10-K 1 form10k20111231.htm FORM 10-K FOR DECEMBER 31, 2011 form10k20111231.htm

 
 

 

As filed with the Securities and Exchange Commission on March 15, 2012
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
 
(Mark One)

[ x ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 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

TCC COMPANY LOGO
TRINITY CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)

New Mexico
 
85-0242376
(State or other jurisdiction of incorporation or
organization)
 
(I.R.S. Employer Identification No.)
     
1200 Trinity Drive
Los Alamos, New Mexico
 
87544
(Address of principal executive offices)
 
(Zip Code)
     
Registrant’s telephone number, including area code (505) 662-5171
     
Securities registered pursuant to Section 12(b) of the Act: None
     
Securities registered pursuant to Section 12(g) of the Act:
     
Common Stock
20,000,000 authorized shares
(Title of class)
 
 
 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. [   ]  Yes    [ x ]  No
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  [   ]  Yes    [ x ]  No
 
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. [ x ]  Yes    [   ]  No

 Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).[   ]  Yes   [   ]  No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.[   ]   Yes    [ x ] No

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

Large accelerated filer [   ]                                                                                           Accelerated filer                                  [ x ]
Non-accelerated filer   [   ]  (do not check if a smaller reporting company)     Smaller reporting company [    ]
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). 
[   ]  Yes   [ x ]  No
 
The aggregate market value of the registrant’s common stock (“Common Stock”) held by non-affiliates as of June 30, 2011, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $76,948,000 (based on the last sale price of the Common Stock at June 30, 2011 of $16.50 per share).
 
As of March 15, 2012, there were 6,449,726 shares of Common Stock outstanding.
 
DOCUMENTS INCORPORATED BY REFERENCE

Document of the Registrant
 
Form 10-K Reference Location
Portions of the 2012 Proxy Statement
 
PART III

 
 

 


   
 

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Please note: Unless the context clearly suggests otherwise, references in this Form 10-K to “us,” “we”, “our” or “the Company” include Trinity Capital Corporation and its wholly owned subsidiaries, including Los Alamos National Bank, TCC Advisors Corporation, TCC Funds, FNM Investment Fund IV and Title Guaranty & Insurance Company.
 
Item 1. Business.
 
Trinity Capital Corporation
 
General. Trinity Capital Corporation (“Trinity”), a financial holding company organized under the laws of the State of New Mexico, is the sole shareholder of Los Alamos National Bank (the “Bank”) and the sole shareholder of Title Guaranty & Insurance Company (“Title Guaranty”).  The Bank is the sole shareholder of TCC Advisors Corporation (“TCC Advisors”) as well as the sole shareholder of Finance New Mexico Investment Fund IV, LLC, a Delaware Limited Liability Company (“FNM Investment Fund IV”).  The Bank is also a member of Cottonwood Technology Group, LLC (“Cottonwood”), a management consulting and counseling company for technology start up companies, which is also designed to manage venture capital funds.  FNM Investment Fund IV is a member of Finance New Mexico—Investor Series IV, LLC, a New Mexico Limited Liability Company (“FNM CDE IV”), an entity created to fund loans and investments in a New Market Tax Credit project.
 
Trinity is located in Los Alamos, New Mexico, a small community in the Jemez Mountains of Northern New Mexico.  Los Alamos has approximately 18,000 residents and enjoys worldwide recognition as the birthplace of the atomic bomb.  Today, Los Alamos National Laboratory (the “Laboratory”) remains a pre-eminent research facility for scientific and technological development in numerous scientific fields.  At December 31, 2011, the Laboratory employed (directly and indirectly) approximately 11,782 people, making it the largest employer in Los Alamos County.  The Laboratory remains the cornerstone of the community and has attracted numerous other scientific businesses to the area.
 
The Bank was founded in 1963 by local investors to provide convenient, full-service banking to the unique scientific community that developed around the Laboratory and continues to expand its market share and customer-base.  Los Alamos National Bank is a full-service commercial banking institution with seven bank offices in Los Alamos, White Rock, Santa Fe and Albuquerque, New Mexico.  The Bank provides a broad range of banking products and services, including credit, cash management, deposit, asset management and trust and investment services to our targeted customer base of individuals and small and medium-sized businesses.  As of December 31, 2011, the Bank had total assets of $1.5 billion, net loans of $1.2 billion and deposits (net of deposits of affiliates) of $1.3 billion.
 
Much of the Bank’s growth during the past several years has involved its expansion into Santa Fe, a city located 35 miles southeast from Los Alamos.  In 1999, the Bank established its first office in Santa Fe and in 2004, the Bank added a second office in Santa Fe to better serve its growing customer-base and continue to attract new customers.  Trinity acquired a ground lease covering additional land in Santa Fe where a third Santa Fe Bank office was opened in October 2009.  The Bank opened its third Santa Fe office to better serve our customers on the southern side of Santa Fe and attract additional commercial and consumer customers in this area.  Based upon the Federal Deposit Insurance Corporation’s Summary of Deposits (“SOD”) Report containing data as of June 30 of each year, the Bank has held the largest share of deposits in Santa Fe County since 2007.  Contributing to its growth, the Bank has also expanded into Albuquerque, New Mexico.  In 2005, the Bank determined the need for an additional site in Albuquerque, New Mexico to serve our commercial loan customers and established a Loan Production Office.  The Bank expanded its charter at the end of 2007 to provide for the ability to provide full banking services out of its Albuquerque office.  In November 2011, the Bank opened an additional office in Albuquerque that offers full depository and lending services.
 


Trinity acquired Title Guaranty in 2000, making it the only title company in New Mexico to be owned by a financial institution.  Title Guaranty is a title insurance company organized under the laws of the State of New Mexico doing business in Los Alamos and Santa Fe Counties.  Title Guaranty opened its Santa Fe office in the Bank’s downtown Santa Fe facility in February 2005.  The services provided by Title Guaranty complement those provided by Trinity’s bank subsidiary.  Title Guaranty provides title insurance, closing services, escrow and notary service, title searches and title reports for Los Alamos and Santa Fe Counties.
 
The Bank created TCC Advisors in February 2006 to enable us to manage certain assets. In April 2010, the Bank activated TCC Advisors as a business unit operating one of the Bank's foreclosed properties, Santa Fe Equestrian Park, in Santa Fe, New Mexico, while seeking a sale of the property.  In February 2006, TCC Funds, a Delaware statutory trust was created with Trinity as its sponsor, to allow for the creation of a mutual fund.  TCC Funds remains dormant with no planned use at this time.  In August of 2008, the Bank invested in Cottonwood as a 26% member. Cottonwood assists in the management of, and counsels, start up companies involved in technology transfer from research institutions in New Mexico, as well as establishing and managing venture funds.  The Bank currently holds a 24% interest in Cottonwood as described below.  Additionally, the Bank is participating in a venture capital fund managed by Cottonwood.  In 2009, the Bank created FNM Investment Fund IV to acquire a 99.99% interest in FNM CDE IV.  Both of these entities were created for the sole purpose of funding loans to and investments in a New Market Tax Credit project located in downtown Albuquerque, New Mexico.  In September of 2010, the Bank invested in 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 capital investment will be $250 thousand of which approximately $186 thousand has been funded.
 
