-	$	1,192,225

Note 7. Other Real Estate Owned

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

	At June 30, 2011		At December 31, 2010
	(In thousands)
Construction property	$	7,085	$	14,872
Residential real estate		2,612		3,427
Commercial real estate		4,279		3,561
Total	$	13,976	$	21,860

Note 8. Short-Term Borrowings

The Company had a Federal Home Loan Bank (FHLB) advance with a maturity date of less than one year of $10.0 million as of June 30, 2011 and $1.2 million as of December 31, 2010.  As of June 30, 2011, the advance had a fixed interest rate of 2.565%.

Note 9. Long-Term Borrowings

The Company had FHLB advances with original maturity dates greater than one year of $22.3 million as of June 30, 2011 and $32.3 million as of December 31, 2010.  As of June 30, 2011, long-term borrowings consisted of the following fixed-rate advances:

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

Note 10. Long-term Capital Lease Obligations

The Company is leasing land in Santa Fe and built a Bank office on the site.  In July of 2009, Trinity sold the improvements to the Bank and entered into a sublease with the Bank.  The construction of the office was completed in October of 2009, and the new office opened on October 19, 2009.  The ground lease has an 8-year term, expiring in 2014, and contains an option to purchase the land for a price certain at the termination of the initial term of the lease.  The ground lease is classified as a capital lease.  The Company also holds a note and mortgage on this land, and the interest payments received on the note are approximately equal to the payments made on the lease.  The principal due on the note at maturity (simultaneous with the lease maturity) will largely offset the option purchase price.  Lease payments for each of the three-month periods ended June 30, 2011 and 2010 were $46 thousand.  Lease payments for each of the six-month periods ended June 30, 2011 and 2010 were $92 thousand.

Note 11. Junior Subordinated Debt Owed to Unconsolidated Trusts

The following table presents details on the junior subordinated debt owed to unconsolidated trusts as of June 30, 2011.

	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	%	2.95% (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	%	2.95% (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 (or twenty consecutive quarterly periods in the case of Trusts with quarterly interest payments) 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).  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, 2011, 100% of the trust preferred securities noted in the table above qualified as Tier 1 capital under the final rule adopted in March 2005.

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

Issuance costs of $615 thousand related to Trust I and Trust III were deferred and are being amortized over the period until mandatory redemption of the securities in March 2030 and September 2034, respectively.  During each of the three-month periods ended June 30, 2011 and 2010, $3 thousand of these issuance costs were amortized.  During each of the six-month periods ended June 30, 2011 and 2010, $7 thousand of these issuance costs were amortized.  Unamortized issuance costs were $263 thousand and $270 thousand at June 30, 2011 and December 31, 2010, respectively.  There were no issuance costs associated with the other trust preferred security issues.

As of June 30, 2011, Trinity was not deferring any interest payments related to the Trusts.  As of June 30, 2011 and December 31, 2010, a total of $374 thousand and $1.9 million of interest had been accrued and unpaid to securities holders, respectively.

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.

Note 12. Commitments, Contingencies and Off-Balance Sheet Activities

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

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

At June 30, 2011 and December 31, 2010, the following credit-related commitments were outstanding:

	Contract Amount
	June 30, 2011		December 31, 2010
	(In thousands)
Unfunded commitments under lines of credit	$	154,424	$	164,850
Commercial and standby letters of credit		13,077		14,051

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

Commercial and standby letters of credit are conditional credit-related commitments issued by the Bank to guarantee the performance of a customer to a third party.  Those letters of credit are primarily issued to support public and private borrowing arrangements.  Essentially all letters of credit issued have expiration dates within one year.  The credit risk involved in issuing letters of credit is the same as that involved in extending loans to customers.  The Bank generally holds collateral supporting those credit-related commitments, if deemed necessary.  In the event the customer does not perform in accordance with the terms of the agreement with the third party, the Bank would be required to fund the credit-related commitment.  The maximum potential amount of future payments the Bank could be required to make is represented by the contractual amount shown in the summary above.  If the credit-related commitment is funded, the Bank would be entitled to seek recovery from the customer.  At June 30, 2011 and December 31, 2010, 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 $21 thousand as of June 30, 2011 and $13 thousand December 31, 2010, 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 13. 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.  As of June 30, 2011, Trinity was current with its dividend payments.  The amount of dividends accrued and unpaid were $242 thousand and $1.2 million as of June 30, 2011 and December 31, 2010, 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 June 30, 2011 and June 30, 2010, a net amount of $44 thousand was accreted to equity.  During both of the six-month periods ended June 30, 2011 and June 30, 2010, a net amount of $89 thousand was accreted to equity.

Both the dividends and net accretion on the preferred shares reduce the amount of net income available to common shareholders.  During the three months ended June 30, 2011 and June 30, 2010, the total of these two amounts was $542 thousand and $528 thousand, respectively.  During both of the six months ended June 30, 2011 and June 30, 2010, the total of these two amounts was $1.1 million.

Note 14. 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 15. 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 a counterparty is the current cost of replacing the contracts net of any available margins retained by the Bank.  However, if the borrower defaults on the commitment, the Bank requires the borrower to cover these costs.

The Company’s derivative instruments outstanding at June 30, 2011 include commitments to fund loans held for sale.  The interest rate lock commitment was valued at fair market value at inception.  The rate locks will continue to be adjusted for changes in value resulting from changes in market interest rates.

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

At June 30, 2011, the Company had notional amounts of $6.1 million in contracts with customers and $9.6 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 $155 thousand as of June 30, 2011.  At December 31, 2010 the Company had notional amounts of $8.1 million in contracts with customers and $33.2 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 $567 thousand and a liability of $25 thousand as of December 31, 2010.  For the three months ending June 30, 2011 and June 30, 2010, income and expenses relating to the valuation of these derivative instruments totaled $74 thousand in income and $159 thousand in expense, respectively.  For the six months ended June 30, 2011 and June 30, 2010, income and expenses relating to the valuation of these derivative instruments totaled $387 thousand in expense and $180 thousand in expense, respectively.  These amounts are included under “Other” in “Other expenses” on the consolidated statements of operations.

Note 16. 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 and are classified as Level 2.  The fair values consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other factors.

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 and similar remaining commitment terms, and are classified as Level 2.  Changes in market value are recorded in current earnings. 

The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of June 30, 2011 and December 31, 2010, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (in thousands):

June 30, 2011	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	$	51,005	$	-	$	51,005	$	-
States and political subdivisions		23,162		-		23,162		-
Residential mortgage-backed securities		69,102		-		69,102		-
Interest rate lock commitments, mandatory forward delivery commitments and pair offs		155		-		155		-
Financial Liabilities:
Interest rate lock commitments, mandatory forward delivery commitments and pair offs	$	-	$	-	$	-	$	-
Off-balance-sheet instruments:
Loan commitments and standby letters of credit	$	21	$	-	$	21	$	-
December 31, 2010
Financial Assets:
Investment securities available for sale:
U.S. Government sponsored agencies	$	42,735	$	-	$	42,735	$	-
States and political subdivisions		20,584		-		20,584		-
Residential mortgage-backed securities		99,272		-		99,272		-
Interest rate lock commitments, mandatory forward delivery commitments and pair offs		567		-		567		-
Financial Liabilities:
Interest rate lock commitments, mandatory forward delivery commitments and pair offs	$	25	$	-	$	25	$	-
Off-balance-sheet instruments:
Loan commitments and standby letters of credit	$	13	$	-	$	13	$	-

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 consolidated financial statements.

