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 </