Corporate Structure. Trinity was organized in 1975 as a bank holding company, as defined in the Bank Holding Company Act of 1956, as amended (“BHCA”), and in 2000 elected to become a financial holding company, as defined in the BHCA.  Trinity acquired the stock of the Bank in 1977 and serves as the holding company for the Bank.  In 2000, Trinity purchased Title Guaranty.  Title Guaranty and the Bank are wholly-owned subsidiaries of Trinity.  The Bank created both TCC Advisors and TCC Funds in February 2006.  In addition, Trinity owns all the common shares of four business trusts, created by Trinity for the sole purpose of issuing trust preferred securities which had an aggregate outstanding balance of $37.1 million at December 31, 2011.  Trinity’s sole business is the ownership of the outstanding shares of the Bank, Title Guaranty and the administration of the Trusts.  The address of our headquarters is 1200 Trinity Drive, Los Alamos, New Mexico 87544, our main telephone number is (505) 662-5171 and our general email address is tcc@lanb.com.
 
Trinity maintains a website at http://www.lanb.com/TCC-Investor-Relations.aspx.  We make available free of charge on or through our website, the annual report on Form 10-K, proxy statements, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the Securities and Exchange Commission.  The Company will also provide copies of its filings free of charge upon written request to: TCC Stock Representative, Trinity Capital Corporation, Post Office Box 60, Los Alamos, New Mexico 87544.  In addition, any materials we filed with the SEC can be read and copied at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549.  Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330.  The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers such as Trinity.  Trinity’s filings are available free of charge on the SEC’s website at http://www.sec.gov.
 

Regulation and Supervision
 
General. Financial institutions, their holding companies and their affiliates are extensively regulated under federal and state law.  As a result, the growth and earnings performance of Trinity may be affected not only by management decisions and general economic conditions, but also by requirements of federal and state statutes and by the regulations and policies of various bank regulatory authorities, including the Office of the Comptroller of the Currency (the “OCC”), the Board of Governors of the Federal Reserve System (the “Federal Reserve”) and the Federal Deposit Insurance Corporation (the “FDIC”).  Furthermore, taxation laws administered by the Internal Revenue Service and state taxing authorities, accounting rules developed by the Financial Accounting Standards Board (the “FASB”) and securities laws administered by the Securities and Exchange Commission (the “SEC”) and state securities authorities have an impact on the business of Trinity.  The effect of these statutes, regulations, regulatory policies and accounting rules are significant to the operations and results of the Company and Bank, and the nature and extent of future legislative, regulatory or other changes affecting financial institutions are impossible to predict with any certainty.
 
Federal and state banking laws impose a comprehensive system of supervision, regulation and enforcement on the operations of financial institutions, their holding companies and affiliates that is intended primarily for the protection of the FDIC-insured deposits and depositors of banks, rather than shareholders.  These federal and state laws, and the regulations of the bank regulatory authorities issued under them, affect, among other things, the scope of business, the kinds and amounts of investments banks may make, reserve requirements, capital levels relative to operations, the nature and amount of collateral for loans, the establishment of branches, the ability to merge, consolidate and acquire, dealings with insiders and affiliates and the payment of dividends.  In addition, turmoil in the credit markets in recent years prompted the enactment of unprecedented legislation that has allowed the U.S. Treasury Department to make equity capital available to qualifying financial institutions to help restore confidence and stability in the U.S. financial markets, which imposes additional requirements on institutions in which the U.S. Treasury Department invests.
 
In addition, the Company and Bank are subject to regular examination by their respective regulatory authorities, which results in examination reports and ratings (that are not publicly available) that can impact the conduct and growth of business.  These examinations consider not only compliance with applicable laws and regulations, but also capital levels, asset quality and risk, management ability and performance, earnings, liquidity, and various other factors.  The regulatory agencies generally have broad discretion to impose restrictions and limitations on the operations of a regulated entity where the agencies determine, among other things, that such operations are unsafe or unsound, fail to comply with applicable law or are otherwise inconsistent with laws and regulations or with the supervisory policies of these agencies.
 
The following is a summary of the material elements of the supervisory and regulatory framework applicable to Trinity and the Bank.  It does not describe all of the statutes, regulations and regulatory policies that apply, nor does it restate all of the requirements of those that are described.  The descriptions are qualified in their entirety by reference to the particular statutory and regulatory provision.


Financial Regulatory Reform.  On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) into law.  The Dodd-Frank Act represents a sweeping reform of the supervisory and regulatory framework applicable to financial institutions and capital markets in the United States, certain aspects of which are described below in more detail.  The Dodd-Frank Act creates new federal governmental entities responsible for overseeing different aspects of the U.S. financial services industry, including identifying emerging systemic risks.  It also shifts certain authorities and responsibilities among federal financial institution regulators, including the supervision of holding company affiliates and the regulation of consumer financial services and products.  In particular, and among other things, the Dodd-Frank Act: creates a Bureau of Consumer Financial Protection authorized to regulate providers of consumer credit, savings, payment and other consumer financial products and services; narrows the scope of federal preemption of state consumer laws enjoyed by national banks and federal savings associations and expands the authority of state attorneys general to bring actions to enforce federal consumer protection legislation; imposes more stringent capital requirements on bank holding companies and subjects certain activities, including interstate mergers and acquisitions, to heightened capital conditions; significantly expands underwriting requirements applicable to loans secured by 1-4 family residential real property; restricts the interchange fees payable on debit card transactions for issuers with $10 billion in assets or greater; requires the originator of a securitized loan, or the sponsor of a securitization, to retain at least 5% of the credit risk of securitized exposures unless the underlying exposures are qualified residential mortgages or meet certain underwriting standards to be determined by regulation; creates a Financial Stability Oversight Council as part of a regulatory structure for identifying emerging systemic risks and improving interagency cooperation; provides for enhanced regulation of advisers to private funds and of the derivatives markets; enhances oversight of credit rating agencies; and prohibits banking agency requirements tied to credit ratings.
 
Numerous provisions of the Dodd-Frank Act are required to be implemented through rulemaking by the appropriate federal regulatory agencies.  Some of the required regulations have been issued and some have been released for public comment, but many have yet to be released in any form.  Furthermore, while the reforms primarily target systemically important financial service providers, their influence is expected to filter down in varying degrees to smaller institutions over time. Management of the Company and Bank will continue to evaluate the affect of the changes; however, in many respects, the ultimate impact of the Dodd-Frank Act will not be fully known for years.  As such, it is uncertain whether the Dodd-Frank Act, or any other new legislative changes, will have a negative impact on the results of operations and financial condition of Trinity and the Bank.
 