Financial Instruments Recorded at Fair Value on a Nonrecurring Basis

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

Impaired Loans.Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired.  Once a loan is identified as impaired, management measures the amount of that impairment in accordance with ASC Topic 310.  The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows.  Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans.  At June 30, 2011, 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 six 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 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 table below.

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 first six months of 2011 and the year ended December 31, 2010, 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 $3.0 million and $25.2 million (utilizing Level 3 valuation inputs) during the three months ended June 30, 2011 and the year ended December 31, 2010, respectively.  Of these, $2.0 million and $13.8 million, respectively, were written down upon initial recognition or subsequent revaluation.  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 $440 thousand and $1.8 million, during the three months ended June 30, 2011 and the year ended December 31, 2010, respectively.  Other than foreclosed assets measured at fair value (less estimated disposal costs) upon initial recognition, a total of $2.0 million and $13.2 million in foreclosed assets were remeasured at fair value during the three months ended June 30, 2011 and the year ended December 31, 2010, respectively, resulting in a charge of $1.0 and $1.9 million to current earnings, respectively.

Foreclosed assets measured at fair value (less estimated disposal costs) upon initial recognition totaled $3.4 million during the six months ended June 30, 2011.  Of these, $2.3 million were written down upon initial recognition or subsequent revaluation.  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 $531 thousand during the six months ended June 30, 2011.  Other than foreclosed assets measured at fair value (less estimated disposal costs) upon initial recognition, a total of $5.6 million in foreclosed assets were remeasured at fair value during the six months ended June 30, 2011, resulting in a charge of $1.5 million to current earnings.

Assets measured at fair value on a nonrecurring basis as of June 30, 2011 and December 31, 2010 are included in the table below (in thousands):

June 30, 2011	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	$	7,173	$	-	$	-	$	7,173
Loans held for sale		75		-		75		-
Mortgage servicing rights		1,965		-		-		1,965
Non-Financial Assets:
Foreclosed assets		8,855		-		-		8,855
December 31, 2010
Financial Assets:
Impaired loans	$	13,971	$	-	$	-	$	13,971
Loans held for sale		12,786		-		12,786		-
Mortgage servicing rights		2,182		-		-		2,182
Non-Financial Assets:
Foreclosed assets		13,794		-		-		13,794

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

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

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

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

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

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

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

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

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

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

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

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

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

The estimated fair values of financial instruments are as follows:

	June 30, 2011				December 31, 2010
	Carrying amount		Fair value		Carrying amount		Fair value
	(In thousands)
Financial assets:
Cash and due from banks	$	21,603	$	21,603	$	16,765	$	16,765
Interest-bearing deposits with banks		95,159		95,159		89,316		89,316
Federal funds sold and securities purchased under resell agreements		25,389		25,389		110		110
Investments:
Available for sale		143,269		143,269		162,591		162,591
Held to maturity		10,945		11,216		11,107		10,951
Other investments		8,696		8,696		9,335		9,335
Loans held for sale		3,482		3,506		25,080		25,223
Loans, net		1,168,284		1,190,029		1,161,216		1,170,701
Accrued interest receivable		6,292		6,292		6,736		6,736
Mortgage servicing rights		7,857		8,401		7,960		8,585
Financial liabilities:
Non-interest bearing deposits	$	129,407	$	129,407	$	109,891	$	109,891
Interest bearing deposits		1,218,349		1,223,654		1,248,454		1,253,836
Short-term borrowings		10,000		10,129		1,152		1,155
Long-term borrowings		22,300		23,793		32,300		33,886
Junior subordinated debt owed to unconsolidated trusts		37,116		18,533		37,116		18,506
Accrued interest payable		2,473		2,473		4,873		4,873

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, 2010.

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 represents 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, 2010.  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.

Ongoing Regulatory Developments. On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”), which is perhaps the most significant financial reform since the Great Depression.  While the provisions of the Act receiving the most public attention have generally been those more likely to affect larger institutions, the Act also contains many provisions which will affect smaller institutions such as the Company in substantial and unpredictable ways.  Consequently, compliance with the Act’s provisions may curtail the Company’s revenue opportunities, increase its operating costs, require it to hold higher levels of regulatory capital and/or liquidity or otherwise adversely affect the Company’s business or financial results in the future.  The Company’s management has been following the rulemaking pursuant to the Act and assessing the probable impact on the Company’s business, financial condition, and result of operations. However, because many aspects of the Act are subject to future rulemaking, much of which has been delayed, it is difficult to precisely anticipate the Act’s overall financial impact on the Company and the Bank at this time.

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.

Management analyzed projected growth, anticipated charge-offs and recoveries along with probable risk rating changes to adequately fund an appropriate reserve for the quarter.  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 June 30, 2011, mortgage loans serviced for others totaled $1.0 billion.  The net carrying amount of the MSRs on these loans total $7.9 million as of June 30, 2011.  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 June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
	(In thousands)
Balance at beginning of period	$	9,145		$	8,330		$	9,030		$	8,525
Servicing rights originated and capitalized		203			373			701			680
Amortization		(373	)		(422	)		(756	)		(924	)
	$	8,975		$	8,281		$	8,975		$	8,281

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
	(In thousands)
Balance at beginning of period	$	(990	)	$	(685	)	$	(1,070	)	$	(878	)
Aggregate reductions credited to operations		-			-			80			332
Aggregate additions charged to operations		(128	)		(552	)		(128	)		(691	)
	$	(1,118	)	$	(1,237	)	$	(1,118	)	$	(1,237	)

The fair values of the MSRs were $8.4 million and $8.6 million on June 30, 2011 and December 31, 2010, respectively.

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

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

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

The impairment is analyzed for other than temporary impairment on a quarterly basis.  The MSRs would be considered other than temporarily impaired if there is likelihood that the impairment would not be recovered before the expected maturity of the asset.  If the underlying mortgage loans have been amortized at a rate greater than the amortization of the MSR, the MSR may be other than temporarily impaired.  As of June 30, 2011, none of the MSRs were considered other than temporarily impaired.

The following assumptions were used to calculate the market value of the MSRs as of June 30, 2011 and December 31, 2010:

	June 30, 2011			December 31, 2010
Prepayment Standard Assumption (PSA) speed		230.00	%		233.33	%
Discount rate		10.75			10.75
Earnings rate		2.03			2.17

Overview

Despite continued weak national and state economic conditions, compared to historic levels, the Company’s net income increased $5.4 million (116.7%) from a loss of $(4.6 million) in the second quarter of 2010 to income of $769 thousand in the second quarter of 2011.  Net income available to common shareholders increased $5.3 million (104.4%) from a loss of $(5.1 million) in the second quarter of 2010 to income of $227 thousand in the second quarter of 2011.  The increase in net income was mainly due to a decrease in the provision for loan losses of $9.0 million from $11.1 million in 2010 to $2.1 million in 2011.

Net income for the second quarter of 2011 was down $1.3 million (63.1%) from the first quarter of 2011, dropping from $2.1 million to $769 thousand.  The primarily reason for this drop was an increase in non-interest expenses of $1.0 million (8.2%) and a decrease in non-interest income of $810 thousand (20.3%).  The main reason for the increase in non-interest expenses was due to an increase in the loss on sale of other real estate owned.  The main reason for the decrease in non-interest income was due to a decrease in the net gains on the sale of loans.