The Increasing Importance of Capital.  While capital has historically been one of the key measures of the financial health of both holding companies and depository institutions, its role is becoming fundamentally more important in the wake of the financial crisis.  Not only will capital requirements increase, but the type of instruments that constitute capital will also change, and, as a result of the Dodd-Frank Act, after a phase-in period, bank holding companies will have to hold capital under rules as stringent as those for insured depository institutions.  Moreover, the actions of the international Basel Committee on Banking Supervision, a committee of central banks and bank supervisors, to reassess the nature and uses of capital in connection with an initiative called “Basel III,” discussed below, will have a significant impact on the capital requirements applicable to U.S. bank holding companies and depository institutions.
 
Required Capital Levels.The Dodd-Frank Act mandates the Federal Reserve to establish minimum capital levels for bank holding companies on a consolidated basis that are as stringent as those required for insured depository institutions.  The components of Tier 1 capital will be restricted to capital instruments that are currently considered to be Tier 1 capital for insured depository institutions.  As a result, the proceeds of trust preferred securities will be excluded from Tier 1 capital unless such securities were issued prior to May 19, 2010 by bank holding companies with less than $15 billion of assets.  As Trinity has assets of less than $15 billion, it will be able to maintain its trust preferred proceeds as capital but it will have to comply with new capital mandates in other respects, and it will not be able to raise Tier 1 capital in the future through the issuance of trust preferred securities.
 

Under current federal regulations, the Bank is subject to, and, after a phase-in period, Trinity will be subject to, the following minimum capital standards: (i) a leverage requirement consisting of a minimum ratio of Tier 1 capital to total assets of 3% for the most highly-rated banks with a minimum requirement of at least 4% for all others; and (ii) a risk-based capital requirement consisting of a minimum ratio of total capital to total risk-weighted assets of 8% and a minimum ratio of Tier 1 capital to total risk-weighted assets of 4%.  For this purpose, Tier 1 capital consists primarily of common stock, noncumulative perpetual preferred stock and related surplus less intangible assets (other than certain loan servicing rights and purchased credit card relationships).  Total capital consists primarily of Tier 1 capital plus Tier 2 capital, which includes other non-permanent capital items such as certain other debt and equity instruments that do not qualify as Tier 1 capital and a portion of the Bank’s allowance for loan and lease losses.
 
The capital requirements described above are minimum requirements.  Federal law and regulations provide various incentives for banking organizations to maintain regulatory capital at levels in excess of minimum regulatory requirements.  For example, a banking organization that is “well-capitalized” may qualify for exemptions from prior notice or application requirements otherwise applicable to certain types of activities, may qualify for expedited processing of other required notices or applications and may accept brokered deposits.  Additionally, one of the criteria that determines a bank holding company’s eligibility to operate as a financial holding company (see “—Acquisitions, Activities and Changes in Control” below) is a requirement that all of its depository institution subsidiaries be “well-capitalized.”  Under the Dodd-Frank Act, that requirement is extended such that, as of July 21, 2011, bank holding companies, as well as their depository institution subsidiaries, had to be well-capitalized in order to operate as financial holding companies.  Under the capital regulations of the Federal Reserve, in order to be “well-capitalized” a banking organization must maintain a ratio of total capital to total risk-weighted assets of 10% or greater, a ratio of Tier 1 capital to total risk-weighted assets of 6% or greater and a ratio of Tier 1 capital to total assets of 5% or greater.
 
Higher capital levels may also be required if warranted by the particular circumstances or risk profiles of individual banking organizations.  For example, the Federal Reserve’s capital guidelines contemplate that additional capital may be required to take adequate account of, among other things, interest rate risk, or the risks posed by concentrations of credit, nontraditional activities or securities trading activities.  Further, any banking organization experiencing or anticipating significant growth would be expected to maintain capital ratios, including tangible capital positions (i.e., Tier 1 capital less all intangible assets), well above the minimum levels.
 
It is important to note that certain provisions of the Dodd-Frank Act and Basel III, discussed below, will ultimately establish strengthened capital standards for banks and bank holding companies, will require more capital to be held in the form of common stock and will disallow certain funds from being included in a Tier 1 capital determination.  Once fully implemented, these provisions may represent regulatory capital requirements which are meaningfully more stringent than those outlined above.
 
Prompt Corrective Action.  A banking organization’s capital plays an important role in connection with regulatory enforcement as well.  Federal law provides the federal banking regulators with broad power to take prompt corrective action to resolve the problems of undercapitalized institutions.  The extent of the regulators’ powers depends on whether the institution in question is “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized,” in each case as defined by regulation.  Depending upon the capital category to which an institution is assigned, the regulators’ corrective powers include: (i) requiring the institution to submit a capital restoration plan; (ii) limiting the institution’s asset growth and restricting its activities; (iii) requiring the institution to issue additional capital stock (including additional voting stock) or to be acquired; (iv) restricting transactions between the institution and its affiliates; (v) restricting the interest rate the institution may pay on deposits; (vi) ordering a new election of directors of the institution; (vii) requiring that senior executive officers or directors be dismissed; (viii) prohibiting the institution from accepting deposits from correspondent banks; (ix) requiring the institution to divest certain subsidiaries; (x) prohibiting the payment of principal or interest on subordinated debt; and (xi) ultimately, appointing a receiver for the institution.
 

As of December 31, 2011: (i) the Bank was not subject to a directive from the OCC to increase its capital to an amount in excess of the minimum regulatory capital requirements; (ii) the Bank exceeded its minimum regulatory capital requirements under OCC capital adequacy guidelines; and (iii) the Bank was “well-capitalized,” as defined by OCC regulations.  However, due to a formal written agreement with the OCC, as discussed below, the Bank cannot be considered to be “well-capitalized” as long as the agreement is in effect.  As of December 31, 2011, Trinity had regulatory capital in excess of the Federal Reserve’s requirements and met the Dodd-Frank Act requirements.
 
Basel III.  The current risk-based capital guidelines that apply to the Bank and will apply to Trinity are based upon the 1988 capital accord of the international Basel Committee on Banking Supervision, a committee of central banks and bank supervisors, as implemented by the U.S. federal banking agencies on an interagency basis.  In 2008, the banking agencies collaboratively began to phase-in capital standards based on a second capital accord, referred to as “Basel II,” for large or “core” international banks (generally defined for U.S. purposes as having total assets of $250 billion or more or consolidated foreign exposures of $10 billion or more).  Basel II emphasized internal assessment of credit, market and operational risk, as well as supervisory assessment and market discipline in determining minimum capital requirements.
 
On September 12, 2010, the Group of Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking Supervision, announced agreement to a strengthened set of capital requirements for banking organizations in the United States and around the world, known as Basel III.  The agreement is currently supported by the U.S. federal banking agencies.  As agreed to, Basel III is intended to be fully-phased in on a global basis on January 1, 2019.  Basel III requires, among other things: (i) a new required ratio of minimum common equity equal to 7% of total assets (4.5% plus a capital conservation buffer of 2.5%); (ii) an increase in the minimum required amount of Tier 1 capital from the current level of 4% of total assets to 6% of total assets; (iii) an increase in the minimum required amount of total capital, from the current level of 8% to 10.5% (including 2.5% attributable to the capital conservation buffer).  The purpose of the conservation buffer (to be phased in from January 2016 until January 1, 2019) is to ensure that banks maintain a buffer of capital that can be used to absorb losses during periods of financial and economic stress.  There will also be a required countercyclical buffer to achieve the broader goal of protecting the banking sector from periods of excess aggregate credit growth.
 
Pursuant to Basel III, certain deductions and prudential filters, including minority interests in financial institutions, mortgage servicing rights and deferred tax assets from timing differences, would be deducted in increasing percentages beginning January 1, 2014, and would be fully deducted from common equity by January 1, 2018.  Certain instruments that no longer qualify as Tier 1 capital, such as trust preferred securities, also would be subject to phase-out over a 10-year period beginning January 1, 2013.
 
The Basel III agreement calls for national jurisdictions to implement the new requirements beginning January 1, 2013.  At that time, the U.S. federal banking agencies, including the Federal Reserve and OCC, will be expected to have implemented appropriate changes to incorporate the Basel III concepts into U.S. capital adequacy standards.
 
Trinity
 
General.  Trinity, as the sole shareholder of the Bank, is a bank holding company.  As a bank holding company, Trinity is registered with, and is subject to regulation by, the Federal Reserve under the Bank Holding Company Act of 1956, as amended (the “BHCA”).  In accordance with Federal Reserve policy, and as now codified by the Dodd-Frank Act, Trinity is legally obligated to act as a source of financial strength to the Bank and to commit resources to support the Bank in circumstances where Trinity might not otherwise do so.  Under the BHCA, Trinity is subject to periodic examination by the Federal Reserve.  Trinity is required to file with the Federal Reserve periodic reports of Trinity’s operations and such additional information regarding Trinity and its subsidiaries as the Federal Reserve may require.
 

Acquisitions, Activities and Change in Control.  The primary purpose of a bank holding company is to control and manage banks.  The BHCA generally requires the prior approval of the Federal Reserve for any merger involving a bank holding company or any acquisition by a bank holding company of another bank or bank holding company.  Subject to certain conditions (including deposit concentration limits established by the BHCA and the Dodd-Frank Act), the Federal Reserve may allow a bank holding company to acquire banks located in any state of the United States.  In approving interstate acquisitions, the Federal Reserve is required to give effect to applicable state law limitations on the aggregate amount of deposits that may be held by the acquiring bank holding company and its insured depository institution affiliates in the state in which the target bank is located (provided that those limits do not discriminate against out-of-state depository institutions or their holding companies) and state laws that require that the target bank have been in existence for a minimum period of time (not to exceed five years) before being acquired by an out-of-state bank holding company.  Furthermore, in accordance with the Dodd-Frank Act, as of July 21, 2011, bank holding companies must be well-capitalized in order to effect interstate mergers or acquisitions.  For a discussion of the capital requirements, see “—The Increasing Importance of Capital” above.
 
The BHCA generally prohibits Trinity from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company that is not a bank and from engaging in any business other than that of banking, managing and controlling banks or furnishing services to banks and their subsidiaries.  This general prohibition is subject to a number of exceptions.  The principal exception allows bank holding companies to engage in, and to own shares of companies engaged in, certain businesses found by the Federal Reserve prior to November 11, 1999 to be “so closely related to banking ... as to be a proper incident thereto.”  This authority would permit Trinity to engage in a variety of banking-related businesses, including the ownership and operation of a savings association, or any entity engaged in consumer finance, equipment leasing, the operation of a computer service bureau (including software development), and mortgage banking and brokerage.  The BHCA generally does not place territorial restrictions on the domestic activities of non-bank subsidiaries of bank holding companies.
 
Additionally, bank holding companies that meet certain eligibility requirements prescribed by the BHCA and elect to operate as financial holding companies may engage in, or own shares in companies engaged in, a wider range of nonbanking activities, including securities and insurance underwriting and sales, merchant banking and any other activity that the Federal Reserve, in consultation with the Secretary of the Treasury, determines by regulation or order is financial in nature or incidental to any such financial activity or that the Federal Reserve determines by order to be complementary to any such financial activity and does not pose a substantial risk to the safety or soundness of depository institutions or the financial system generally.  Trinity has elected (and the Federal Reserve has accepted Trinity’s election) to operate as a financial holding company.
 
Federal law also prohibits any person or company from acquiring “control” of an FDIC-insured depository institution or its holding company without prior notice to the appropriate federal bank regulator.  “Control” is conclusively presumed to exist upon the acquisition of 25% or more of the outstanding voting securities of a bank or bank holding company, but may arise under certain circumstances between 10% and 24.99% ownership.
 
Capital Requirements.  Bank holding companies are required to maintain minimum levels of capital in accordance with Federal Reserve capital adequacy guidelines, as affected by the Dodd-Frank Act and Basel III.  For a discussion of capital requirements, see “—The Increasing Importance of Capital” above.
 
Emergency Economic Stabilization Act of 2008.  Events in the U.S. and global financial markets over the past several years, including deterioration of the worldwide credit markets, have created significant challenges for financial institutions throughout the country.  In response to this crisis affecting the U.S. banking system and financial markets, on October 3, 2008, the U.S. Congress passed, and the President signed into law, the Emergency Economic Stabilization Act of 2008 (the “EESA”).  The EESA authorized the Secretary of the United States Department of Treasury (“Treasury”) to implement various temporary emergency programs designed to strengthen the capital positions of financial institutions and stimulate the availability of credit within the U.S. financial system.  Financial institutions participating in certain of the programs established under the EESA are required to adopt Treasury’s standards for executive compensation and corporate governance.
 

The TARP Capital Purchase Program.  On October 14, 2008, Treasury announced a program that provided Tier 1 capital (in the form of perpetual preferred stock) to eligible financial institutions.  This program, known as the TARP Capital Purchase Program (the “CPP”), allocated $250 billion from the $700 billion authorized by the Emergency Economic Stabilization Act of 2008 (“EESA”) to Treasury for the purchase of senior preferred shares from qualifying financial institutions (the “CPP Preferred Stock”).  Eligible institutions were able to sell equity interests to Treasury in amounts equal to between 1% and 3% of the institution’s risk-weighted assets.  Trinity determined participation in CPP to be in its best interests based upon the economic uncertainties of the deep recession, the benefits of holding additional capital and the relatively low cost of participation.
 
As part of this program, on March 27, 2009, the Company participated in this program by issuing 35,500 shares of the Company’s Series A Preferred Stock to Treasury for a purchase price of $35.5 million in cash and issued warrants which were immediately exercised by Treasury for 1,777 shares of the Company's Series B Preferred Stock.  The Series A Preferred Stock is non-voting and pays dividends at the rate of 5% per annum for the first five years and thereafter at a rate of 9% per annum.  The Series B Preferred Stock is also non-voting and pays dividends at the rate of 9% per annum from the date of the transaction.
 