During the first six months of 2011, net income totaled $2.9 million, an increase of $7.0 million (168.7%) from a net loss of $(4.2 million) during the first six months of 2010.  Net income available to common shareholders increased $7.0 million (134.0%) to a total of $1.8 million during the first six months of 2011, up from a loss of $(5.2 million) during the first six months of 2010.  The increase in net income was mainly due to a decrease in the provision for loan losses of $11.8 million (76.7%).

The national and state economies continue to be depressed relative to historical comparisons.  The Company continues to experience challenges in its loan portfolio, with higher than typically experienced levels of non-performing loans and foreclosed properties.  In response to these challenges, and to proactively position the Company to meet these challenges, we have continued to reduce our concentrations in the commercial real estate and construction real estate portfolios, increased capital by managing growth and restricting dividends and have taken other steps in compliance with the Agreement with the Office of the Comptroller of the Currency (“OCC”) (discussed below).

A major fire near the Los Alamos town site in late June necessitated an evacuation of all of Los Alamos and the temporary closure of the Bank’s main office.  However, the impact on the operations and earnings of the Bank was minimal, and service to the Bank’s customers at the offices in Santa Fe and White Rock was uninterrupted.

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

At June 30, 2011, the Bank believed that it had fully addressed the provisions of the Agreement.  The Bank will continue taking the necessary actions to continue its compliance with the Agreement.  A copy of the Agreement was filed as part of 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 $3.3 million during the second quarter of 2011, a decrease of $625 thousand from $4.0 million during the same period in 2010.  Net income available to common shareholders for the second quarter of 2011 increased to $227 thousand or $0.03 per share, compared to a net loss available to common shareholders for the same period in 2010 of $(5.1 million) or a loss of $(0.80) per common share, an increase of $5.3 million (104.4%) in net income available to common shareholders and an increase in earnings per share of $0.83 (103.8%).  This increase in net income available to common shareholders was primarily due to a decrease in provision for loan losses of $9.0 million (80.8%) and an increase in net interest income of $651 thousand (4.9%).  The decrease in provision for loan losses was primarily due to a decrease in net charge-offs in the second quarter of 2011 compared to the second quarter of 2010, and improving asset quality as indicated by the allowance for loan loss analysis.  The increase in net interest income was primarily due to a decline in interest expense, which was partially offset by a decline in interest income, due to a drop in interest rates from the prior period.

Partially offsetting these items was an increase in non-interest expenses of $986 thousand (7.8%) and a decrease in non-interest income of $290 thousand (8.4%).  Non-interest expense increased primarily due to an increase in the loss on sale of other real estate owned of $620 thousand, an increase in salaries and employee benefits of $366 thousand, an increase in legal, professional and accounting fees of $352 thousand and an increase in data processing expenses of $223 thousand.  These increases were partially offset by a decrease in the amortization and valuation of mortgage servicing rights of $473 and a decrease in FDIC insurance premiums of $186 thousand.  The increase in the loss on sale of other real estate owned was due to a higher volume of foreclosed property being sold and written down to new appraisal values.  The increase in salaries and employee benefits was primarily due to an increase in the number of employees, as well as normal wage increases.  The increase in legal, professional and accounting fees was primarily due to an increase in fees associated with collecting on loans.  The increase in data processing fees was primarily due to computer supplies expensed during the period.  The decrease in the amortization and valuation of mortgage servicing rights was primarily due to a decrease in the valuation allowance between the two periods.  The decrease in non-interest income was primarily due to a decrease in net gain on sale of loans of $299 thousand.  Provision for income taxes increased $3.0 million (117.6%) 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 $7.9 million during the first six months of 2011, a decrease of $1.4 million (15.0%) from $9.3 million during the first six months of 2010.  Net income available to common shareholders for the first six months of 2011 increased to $1.8 million or $0.27 per share, compared to a net loss available to common shareholders for the same period in 2010 of $(5.2 million) or a loss of $(0.81) per common share, an increase of $7.0 million (134.0%) in net income available to common shareholders and an increase in earnings per share of $1.08 (133.3%).  This increase in net income available to common shareholders was primarily due to a decrease in provision for loan losses of $11.8 million (76.7%), an increase in non-interest income of $638 thousand (9.8%) and an increase in net interest income of $600 thousand (2.3%).  The decrease in provision for loan losses was primarily due to a decrease in net charge-offs in the first six months of 2011 compared to the first six months of 2010, and improving asset quality as indicated by the allowance for loan loss analysis.  The increase in non-interest income was primarily due to an increase in the net gain on sale of loans of $261 thousand, an increase in trust fee income of $150 thousand and an increase in the net gain on sale of securities of $149 thousand.  The increase in net interest income was primarily due to a decline in interest expense, which was partially offset by a decline in interest income, due to a drop in interest rates from the prior period.

Partially offsetting these items was an increase in non-interest expenses of $2.6 million (11.1%).  Non-interest expense increased primarily due to an increase in the loss on sale of other real estate owned of $846 thousand, an increase in salaries and employee benefits of $789 thousand, an increase in miscellaneous other expenses of $462 thousand, an increase in legal, professional and accounting fees of $324 thousand and an increase in supplies expenses of $297 thousand.  The increase in the loss on sale of other real estate owned was due to a higher volume of foreclosed property being sold and written down to new appraisal values.  The increase in salaries and employee benefits was primarily due to an increase in the number of employees, as well as normal wage increases.  The increase in miscellaneous other expenses was primarily due to an increase in expenses associated with the valuation of interest rate contracts (see Item 1, Financial Statements—Note 15, Derivative Financial Instruments in this Form 10-Q for more details).  The increase in legal, professional and accounting fees was primarily due to an increase in fees associated with collecting on loans.  The increase in supplies expense was primarily due to the purchase of a large volume of small value supplies that were expensed upon purchase rather than tracked in inventory.  Provision for income taxes increased $3.4 million (178.7%) due to higher pre-tax income.

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

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

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

	Three Months Ended June 30,
	2011							2010
	Average Balance		Interest		Yield/ Rate			Average Balance		Interest		Yield/ Rate
	(Dollars in thousands)
Interest-earning Assets:
Loans(1)	$	1,182,732	$	15,976		5.42	%	$	1,210,503	$	16,638		5.51	%
Taxable investment securities		125,083		675		2.16			139,192		776		2.24
Investment securities exempt from federal income taxes (2)		33,427		462		5.54			37,497		482		5.16
Federal funds sold		7,661		7		0.37			124		-		-
Other interest-bearing deposits		122,349		80		0.26			119,150		75		0.25
Investment in unconsolidated trust subsidiaries		1,116		18		6.47			1,116		21		7.55
Total interest-earning assets		1,472,368		17,218		4.69			1,507,582		17,992		4.79
Non-interest-earning assets		77,075							86,698
Total assets	$	1,549,443						$	1,594,280
Interest-bearing Liabilities:
Deposits:
NOW deposits	$	148,079	$	63		0.17	%	$	119,828	$	67		0.22	%
Money market deposits		248,006		120		0.19			206,264		126		0.25
Savings deposits		328,301		137		0.17			351,323		241		0.28
Time deposits over $100,000		295,938		1,169		1.58			418,263		2,115		2.03
Time deposits under $100,000		204,735		711		1.39			215,821		1,056		1.96
Short-term borrowings		10,000		64		2.57			1,215		17		5.61
Long-term borrowings		22,300		189		3.40			32,300		253		3.14
Long-term capital lease obligations		2,211		67		12.15			2,211		67		12.15
Junior subordinated debt owed to unconsolidated trusts		37,116		685		7.40			37,116		684		7.39
Total interest-bearing liabilities		1,296,686		3,205		0.99			1,384,341		4,626		1.34
Demand deposits--non-interest-bearing		58,876							46,231
Other non-interest-bearing liabilities		68,229							41,863
Stockholders' equity, including stock owned by ESOP		125,652							121,845
Total liabilities and stockholders equity	$	1,549,443						$	1,594,280
Net interest income on a fully tax-equivalent basis/interest rate spread(3)			$	14,013		3.70	%			$	13,366		3.45	%
Net interest margin on a fully tax-equivalent basis(4)						3.82	%						3.56	%
Net interest margin(4)						3.77	%						3.51	%