Participating financial institutions were required to adopt Treasury’s standards for executive compensation and corporate governance for the period during which Treasury holds equity issued under the CPP.  These requirements are discussed in more detail in the Compensation Discussion and Analysis section in Trinity’s proxy statement, which is incorporated by reference in this Form 10-K.
 
Dividends. Trinity’s ability to pay dividends to its shareholders may be affected by both general corporate law considerations and policies of the Federal Reserve applicable to bank holding companies. New Mexico law prohibits Trinity from paying dividends if, after giving effect to the dividend: (i) Trinity would be unable to pay its debts as they become due in the usual course of its business; or (ii) Trinity’s total assets would be less than the sum of its total liabilities and (unless Trinity’s articles of incorporation otherwise permit) the maximum amount that then would be payable, in any liquidation, in respect of all outstanding shares having preferential rights in liquidation.  Additionally, policies of the Federal Reserve caution that a bank holding company should not pay cash dividends unless its net income available to common shareholders over the past year has been sufficient to fully fund the dividends and the prospective rate of earnings retention appears consistent with its capital needs, asset quality, and overall financial condition.  The Federal Reserve also possesses enforcement powers over bank holding companies and their non-bank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations.  Among these powers is the ability to proscribe the payment of dividends by banks and bank holding companies.  Given recent developments concerning the Bank described further below, the Federal Reserve has notified Trinity that it must receive prior approval to pay dividends.  Notwithstanding the availability of funds to pay dividends, the OCC may prohibit the payment of dividends by the Bank if it determines such payment would constitute an unsafe or unsound practice.  By virtue of express restrictions set forth in the Agreement, the Bank may not pay any dividend unless it complies with certain provisions of the Agreement and receives a prior written determination of no supervisory objection from the OCC.
 

Further, with respect to Trinity’s participation in the CPP, the terms of the CPP Preferred Stock provide that no dividends on any common or preferred stock that ranks equal to or junior to the CPP Preferred Stock may be paid unless and until all accrued and unpaid dividends for all past dividend periods on the CPP Preferred Stock have been fully paid.  Furthermore, with respect to Trinity’s participation in the CPP, the terms of the CPP Preferred Stock provides that no dividends on any common or preferred stock that ranks equal to or junior to the CPP Preferred Stock may be paid unless and until all accrued and unpaid dividends for all past dividend periods on the CPP Preferred Stock have been fully paid.  Additionally, Trinity is prohibited from paying a semi-annual dividend in excess of the amount paid in the last dividend paid prior to participating in CPP during the first three years.  This means that Trinity may not pay in excess of $0.40/share as a semi-annual dividend on its common stock without the prior permission from Treasury until March 27, 2012.  From March 28, 2012 to March 27, 2019, if Trinity has not yet redeemed Preferred Shares held by Treasury, Trinity may increase its dividends on its common stock by no more than 3% per year.  Thereafter, Trinity may not pay any dividends on its common stock until it redeems all Preferred Shares held by Treasury.  Trinity anticipates redeeming all such shares prior to March 27, 2019.  Finally, the ability of Trinity to pay dividends to its common shareholders is largely dependent upon receiving dividends from the Bank as further discussed in “Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” in Item 5 of this Form 10-K.  In addition, during the term of its participation in the CPP, the Company may not repurchase outstanding common shares or redeem any of the trust preferred securities without the prior approval of Treasury.
 
Additionally, the Company may not pay any dividends on our common stock unless all accrued dividends on the Preferred Stock have been paid in full.  Pursuant to the written Agreement with the OCC, the Bank must obtain prior approval for payment of dividends.  Finally, because of the Agreement and the circumstances leading to its issuance by the OCC, the approval of the Federal Reserve is required prior to the holding company paying dividends on its common stock or distributions on the trust preferred securities and the Preferred Stock.
 
Incentive Compensation.  On October 22, 2009, the Federal Reserve issued a comprehensive proposal on incentive compensation policies (the “Incentive Compensation Proposal”) intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking.  The Incentive Compensation Proposal, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon the key principles that a banking organization’s incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the organization’s ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors.  Banking organizations were instructed to begin an immediate review of their incentive compensation policies to ensure that they do not encourage excessive risk-taking and implement corrective programs as needed.  Deficiencies in the incentive compensation arrangements must be immediately addressed.
 
Federal Securities Regulation.  Trinity’s common stock is registered with the SEC under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  Consequently, Trinity is subject to the information, proxy solicitation, insider trading and other restrictions and requirements of the SEC under the Exchange Act.
 
Corporate Governance.  The Dodd-Frank Act addresses many investor protection, corporate governance and executive compensation matters that will affect most U.S. publicly traded companies.  The Dodd-Frank Act will increase stockholder influence over boards of directors by requiring companies to give stockholders a non-binding vote on executive compensation and so-called “golden parachute” payments, and authorizing the SEC to promulgate rules that would allow stockholders to nominate and solicit voters for their own candidates using a company’s proxy materials.  The legislation also directs the Federal Reserve to promulgate rules prohibiting excessive compensation paid to bank holding company executives, regardless of whether Trinity is publicly traded.
 

Los Alamos National Bank
 
General. The Bank is a national banking organization created under the laws of the United States of America.  The Bank is regulated primarily by the OCC.
 
Products and Services. The Bank provides a full range of financial services for deposit customers and we lend money to creditworthy borrowers at competitive interest rates.  Our strategy has been to position ourselves in the market as a low-fee, high-value community bank.  Our products include certificates of deposits, checking and saving accounts, on-line banking, Individual Retirement Accounts, loans, mortgage loan servicing, trust and investment services, international services and safe deposit boxes.  These business activities make up our three key processes: investment of funds, generation of funds and service-for-fee income.  We achieved our success in part by minimizing charges relating to the investment and generation of funds processes, i.e. loans, credit cards, checking and savings accounts.  The profitability of our operations depends primarily on our net interest income, which is the difference between total interest earned on interest-earning assets and total interest paid on interest-bearing liabilities, and our ability to maintain efficient operations.  In addition to our net interest income, we produce income through our mortgage servicing operations and other income processes, such as trust and investment services.  A more complete description of our products and services makeup can be found under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 in this Form 10-K.
 
Lending Activities.
 
General. We provide a broad range of commercial and retail lending services to corporations, partnerships, individuals and government agencies.  We actively market our services to qualified borrowers.  Lending officers build relationships with new borrowers entering our market areas as well as long-standing members of the local business community.  We have established lending policies which include a number of underwriting factors to be considered in making a loan, including location, loan-to-value ratio, cash flow and the credit history of the borrower.  Our current maximum legal lending limit to one borrower is approximately $27.7 million; however, the Bank may impose additional limitations on the amount it is willing to lend to one borrower as part of its credit risk management policies.  Our loan portfolio is comprised primarily of loans in the areas of commercial real estate, residential real estate, construction, general commercial and consumer lending.  As of December 31, 2011, residential mortgages made up approximately 31.6% of our loan portfolio; commercial real estate loans comprised approximately 36.8%; construction lending comprised 13.3%; general commercial loans comprised 13.4%; and consumer lending comprised 4.9%.  The Bank is currently working to diversify its loan portfolio by emphasizing growth in the loan portfolio outside of the residential and commercial real estate categories.  In addition, the Bank originates residential mortgage loans for sale to third parties, primarily the Federal National Mortgage Association (“Fannie Mae”), and services most of these loans for the buyers.
 