(1) Average loans include non-accrual loans of $59.9 million and $64.4 million for June 30, 2011 and 2010, respectively.  Interest income includes loan origination fees of $331 thousand and $456 thousand for the three months ended June 30, 2011 and 2010, respectively.

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

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

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

 For the second quarter of 2011, net interest income on a fully tax-equivalent basis increased $647 thousand (4.8%) compared to the second quarter of 2010, increasing from $13.4 million in 2010 to $14.0 million in 2011.  The increase in net interest income on a fully tax-equivalent basis resulted from a decrease in interest expense of $1.4 million (30.7%), which was partially offset by a decrease in interest income on a fully tax-equivalent basis of $744 thousand (4.3%).  Interest expense decreased mainly due to a decrease in the cost on interest-bearing liabilities of 35 basis points, which accounted for a decrease in interest expense of $827 thousand.  There was also a decrease in average interest-bearing liabilities of $87.7 million (6.3%), which accounted for a decrease of $594 thousand in interest expense.  Interest income on a full tax-equivalent basis decreased primarily due to a decrease in average interest-earning assets of $35.2 million (2.3%), which accounted for a decrease in interest income on a fully tax-equivalent basis of $507 thousand.  There was also a decrease in the yield on interest-earning assets of 10 basis points, which accounted for a decrease of $267 thousand in interest income on a fully tax-equivalent basis.  The net interest margin expressed on a fully tax-equivalent basis increased 26 basis points to 3.82% for the quarter ended June 30, 2011 from 3.56% for the quarter ended June 30, 2010.

	Six Months Ended June 30,
	2011							2010
	Average Balance		Interest		Yield/ Rate			Average Balance		Interest		Yield/ Rate
	(Dollars in thousands)
Interest-earning Assets:
Loans(1)	$	1,187,110	$	31,773		5.40	%	$	1,223,197	$	33,910		5.59	%
Taxable investment securities		129,584		1,138		1.77			127,817		1,409		2.22
Investment securities exempt from federal income taxes (2)		33,100		920		5.60			37,494		963		5.18
Federal funds sold		3,964		7		0.36			316		-		-
Other interest-bearing deposits		106,243		134		0.25			128,813		180		0.28
Investment in unconsolidated trust subsidiaries		1,116		40		7.23			1,116		41		7.41
Total interest-earning assets		1,461,117		34,012		4.69			1,518,753		36,503		4.85
Non-interest-earning assets		78,122							86,867
Total assets	$	1,539,239						$	1,605,620
Interest-bearing Liabilities:
Deposits:
NOW deposits	$	137,563	$	112		0.16		$	111,102	$	137		0.25	%
Money market deposits		250,714		239		0.19			208,942		263		0.25
Savings deposits		319,794		264		0.17			361,203		508		0.28
Time deposits over $100,000		298,242		2,443		1.65			408,576		4,473		2.21
Time deposits under $100,000		206,581		1,495		1.46			215,567		2,187		2.05
Short-term borrowings		8,631		104		2.43			10,028		233		4.69
Long-term borrowings		23,681		403		3.43			23,473		381		3.27
Long-term capital lease obligations		2,211		134		12.22			2,211		134		12.22
Junior subordinated debt owed to unconsolidated trusts		37,116		1,408		7.65			37,116		1,367		7.43
Total interest-bearing liabilities		1,284,533		6,602		1.04			1,378,218		9,683		1.42
Demand deposits--non-interest-bearing	$	56,309						$	46,017
Other non-interest-bearing liabilities		73,186							58,847
Stockholders' equity, including stock owned by ESOP		125,211							122,538
Total liabilities and stockholders equity	$	1,539,239						$	1,605,620
Net interest income on a fully tax-equivalent basis/interest rate spread(3)			$	27,410		3.66	%			$	26,820		3.43	%
Net interest margin on a fully tax-equivalent basis(4)						3.78	%						3.56	%
Net interest margin(4)						3.73	%						3.51	%

(1) Average loans include non-accrual loans of $57.5 million and $61.1 million for June 30, 2011 and 2010, respectively.  Interest income includes loan origination fees of $738 thousand and $920 thousand for the six months ended June 30, 2011 and 2010, respectively.

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

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

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

For the first six months of 2011, net interest income on a fully tax-equivalent basis increased $590 thousand (2.2%) compared to the first six months of 2010, increasing from $26.8 million in 2010 to $27.4 million in 2011.  The increase in net interest income on a fully tax-equivalent basis resulted from a decrease in interest expense of $3.1 million (31.8%), which was partially offset by a decrease in interest income on a fully tax-equivalent basis of $2.5 million (6.8%).  Interest expense decreased mainly due to a decrease in the cost on interest-bearing liabilities of 38 basis points, which accounted for a decrease in interest expense of $1.9 million.  There was also a decrease in average interest-earning assets of $93.7 million (6.8%), which accounted for a decrease of $1.1 million in interest expense.  Interest income on a full tax-equivalent basis decreased primarily due to a decrease in the yield on interest-earning assets of 16 basis points, which accounted for a decrease in interest income on a fully tax-equivalent basis of $1.4 million.  There was also a decrease in average interest-earning assets of $57.6 million (3.8%), which accounted for a decrease of $1.1 million in interest income on a fully tax-equivalent basis.  The net interest margin expressed on a fully tax-equivalent basis increased 22 basis points to 3.78% for the six months ended June 30, 2011 from 3.56% for the six months ended June 30, 2010.

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

	Three Months Ended June 30,				Six Months Ended June 30,
	2011		2010		2011		2010
	(In thousands)
Net interest income	$	13,834	$	13,183	$	27,054	$	26,454
Tax-equivalent adjustment to net interest income		179		183		356		366
Net interest income, fully tax-equivalent basis	$	14,013	$	13,366	$	27,410	$	26,820

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

	Three Months Ended June 30,									Six Months Ended June 30,
	2011 Compared to 2010									2011 Compared to 2010
	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	$	(378	)	$	(284	)	$	(662	)	$	(984	)	$	(1,153	)	$	(2,137	)
Taxable investment securities		(77	)		(24	)		(101	)		19			(290	)		(271	)
Investment securities exempt from federal income taxes(1)		(54	)		34			(20	)		(118	)		75			(43	)
Federal funds sold		-			7			7			-			7			7
Other interest bearing deposits		2			3			5			(29	)		(17	)		(46	)
Investment in unconsolidated trust subsidiaries		-			(3	)		(3	)		-			(1	)		(1	)
Total increase (decrease) in interest income	$	(507	)	$	(267	)	$	(774	)	$	(1,112	)	$	(1,379	)	$	(2,490	)
Interest-bearing Liabilities:
Now deposits	$	14		$	(18	)	$	(4	)	$	28		$	(53	)	$	(25	)
Money market deposits		23			(29	)		(6	)		47			(71	)		(24	)
Savings deposits		(15	)		(89	)		(104	)		(53	)		(191	)		(244	)
Time deposits over $100,000		(541	)		(405	)		(946	)		(1,051	)		(979	)		(2,030	)
Time deposits under $100,000		(52	)		(293	)		(345	)		(88	)		(604	)		(692	)
Short-term borrowings		61			(14	)		47			(28	)		(101	)		(129	)
Long-term borrowings,		(84	)		20			(64	)		3			19			22
Long-term capital lease obligations		-			-			-			-			-			-
Junior subordinated debt owed to unconsolidated trusts		-			1			1			-			41			41
Total increase (decrease) in interest expense	$	(594	)	$	(827	)	$	(1,421	)	$	(1,142	)	$	(1,939	)	$	(3,081	)
Increase (decrease) in net interest income	$	87		$	560		$	647		$	30		$	560		$	590

____________________

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

Other Income. Changes in other income between the three and six months ended June 30, 2011 and 2010 were as follows:

	Three Months Ended June 30,							Six Months Ended June 30,
	2011		2010		Net difference			2011		2010		Net difference
	(In thousands)
Other income:
Mortgage loan servicing fees	$	665	$	654	$	11		$	1,332	$	1,300	$	32
Trust fees		501		456		45			961		811		150
Loan and other fees		849		804		45			1,601		1,470		131
Service charges on deposits		429		433		(4	)		812		841		(29	)
Net gain on sale of loans		459		758		(299	)		1,739		1,478		261
Net gain on sale of securities		25		-		25			196		47		149
Title insurance premiums		141		274		(133	)		305		462		(157	)
Other operating income		105		85		20			212		111		101
	$	3,174	$	3,464	$	(290	)	$	7,158	$	6,520	$	638

In the second quarter of 2011, other income decreased from the second quarter of 2010 by $(290 thousand) (8.4%) from $3.5 million to $3.2 million.  Net gain on sale of loans decreased $299 thousand (39.4%) primarily due to a decrease in the volume of loans sold from the second quarter of 2010 to the second quarter of 2011.  Title insurance premiums decreased $133 thousand (48.5%) due to a lower volume of title insurance policies being written during the second quarter of 2011 when compared to the same period in 2010.  Both of these items decreased due to a general slowdown of mortgage refinance activity from the second quarter of 2010 to the same period in 2011.

In the first six months of 2011, other income increased $638 thousand (9.8%) from $6.5 million to $7.2 million.  Net gain on sale of loans increased $261 thousand (17.7%) primarily due to an increase in the volume of loans sold from the first six months of 2010 to the same period in 2011 (due to loans sold in the first quarter, as the volume of loans sold during the second quarter of 2011 was lower than the volume sold during the second quarter of 2010).  Title insurance premiums decreased $157 thousand (34.0%) due to a lower volume of title insurance policies being written during the first six months of 2011 when compared to the same period in 2010.  Trust fees increased $150 thousand (18.5%) primarily due to an increase in the total assets under trust management from 2010 to 2011.  Net gain on sale of securities increased $149 thousand (317.0%) primarily due to a higher volume of securities sold during the first six months of 2011 than were sold during the same period in 2010.  Loans and other fees increased $131 thousand (8.9%) primarily due to an increase in fees generated from ATM and debit card transactions, which was a result of the continued increase in debit card transactions.

Other Expenses. Changes in other expenses between the three and six months ended June 30, 2011 and 2010 were as follows:

	Three Months Ended June 30,							Six Months Ended June 30,
	2011		2010		Net difference			2011		2010		Net difference
	(In thousands)
Other expenses:
Salaries and employee benefits	$	5,457	$	5,091	$	366		$	10,958	$	10,169	$	789
Occupancy		951		1,028		(77	)		1,885		2,005		(120	)
Data processing		932		709		223			1,720		1,433		287
Marketing		313		375		(62	)		768		731		37
Amortization and valuation of mortgage servicing rights		501		974		(473	)		804		1,283		(479	)
Amortization and valuation of other intangible assets		163		97		66			326		222		104
Supplies		145		118		27			506		209		297
Loss on sale of other real estate owned		1,673		1,053		620			2,331		1,485		846
Postage		180		161		19			357		322		35
Bankcard and ATM network fees		374		335		39			717		498		219
Legal, professional and accounting fees		925		573		352			1,650		1,326		324
FDIC insurance premiums		748		934		(186	)		1,509		1,832		(323	)
Collection expenses		547		448		99			981		828		153
Other		754		781		(27	)		1,781		1,319		462
	$	13,663	$	12,677	$	986		$	26,293	$	23,662	$	2,631

For the second quarter of 2011, other expenses increased $986 (7.8%) to $13.7 million in 2011 from $12.7 million in the second quarter of 2010.  Loss on sale of other real estate owned increased $620 thousand (58.9%) primarily due to a higher volume of write-downs and sales of other real estate owned during 2011 compared to 2010.  The amortization and valuation of mortgage servicing rights decreased $473 thousand (48.6%) primarily due to a reduction in the valuation allowance associated with these servicing rights.  Salaries and employee benefits increased $366 thousand (7.2%) primarily due to an increase in the total number of full-time equivalent employees and normal increases in pay.  Legal, professional and accounting fees increased $352 thousand (61.4%) primarily due to legal expenses associated with work performed in the collection of non-performing assets.  Data processing expenses increased $223 thousand (31.5%) primarily due to computer supplies expensed during the period, which is not expected to continue.  FDIC insurance premiums decreased $186 thousand (19.9%) primarily due to a decrease in total deposits between the two periods.

For the first six months of 2011, other expenses increased $2.6 million (11.1%) to $26.3 million in 2011 from $23.7 million in the first six months of 2010.  Loss on sale of other real estate owned increased $846 thousand (57.0%) primarily due to a higher volume of write-downs and sales of other real estate owned during 2011 compared to 2010.  Salaries and employee benefits increased $789 thousand (7.8%) primarily due to an increase in the total number of full-time equivalent employees and normal increases in pay.  The amortization and valuation of mortgage servicing rights decreased $479 thousand (37.3%) primarily due to a reduction in the valuation allowance associated with these servicing rights.  Miscellaneous other expenses increased $462 thousand (35.0%) primarily due to an increase in expenses associated with the valuation of interest rate contracts (see Item 1, Financial Statements—Note 15, Derivative Financial Instruments in this Form 10-Q for more details).  Legal, professional and accounting fees increased $324 thousand (24.4%) primarily due to legal expenses associated with work performed in the collection of non-performing assets.  FDIC insurance premiums decreased $323 thousand (17.6%) primarily due to a decrease in total deposits between the two periods.  Supplies expense increased $297 thousand (142.1%) primarily due to the purchase of a large volume of small value supplies that were expensed upon purchase rather than tracked in inventory.