Commercial Real Estate Loans. The largest portion of our loan portfolio is comprised of commercial real estate loans.  Our focus in commercial real estate lending concentrates on loans to building contractors and developers.  The primary repayment risk for a commercial real estate loan is the failure of the business due to economic events or governmental regulations outside of the control of the borrower or lender that negatively impact the future cash flow and market values of the affected properties.  We have collateralized these loans and, in most cases, taken personal guarantees to help assure repayment.  Our commercial real estate loans are primarily made based on the identified cash flow of the borrower and secondarily on the underlying real estate collateral.  Credit support provided by the borrower for most of these loans and the probability of repayment is based on the liquidation of the real estate and enforcement of a personal guarantee, if any exists.
 

Residential Real Estate Loans. Residential mortgage lending has been an important part of our business since our formation in 1963.  The majority of the residential mortgage loans we originate and retain are in the form of 15- and 30-year variable rate loans.  We also originate 15- to 30-year fixed rate residential mortgages and sell most of these loans to outside investors.  In 2011, we originated approximately $157.6 million in residential mortgage loans sold to third parties.  We retain the servicing of almost all of the residential mortgages we originate.  We believe the retention of mortgage servicing provides us with a relatively steady source of fee income as compared to fees generated solely from mortgage origination operations.  Moreover, the retention of such servicing rights allows us to continue to have regular contact with mortgage customers and solidify relationships with those customers.  As of December 31, 2011, the total sold residential mortgage loan portfolio we service on behalf of third parties was $973.1 million.  We do not engage in financing sub-prime loans nor do we participate in any sub-prime lending programs.  We participate in the current Treasury programs, including Home Affordable Modification Program, to work with borrowers who are in danger of or who have defaulted on residential mortgage loans.
 
Construction Loans. We have been active in financing construction of residential and commercial properties in New Mexico, primarily in Northern New Mexico.  This type of lending has continued to decrease over the past four years because of the economic downturn and the effect it has had on real estate sales.  We manage the risk of construction lending through the use of underwriting and construction loan guidelines and require the work be done by reputable contractors.  Construction loans are structured either to be converted to permanent loans at the end of the construction phase or to be paid off upon receiving financing from another financial institution.  The amount financed on construction loans is based on the appraised value of the property, as determined by an independent appraiser, and an analysis of the potential marketability and profitability of the project and the costs of construction.  Construction loans generally have terms that do not exceed 24 months.  Loan proceeds are typically disbursed on a percentage of completion basis, as determined by inspections, with all construction required to be completed prior to the final disbursement of funds.
 
Construction loans afford us the opportunity to increase the interest rate sensitivity of our loan portfolio and to receive yields higher than those obtainable on adjustable rate mortgage loans secured by existing residential properties.  These higher yields correspond to the higher risks associated with construction lending.
 
Commercial Loans. The Bank is an active commercial lender.  Our focus in commercial lending concentrates on loans to business services companies and retailers.  The Bank provides various credit products to our commercial customers, including lines of credit for working capital and operational purposes and term loans for the acquisition of equipment and other purposes.  Collateral on commercial loans typically includes accounts receivable, furniture, fixtures, inventory and equipment.  In addition, almost all commercial loans have personal guarantees to assure repayment.  The terms of most commercial loans range from one to seven years.  A significant portion of our commercial business loans reprice within one year or have floating interest rates.  Such loans include loans to finance film production (a growing industry in New Mexico), as well as more traditional industries.
 
Consumer Loans. We also provide all types of consumer loans, including motor vehicle, home improvement, student loans, credit cards, signature loans and small personal credit lines.  Consumer loans typically have shorter terms and lower balances with higher yields as compared to our other loans, but generally carry higher risks of default.  Consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be affected by adverse personal circumstances.
 
Additional information on the risks associated with our banking activities and products and concentrations can be found under “Risk Factors” in Section 1A of this Form 10-K.


Market Area.
 
General. In recent years, the economy in Northern New Mexico has seen significant increases in unemployment and has experienced slower than historical levels of activity in both real estate and retail segments of the economy.  The economic data compiled by the University of New Mexico’s FOR-UNM (Quarterly Census of Employment and Wages) indicates that the state is showing gradual improvement in the economy but has yet to post net positive quarterly employment gains. Losses in personal income limited consumer demand in the private sector and constrained public revenues that finance government jobs, limiting the ability of the public sector to stabilize the economy in times of volatility.  Residential construction also continued to decline in 2011 as did non-residential building and non-building construction following the end of ARRA-funded projects.  Residential construction is expected to begin a recovery in late-2012.  The outlook for the New Mexico economy is uninspired.  With continued cuts expected in the public sector and no single industry positioned to ignite rapid growth in the private sector, recovery will continue to be gradual and shallow.
 
Unemployment in New Mexico in December 2011 remained lower than the national average with an unemployment rate of 6.6% (seasonally adjusted) compared to a national unemployment rate of 8.5% (seasonally adjusted); with 2011 averages of 7.1% for New Mexico and 8.9% nationally.  As of December 2011, New Mexico’s unemployment rate decreased by 2.0% from the previous year; falling dramatically from its high of 9.0% in July 2010.  However, unemployment in New Mexico remains approximately 1.5% higher than the average from 2000 to 2009. New Mexico has seen lower than national levels of unemployment in recent years,  and New Mexico experienced approximately double the decrease (2.0%) from December 2010 to December 2011 in its unemployment rate as seen in the national unemployment rate (0.9%) during the same period.  Foreclosure rates in New Mexico during 2011 remained lower than the national average.  New Mexico saw a change in governor in January 2011 which resulted in some changes to the incentives provided to new businesses to move to and film industry incentives for doing business in New Mexico.   Tourism, one of the primary industries within the state, has begun to recover, with room rates and occupancies up leading to increases in lodgers’ taxes and gross receipts taxes on accommodations and food services.  Additionally, manufacturing is making a comeback and high tech businesses, solar and wind energy are making strides in New Mexico.
 
Los Alamos. The Bank’s customers are concentrated in Northern and Central New Mexico, particularly in Santa Fe and Los Alamos Counties.  The city of Los Alamos, the base of our operations, lies within Los Alamos County.  Los Alamos County has approximately 18,000 residents.  As of December 31, 2011, the Bank had approximately $57.0 million in commercial loans, $173.3 million in commercial real estate loans, $201.6 in residential loans, $36.4 million in construction loans, $26.6 million in consumer and other loans and $761.5 million in deposits in Los Alamos County. The stability of the Los Alamos market has provided a solid base for the Company throughout its history.  As virtually all communities suffered from the economic downturn in recent years, the effect in Los Alamos County has been minimized by federal government spending, primarily in the form of providing approximately $2.2 billion toward funding Laboratory projects and operations; however, there is no guarantee that such funding will continue at current rates. The Fiscal Year 2012 funding for the Laboratory from the federal government was reduced by more than $300 million, leading to certain measures including a voluntary workforce reduction program currently seeking 400-800 persons to voluntarily separate from Laboratory employment.  A similar measure conducted in 2008 sought to decrease the Laboratory’s workforce by 500-750 employees.  The effort had little effect on the business of the Bank.  Los Alamos County has the lowest unemployment rate in the state at a 2011 average rate of 3.1%, and consistently has the state’s highest personal per capita and median family income levels.
 