Income Taxes. In the second quarter of 2011, provision for income tax expense increased $3.0 million (117.6%) from the second quarter of 2010, from a benefit of $(2.5 million) in 2010 to an expense of $447 thousand in 2011.  This was due to greater pretax earnings in the second quarter of 2011 compared to the second quarter of 2010.  The effective tax rate increased from 35.6% to 36.8% between the two periods.  The main reason for this increase in effective tax rate was due to the permanent tax differences being a smaller percentage of the pretax earnings in 2011 than in 2010, as permanent differences were relatively unchanged but pre-tax income was significantly greater in 2011 compared to 2010.

In the first six months of 2011, provision for income tax expense increased $3.4 million (178.7%) from the first six months of 2010, from a benefit of $(1.9 million) in 2010 to an expense of $1.5 million in 2011.  This was due to greater pretax earnings in the first six months of 2011 compared to the same period in 2010.  The effective tax rate increased from 31.2% to 34.2% between the two periods.  The main reason for this increase in effective tax rate was due to the permanent tax differences being a smaller percentage of the pretax earnings in 2011 than in 2010, as permanent differences were relatively unchanged but pre-tax income was significantly greater in 2011 compared to 2010.

Financial Condition

General. Total assets at June 30, 2011, were $1.6 billion, a decrease of $12.6 million (0.8%) from December 31, 2010.  Loans held for sale decreased $21.6 million (86.1%) as the volume of loans originated to be sold was below the sales of such loans during the first six months of 2011.  Total investment securities decreased $20.1 million (11.0%) as securities were sold during the period or matured without replacement.  Partially offsetting these decreases was an increase in cash and cash equivalents of $36.0 million (33.9%) as some of the cash generated from the maturities and sales of investment securities and the sales of loans held for sale increased liquid funds.  Much of this decrease in total assets corresponded with a decrease in deposits of $10.6 million (0.8%).  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.  This drop was due to shedding core deposits, but rather in large certificates of deposit, many of which were re-invested in the markets through the Bank’s Investment Services department.  Total liabilities decreased $14.7 million (1.0%) during the first six months of 2011, largely due to this decrease in total deposits.  Stockholders' equity (including stock owned by the Employee Stock Ownership Plan) increased by $2.1 million (1.7%) mainly due to an increase 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” below and “Asset Liability Management” under Item 3 of this Form 10-Q.

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

	At June 30, 2011				At December 31, 2010				At June 30, 2010
	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(In thousands)
Securities Available for Sale:
U.S. Government sponsored agencies	$	50,784	$	51,005	$	42,551	$	42,735	$	85,114	$	85,281
States and political subdivisions		22,433		23,162		20,263		20,584		26,550		27,056
Residential mortgage-backed securities		68,619		69,102		98,692		99,272		70,453		70,332
Total securities available for sale	$	141,836	$	143,269	$	161,506	$	162,591	$	182,117	$	182,669
Securities Held to Maturity
States and political subdivisions	$	10,945	$	11,216	$	11,107	$	10,951	$	11,271	$	11,424
Total securities held to maturity	$	10,945	$	11,216	$	11,107	$	10,951	$	11,271	$	11,424
Other securities:
Non-marketable equity securities (including FRB and FHLB stock)	$	7,580	$	7,580	$	8,219	$	8,219	$	8,281	$	8,281
Investment in unconsolidated trusts		1,116		1,116		1,116		1,116		1,116		1,116
Total other securities	$	8,696	$	8,696	$	9,335	$	9,335	$	9,397	$	9,397

The Company had a total of $68.6 million in Collateralized Mortgage Obligations (“CMOs”) as of June 30, 2011.  All of these CMOs were private label issues or issued by U.S. Government-sponsored agencies and were considered “Investment Grade” (rating of “BBB” or higher).  At the time of purchase, the ratings of these securities ranged from AAA to Aaa.  As of June 30, 2011, the ratings of these securities ranged from AAA to Baa3.  At the time of purchase and on a monthly basis, the Company reviews these securities for impairment on an other-than-temporary basis.  As of June 30, 2011, none of these securities were deemed to have other than temporary impairment. The Company continues to closely monitor the performance and ratings of these securities.

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

	At June 30, 2011						At December 31, 2010						At June 30, 2010
	Amount			Percent			Amount			Percent			Amount			Percent
	(Dollars in thousands)
Commercial	$	157,072			13.11	%	$	149,987			12.58	%	$	135,111			11.35	%
Commercial real estate		433,148			36.15			425,172			35.66			429,500			36.09
Residential real estate		397,860			33.21			400,713			33.61			414,389			34.82
Construction real estate		163,159			13.62			164,721			13.82			158,663			13.33
Installment and other		46,894			3.91			51,632			4.33			52,501			4.41
Total loans		1,198,133			100.00			1,192,225			100.00			1,190,164			100.00
Unearned income		(2,306	)					(2,287	)					(2,117	)
Gross loans		1,195,827						1,189,938						1,188,047
Allowance for loan losses		(27,543	)					(28,722	)					(29,658	)
Net loans	$	1,168,284					$	1,161,216					$	1,158,389

Total loans increased $5.9 million (0.5%) from December 31, 2010 to June 30, 2011, remaining at $1.2 billion.  The increase was primarily in the commercial real estate and commercial non-real estate loan portfolios, which was partially offset by decrease in all other loan 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, 2010 filed with the SEC on March 10, 2011.

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

	At June 30, 2011			At December 31, 2010			At June 30, 2010
	(Dollars in thousands)
Non-accruing loans	$	57,818		$	49,968		$	52,010
Loans 90 days or more past due, still accruing interest		-			-			-
Total non-performing loans		57,818			49,968			52,010
Other real estate owned		13,976			21,860			29,513
Other repossessed assets		1,153			420			389
Total non-performing assets	$	72,947		$	72,248		$	81,912
Restructured loans, still accruing interest		8,918			5,588			4,633
Total non-performing loans to total loans		4.83	%		4.19	%		4.37	%
Allowance for loan losses to non-performing loans		47.64	%		57.48	%		57.02	%
Total non-performing assets to total assets		4.70	%		4.62	%		5.24	%

At June 30, 2011, total non-performing assets increased $699 thousand (1.0%) to $72.9 million from $72.2 million at December 31, 2010, primarily due to an increase in non-accruing loans of $7.9 million (15.7%) and an increase in other repossessed assets of $733 thousand (174.5%), which was largely offset by a decrease in other real estate owned of $7.9 million (36.1%).  Non-accruing loans increased mainly due to a single large construction loan relationship being placed on non-accrual status.  The decrease in other real estate owned was primarily due to the sale of a large tract of undeveloped lots during the second quarter, which resulted in a charge to loss on sale of other real estate owned of $904 thousand for the quarter.  Prior period losses recorded on this property totaled $827 thousand.  Loans with specifically identified losses as of June 30, 2011, totaled $8.9 million, with a specific portion of the allowance for loan losses allocated to cover these estimated losses of $1.0 million.  As of June 30, 2011, 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.  Total loans which were considered restructured (including both those considered performing and those considered non-performing) were $11.3 million and $6.5 million as of June 30, 2011 and December 31, 2010, respectively.  Those restructured loans considered to be performing loans totaled $8.9 million and $5.6 million as of June 30, 2011 and December 31, 2010, respectively.

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

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
	(Dollars in thousands)						(Dollars in thousands)
Balance at beginning of period	$	28,384		$	24,822		$	28,722		$	24,504
Provision for loan losses		2,129			11,101			3,579			15,358
Total charge-offs		(3,144	)		(6,406	)		(5,166	)		(10,465	)
Total recoveries		174			141			408			261
Net charge-offs		(2,970	)		(6,265	)		(4,758	)		(10,204	)
Balance at end of period	$	27,543		$	29,658		$	27,543		$	29,658
Gross loans at end of period	$	1,195,827		$	1,188,047		$	1,195,827		$	1,188,047
Ratio of allowance to total loans		2.30	%		2.49	%		2.30	%		2.49	%
Ratio of net charge-offs to average loans(1)		1.01	%		2.08	%		0.81	%		1.68	%

____________________

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

Net charge-offs for the three months ended June 30, 2011, totaled $3.0 million, a decrease of $3.3 million (52.6%), from $6.3 million for the three months ended June 30, 2010.  The majority of the net charge-offs were construction real estate ($1.1 million), residential real estate ($1.0 million) and commercial non-real estate ($589 thousand).  The decrease in net charge-offs for the second quarter of 2011 compared to the same period in 2010 was primarily due to decreases in net charge-offs in the construction real estate portfolio of $2.1 million and the residential real estate portfolio of $609 thousand.  The provision for loan losses decreased $9.0 million (80.8%) based upon management’s estimate of the adequacy of the reserve for loan losses.  For further information, please see discussion in “Critical Accounting Policies –Allowance for Loan Losses” and “Results of Operations—Income Statement Analysis” above.

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

	At June 30, 2011					At December 31, 2010					At June 30, 2010
	Amount		Percent			Amount		Percent			Amount		Percent
	(Dollars in thousands)
Commercial	$	5,207		13.11	%	$	5,857		12.58	%	$	6,570		11.35	%
Commercial and residential real estate		12,182		69.36			11,102		69.27			9,722		70.91
Construction real estate		6,251		13.62			7,322		13.82			6,941		13.33
Installment and other		3,903		3.91			4,122		4.33			3,255		4.41
Unallocated		-		N/A			319		N/A			3,170		N/A
Total	$	27,543		100.00	%	$	28,722		100.00	%	$	29,658		100.00	%

The allowance for loan losses decreased $2.1 million (7.1%) from June 30, 2010 to June 30, 2011.  This was mainly due to a decrease in the unallocated portion of the allowance and a decrease in the portion allocated to commercial non-real estate loans.  The unallocated portion decreased $3.2 million (100.0%) mainly due to increased certainty of the size and categories of probable loan losses.  The allocation for commercial non-real estate loans decreased $1.3 million (20.4%) mainly due to a decrease in the allocation for historical loss experience (based on regression analysis) of $1.6 million.  These decreases were partially offset by increases in the allocation for commercial and residential real estate of $2.5 million (25.3%), mainly due to an increase in the allocation for historical loss experience (based on regression analysis) of $2.0 million.

A loan is considered impaired when, based on current information and events, it is probable that the bank will be unable to collect all amounts due according to the original contractual terms of the loan agreement, including both principal and interest.  The impairment amount of the loan is equal to the recorded investment in the loan less the net fair value.  The bank generally uses one of three methods to measure impairment: the fair value of the collateral less disposition costs, the present value of expected future cash flows method, or the observable market price of a loan method.  The impairment amount above collateral value is normally charged to the allowance for loan and lease losses in the quarter it is identified.  Total loans which were deemed to have been impaired as of June 30, 2011 were $66.7 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 $1.1 million 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 after modest growth at the end of 2010 is that the economy will likely add jobs in 2011 and continue a trend of moderate growth thereafter.  For 2011, we expect employment growth of only 0.8%, and less than 1.5% per year in the following two years.  We anticipate that the economy will not recover its 2007 employment level until 2014.  The national housing market continued its long decline to its lowest point in a decade; however, the local bank markets had an uptick in sales.  In the second quarter of 2011, sales of homes in Albuquerque were up by 4% and in Santa Fe up 7.9%.  The median sales price in Albuquerque decreased 8% from last year; however, the median sales price in Santa Fe increased 7.3%.  While the weak housing market and expiration of ARRA infrastructure spending, in construction is unlikely to stimulate rapid economic growth in 2011, the local market appears to be stabilizing and improving without the federal stimulus.

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 June 30, 2011		At December 31, 2010		At June 30, 2010
	(In thousands)
Performing loans classified as:
Substandard	$	22,700	$	25,667		$	23,514
Doubtful		-		-			-
Total performing adversely classified loans	$	22,700	$	25,667		$	23,514
Special mention loans	$	12,295	$	1,091		$	699

Total performing adversely classified loans decreased $814 thousand (3.5%) from June 30, 2010 to June 30, 2011.  This was primarily due to a decrease in classified construction loans of $8.1 million (72.0%) and a decrease in classified commercial non-real estate loans of $792 thousand (29.8%), which was largely offset by increases in classified commercial real estate loans of $5.3 million (62.1%) and classified residential real estate loans of $2.7 million (270.1%).  Performing classified construction loans decreased largely due to the placing of a single large loan on non-accrual status.  Performing classified commercial non-real estate loans decreased primarily due to the upgrading of a single large commercial loan.  Performing classified commercial real estate loans increased primarily due to the downgrading of a single commercial real estate loan.  Performing classified residential real estate increased primarily due to the downgrading of ten separate residential credits.Special mention loans increased $11.6 million (1,658.9%) between June 30, 2010 and June 30, 2011, primarily due to the downgrading of three larger commercial credits (two in residential development for infrastructure and one in hotel lodging.)  As of June 30, 2011, 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.  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 $36.2 million and $13.3 million for the six months ended June 30, 2011 and June 30, 2010, respectively, an increase in cash provided of $22.9 million between the two periods.  This increase was primarily due to a decrease in cash used in the origination of loans held for sale of $16.4 million and an increase in cash provided by the sale of these loans of $4.1 million.  Net cash provided by investing activities was $13.5 million and $(19.0) million for the six months ended June 30, 2011 and June 30, 2010, respectively.  The $32.5 million increase in cash provided by investing activities was largely due to a decrease in cash used in the purchase of investment securities of $70.1 million, which was partially offset by an increase in the cash used in the funding of loans (net of repayments) of $29.7 million and a decrease in cash provided by the maturities and paydowns of investment securities of $8.8 million.  Net cash used in financing activities was $13.7 million and $108.6 million for the six months ended June 30, 2011 and June 30, 2010, respectively.  The $94.9 million decrease in cash used in financing activities, between June 30, 2010 and June 30, 2011, was mainly due to an increase in cash provided by net growth of deposits of $95.4 million.

The most significant change in deposits from December 31, 2010 to June 30, 2011 occurred in time deposits over $100,000 (decreasing $52.0 million), with decreases also in MMDA accounts ($26.7 million) and other time deposits ($6.3 million).  The largest increase in deposits was in NOW accounts ($41.2 million), with increases also in savings accounts ($22.3 million) and demand deposits ($10.9 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 $50.0 million for a short period (15 to 60 days) from these banks on a collective basis.  Management believes that we will be able to continue to borrow federal funds from our correspondent banks in the future.  Additionally, we are a member of the FHLB and, as of June 30, 2011, we had the ability to borrow from the FHLB up to a total of $240.5 million in additional funds.  We also may borrow through the Federal Reserve Bank’s discount window up to a total of $107.1 million on a short-term basis.  As a contingency plan for significant funding needs, the Asset/Liability Management committee may also consider the sale of investment securities, selling securities under agreement to repurchase, sale of certain loans and/or the temporary curtailment of lending activities.