Los Alamos County experienced minimal growth in its population of 0.2% from 1990 to 2000 and an estimated decrease of 2.1% from 2000 to 2010, due to the aging population and the lack of significant parcels of land for development.  The primary employer in Los Alamos County is the Laboratory, one of the world’s premier national security and scientific research and development institutions.  The Laboratory is operated by Los Alamos National Security, LLC for the Department of Energy.  The Laboratory employs approximately 11,782 employees.  Most of the employees are scientists, engineers and technicians working in the areas of national security, bio-sciences, chemistry, computer science, earth and environmental sciences, materials science and physics, contributing to Los Alamos County’s exceptional percentages of the population with high school diplomas or equivalents (99.3%) and those with bachelor or higher degrees (64.0%) compared with national averages of 85.0% and 27.9% respectively (based upon census data from 2006-2010).  The concentration of highly skilled and highly educated residents provides the Bank with a sophisticated customer base and supports a median household income approximately 197% of the national average and an unemployment rate (3.1%) almost one-third the national average (8.9%) and less than one-half of the state average (7.1%).  Median home values (based upon census data from 2006-2010) in Los Alamos County are well above average, $297,100 compared to $188,400 nationally, as is homeownership, at 77.2% compared to a national average of 66.6%.  
 
Santa Fe. In 1999, the Bank opened its first full-service office in Santa Fe, New Mexico and opened a second full-service office in Downtown Santa Fe in August of 2004.  The Bank opened a third full-service office in south Santa Fe in October of 2009.  The Bank’s continued expansion into Santa Fe has permitted the convenient provision of products and services to our existing customer base in Santa Fe as well as attracting new customers.  As of December 31, 2011, the Bank had approximately $72.1 million in commercial loans, $173.3 million in commercial real estate loans, $155.5 in residential loans, $74.3 million in construction loans, $12.7 in consumer and other loans and $490.4 million in deposits in the greater Santa Fe area.  As of June 30, 2011, the Bank was the largest depository in Santa Fe according to the FDIC’s SOD Report for the fifth year in a row.  The Santa Fe market has provided a solid base for the Company over the past several years.  Santa Fe County is home to the state capital and the state government.  The state and federal government are the area’s largest employers but Santa Fe is also heavily reliant upon tourism.
 
Santa Fe serves as the capital of New Mexico and is located approximately 35 miles southeast of Los Alamos.  Santa Fe County has approximately 144,000 residents with its local economy based primarily on government and tourism.  We expanded to the Santa Fe market, in part, to take advantage of the population growth, which has been higher than the state and national averages.  Santa Fe County is one of the fastest growing counties in the state, with an estimated increase in population of 45.5% from 1990 to 2008 compared to 31.0% for the state and 22.3% for the country as a whole.  From 2000 to 2010, Santa Fe County’s growth slowed to 11.5% compared to the growth of the population for the State at 13.2%, but is still higher than the national growth rate of 9.7%.  Santa Fe County also has higher than average percentages of its population with high school diplomas or equivalents (86.3%) and those with bachelor or higher degrees (40.0%) (based upon 2010 Census data).  The median household income in Santa Fe County is slightly higher (1.5%) than the national average and significantly higher than the state average (20.3%).  The Santa Fe Metropolitan Statistical Area (“MSA”) had the lowest unemployment rate for the four largest MSAs in the state with an average of 5.9% for 2011, with all of the others in excess of 7%.  Median home values in Santa Fe County (based upon 2010 data) are 54.8% above the national average, at $291,700 compared to $188,400 nationally, and homeownership is higher at 71.2% compared to a national average of 66.6%.
 
Albuquerque. The Bank opened a Loan Production Office in the Uptown area of Albuquerque, New Mexico in 2005.  The Bank received approval from the OCC on December 31, 2007 to provide full-services at this location.  In November 2011, the Bank opened a second Albuquerque office offering both loan and deposit services.  As of December 31, 2011, the Bank had approximately $34.0 million in commercial loans, $102.4 million in commercial real estate loans, $28.3 in residential loans, $51.1 million in construction loans, $20.0 million in consumer and other loans and $75.2 million in deposits in the greater Albuquerque area.  Albuquerque is a city of approximately 546,000 residents and is located approximately 60 miles south of Los Alamos.  The Albuquerque economy is more varied than either Los Alamos or Santa Fe, with no predominant industry or employer.
 

Albuquerque had an estimated increase in population of 21.7% from 2000 to 2010 compared to 13.2% for the state and 9.7% for the country as a whole.  Albuquerque and its surrounding areas are some of the fastest growing in the state: the City of Rio Rancho, on the northern limits of Albuquerque grew 69.1% from 2000 to 2010; Sandoval County to the north of Albuquerque, which includes the City of Rio Rancho, grew 46.3% from 2000 to 2010; and Bernalillo County, which includes Albuquerque, grew 19.0% from 2000 to 2010.  Albuquerque has higher than national and state averages in the percentage of its population with high school diplomas or equivalents (87.1%) and those with bachelor or higher degrees (32.2%).  The median household income in Albuquerque is 10.1% lower than the national average and the unemployment rate was an average of 7.5% in 2011, 1.4% lower than the national average (8.9%).  Albuquerque’s unemployment rate (seasonally adjusted) decreased from a high of 9.0% lasting from November 2010 to  February 2011, down to 7.0% in December 2011.  Median home values in Albuquerque (based upon 2010 data) are virtually identical to the national average, at $188,600 compared to $188,400 nationally, but homeownership is slightly lower at 61.5% compared to a national average of 66.6%.
 
Competition. We face strong competition both in originating loans and in attracting deposits.  Competition in originating real estate loans comes primarily from other commercial banks, savings institutions and mortgage bankers making loans secured by real estate located in our market area.  Commercial banks and finance companies, including finance company affiliates of automobile manufacturers, provide vigorous competition in consumer lending.  We compete for real estate and other loans principally on the basis of the interest rates and loan fees we charge, the types of loans we originate and the quality and speed of services we provide to borrowers.  Insurance companies and internet-based financial institutions present growing areas of competition both for loans and deposits.
 
There is substantial competition in attracting deposits from other commercial banks, savings institutions, money market and mutual funds, credit unions and other investment vehicles.  Our ability to attract and retain deposits depends on our ability to provide investment opportunities that satisfy the requirements of investors as to rate of return, liquidity, risk and other factors.  The financial services industry has become more competitive as technological advances enable companies to provide financial services to customers outside their traditional geographic markets and provide alternative methods for financial transactions.  These technological advances may diminish the importance of depository institutions and other financial intermediaries in the transfer of funds between parties. 
 