At June 30, 2011, Trinity’s total risk-based capital ratio was 14.81%, the Tier 1 capital to risk-weighted assets ratio was 13.55%, and the Tier 1 capital to adjusted average assets ratio was 10.35%.  At December 31, 2010, Trinity’s total risk-based capital ratio was 14.50%, the Tier 1 capital to risk-weighted assets ratio was 13.23%, and the Tier 1 capital to average assets ratio was 9.82%.

At June 30, 2011, the Bank’s total risk-based capital ratio was 14.53%, the Tier 1 capital to risk-weighted assets ratio was 13.26%, and the Tier 1 capital to adjusted average assets ratio was 10.12%.  At December 31, 2010, the Bank’s total risk-based capital ratio was 14.26%, the Tier 1 capital to risk-weighted assets ratio was 12.99%, and the Tier 1 capital to adjusted average assets ratio was 9.64%.  The Bank exceeded the general minimum regulatory requirements to be considered “well-capitalized” under Federal Deposit Insurance Corporation regulations at June 30, 2011 and December 31, 2010.

At June 30, 2011 and December 31, 2010, Trinity’s book value per common share was $13.90 and $13.58, respectively.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Asset Liability Management

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

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

The following tables set forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at June 30, 2011, which we anticipate, based upon certain assumptions, to reprice or mature in each of the future time periods shown.  Except as stated below, the amount of assets and liabilities shown which reprice or mature during a particular period were determined based on the earlier of the term to repricing or the term to repayment of the asset or liability.  These tables are intended to provide an approximation of the projected repricing of assets and liabilities at June 30, 2011 on the basis of contractual maturities and scheduled rate adjustments within a three-month period and subsequent selected time intervals.  The loan amounts in the table reflect principal balances expected to be reinvested and/or repriced as a result of contractual amortization and rate adjustments on adjustable-rate loans.  The contractual maturities and amortization of loans and investment securities reflect modest prepayment assumptions.  While NOW, money market and savings deposit accounts have adjustable rates, it is assumed that the interest rates on these accounts will not adjust immediately to changes in other interest rates.  Therefore, the table is calculated assuming that these accounts will reprice based upon an historical analysis of decay rates of these particular accounts, with repricing assigned to these accounts from 1 to 10 months.

	Time to Maturity or Repricing
As of June 30, 2011:	0-90 Days			91-365 Days			1-5 Years			Over 5 Years			Total
	(Dollars in thousands)
Interest-earning Assets:
Loans	$	516,931		$	443,324		$	172,300		$	63,272		$	1,195,827
Loans held for sale		3,482			-			-			-			3,482
Investment securities		28,156			16,133			58,482			59,023			161,794
Securities purchased under agreements to resell		25,389			-			-			-			25,389
Interest-bearing deposits with banks		95,159			-			-			-			95,159
Investment in unconsolidated trusts		186			-			-			930			1,116
Total interest-earning assets	$	669,303		$	459,457		$	230,782		$	123,225		$	1,482,767
Interest-bearing Liabilities:
NOW deposits	$	88,856		$	143,265		$	-		$	-		$	232,121
Money market deposits		70,813			105,205			-			-			176,018
Savings deposits		134,963			194,278			-			-			329,241
Time deposits over $100,000		63,380			148,610			49,019			15,192			276,201
Time deposits under $100,000		47,887			128,429			24,384			4,068			204,768
Short-term borrowings		-			10,000			-			-			10,000
Long-term borrowings		-			-			20,000			2,300			22,300
Capital lease obligations		-			-			2,211			-			2,211
Junior subordinated debt owed to unconsolidated trusts		6,186			-			-			30,930			37,116
Total interest-bearing liabilities	$	412,085		$	729,787		$	95,614		$	52,490		$	1,289,976
Rate sensitive assets (RSA)	$	669,303		$	1,128,760		$	1,359,542		$	1,482,767			1,482,767
Rate sensitive liabilities (RSL)		412,085			1,141,872			1,237,486			1,289,976			1,289,976
Cumulative GAP (GAP=RSA-RSL)		257,218			(13,112	)		122,056			192,791			192,791
RSA/Total assets		43.10	%		72.69	%		87.55	%		95.49	%		95.49	%
RSL/Total assets		26.54	%		73.53	%		79.69	%		83.07	%		83.07	%
GAP/Total assets		16.56	%		(0.84	)%		7.86	%		12.42	%		12.42	%
GAP/RSA		38.43	%		(1.16	)%		8.98	%		13.00	%		13.00	%

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

Based on simulation modeling at June 30, 2011 and December 31, 2010, our net interest income would change over a one-year time period due to changes in interest rates as follows:

Change in Net Interest Income over One Year Horizon

			At June 30, 2011						At December 31, 2010
Changes in Levels of Interest Rates			Dollar Change			Percent Change			Dollar Change			Percent Change
(Dollars in thousands)
	+2.00	%	$	(5,663	)		(10.56	)%	$	(5,253	)		(9.95	)%
	+1.00			(5,481	)		(10.22	)		(3,363	)		(6.37	)
	(1.00	)		(80	)		(0.15	)		(1,711	)		(3.24	)
	(2.00	)		(118	)		(0.22	)		(3,426	)		(6.49	)

Our simulations used assume the following:

1. Changes in interest rates are immediate.

2. It is our policy that interest rate exposure due to a 2% interest rate rise or fall be limited to 15% of our annual net interest income, as forecasted by the simulation model.  As demonstrated by the table above, our interest rate risk exposure was within this policy at June 30, 2011.

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.  Note that significant declines in interest rates from the current levels are unlikely or impossible as this would result in negative interest rates.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

We have established disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to the officers who certify our financial reports and to other members of senior management and the board of directors and to ensure that information that is required to be disclosed in reports we file with the SEC is properly and timely recorded, processed, summarized and reported.  A review and evaluation was performed by our management, including the Company’s Chief Executive Officer (the “CEO”) and Chief Financial Officer (the “CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2011 pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934.  Based upon and as of the date of that review and evaluation, the CEO and CFO have concluded that our current disclosure controls and procedures were effective as of June 30, 2011.

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, 2010, filed with the Securities and Exchange Commission on March 10, 2011.

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

During the second quarter of 2011, we made no repurchases of any class of our equity securities.

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

101* Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets at June 30, 2011 and December 31, 2010; (ii) Consolidated Statements of Operations for the three and six months ended June 30, 2011 and June 30, 2010; (iii) Consolidated Statements of Cash Flows for the six months ended June 30, 2011 and June 30, 2010; and (iv) Notes to Consolidated Financial Statements, tagged as blocks of text.

* As provided in Rule 406T of Regulation S-T, this information shall not be deemed “filed” for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934, or otherwise subject to liability under those sections.

SIGNATURES

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

	TRINITY CAPITAL CORPORATION
Date: August 9, 2011	By:	/s/ WILLIAM C. ENLOE
		William C. Enloe
		President and Chief Executive Officer
Date: August 9, 2011	By:	/s/ DANIEL R. BARTHOLOMEW
		Daniel R. Bartholomew
		Chief Financial Officer