Employees. As of December 31, 2011, the Bank had approximately 319 full time-equivalent employees.  We are not a party to any collective bargaining agreements.  Employee relations are excellent as evidenced by the results of our annual employee satisfaction surveys.  Over the last ten years, the results of the employee satisfaction survey have consistently shown satisfaction levels exceeding our peers according to the independent consultant hired to administer and evaluate our surveys.
 
Regulation and Supervision
 
General.  The Bank is a national bank, chartered by the OCC under the National Bank Act.  The deposit accounts of the Bank are insured by the FDIC’s Deposit Insurance Fund (the “DIF”) to the maximum extent provided under federal law and FDIC regulations, and the Bank is a member of the Federal Reserve System.  As a national bank, the Bank is subject to the examination, supervision, reporting and enforcement requirements of the OCC, the chartering authority for national banks.  The FDIC, as administrator of the DIF, also has regulatory authority over the Bank.  The Bank is also a member of the Federal Home Loan Bank System, which provides a central credit facility primarily for member institutions.
 

Regulatory Proceedings Against the Bank.  On January 26, 2010, the Bank and the OCC entered into a formal written agreement (the “Agreement”).  In the Agreement, the Bank was cited for an excessive level of classified assets and concentrations of credit.  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; (iv) maintain higher minimum capital ratios; and (v) obtain prior OCC approval before paying dividends.
 
Because of the requirement to meet and maintain specific capital levels, the Bank cannot be deemed to be “well capitalized” so long as the Agreement is in effect.  If the OCC is not satisfied with the corrective actions that are taken in order to address the deficiencies, the OCC could take further enforcement actions, including requiring the sale or liquidation of the Bank.  In such case, there can be no assurance that the proceeds of any such sale or liquidation would result in a full return of capital to investors.
 
In addition, because the Bank is deemed to be in “troubled condition” by virtue of the Agreement, it also is required to: (i) obtain prior approval for the appointment of new directors and the hiring or promotion of senior executive officers; (ii) comply with restrictions on severance payments and indemnification payments to institution-affiliated parties; and (iii) refrain from accepting or renewing brokered deposits.
 
Deposit Insurance.  As an FDIC-insured institution, the Bank is required to pay deposit insurance premium assessments to the FDIC.  The FDIC has adopted a risk-based assessment system whereby FDIC-insured depository institutions pay insurance premiums at rates based on their risk classification.  An institution’s risk classification is assigned based on its capital levels and the level of supervisory concern the institution poses to the regulators.
 
On November 12, 2009, the FDIC adopted a final rule that required insured depository institutions to prepay on December 30, 2009, their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011, and 2012.  As such, on December 31, 2009, the Bank prepaid the its assessments based on its actual September 30, 2009 assessment base, adjusted quarterly by an estimated 5% annual growth rate through the end of 2012.  The FDIC also used the institution’s total base assessment rate in effect on September 30, 2009, increasing it by an annualized 3 basis points beginning in 2011.  The FDIC began to offset prepaid assessments on March 30, 2010, representing payment of the regular quarterly risk-based deposit insurance assessment for the fourth quarter of 2009.  Any prepaid assessment not exhausted after collection of the amount due on June 30, 2013, will be returned to the institution.
 
Amendments to the Federal Deposit Insurance Act also revise the assessment base against which an insured depository institution’s deposit insurance premiums paid to the DIF will be calculated.  Under the amendments, the assessment base will no longer be the institution’s deposit base, but rather its average consolidated total assets less its average tangible equity.  This may shift the burden of deposit insurance premiums toward those large depository institutions that rely on funding sources other than U.S. deposits.  Additionally, the Dodd-Frank Act makes changes to the minimum designated reserve ratio of the DIF, increasing the minimum from 1.15% to 1.35% of the estimated amount of total insured deposits, and eliminating the requirement that the FDIC pay dividends to depository institutions when the reserve ratio exceeds certain thresholds.  The FDIC is given until September 3, 2020 to meet the 1.35 reserve ratio target.  Several of these provisions could increase the Bank’s FDIC deposit insurance premiums. 
 
The Dodd-Frank Act permanently increases the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per insured depositor, retroactive to January 1, 2009.  Furthermore, the legislation provides that non-interest bearing transaction accounts have unlimited deposit insurance coverage through December 31, 2012.  This temporary unlimited deposit insurance coverage replaces the Transaction Account Guarantee Program (“TAGP”) that expired on December 31, 2010.  It covers all depository institution noninterest-bearing transaction accounts, but not low interest-bearing accounts.  Unlike TAGP, there is no special assessment associated with the temporary unlimited insurance coverage, nor may institutions opt-out of the unlimited coverage.
 

FICO Assessments.  The Financing Corporation (“FICO”) is a mixed-ownership governmental corporation chartered by the former Federal Home Loan Bank Board pursuant to the Competitive Equality Banking Act of 1987 to function as a financing vehicle for the recapitalization of the former Federal Savings and Loan Insurance Corporation.  FICO issued 30-year noncallable bonds of approximately $8.1 billion that mature in 2017 through 2019.  FICO’s authority to issue bonds ended on December 12, 1991.  Since 1996, federal legislation has required that all FDIC-insured depository institutions pay assessments to cover interest payments on FICO’s outstanding obligations.  These FICO assessments are in addition to amounts assessed by the FDIC for deposit insurance.  During the year ended December 31, 2011, the FICO assessment rate was approximately 0.01% of deposits.  A rate reduction to 0.00680% began with the fourth quarter of 2011 to reflect the change from an assessment base computed on deposits to an assessment base computed on assets as required by the Dodd-Frank Act.
 
Supervisory Assessments.  National banks are required to pay supervisory assessments to the OCC to fund the operations of the OCC.  The amount of the assessment is calculated using a formula that takes into account the bank’s size and its supervisory condition. During the years ended December 31, 2011 and 2010, the Bank paid supervisory assessments to the OCC totaling $479 thousand and $490 thousand, respectively.
 
Capital Requirements.  Banks are generally required to maintain capital levels in excess of other businesses.  For a discussion of capital requirements, see “—The Increasing Importance of Capital” above.
 
Dividend Payments.  The primary source of funds for Trinity is dividends from the Bank.  Under the National Bank Act, a national bank may pay dividends out of its undivided profits in such amounts and at such times as the bank’s board of directors deems prudent.  Without prior OCC approval, however, a national bank may not pay dividends in any calendar year that, in the aggregate, exceed that bank’s year-to-date net income plus retained net income for the two preceding years.
 
The payment of dividends by any financial institution is affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations, and a financial institution generally is prohibited from paying any dividends if, following payment thereof, the institution would be undercapitalized.  As described above, the Bank exceeded its minimum capital requirements under applicable guidelines as of December 31, 2011.  As of December 31, 2011, approximately $51.6 million was available to be paid as dividends by the Bank.  Notwithstanding the availability of funds for dividends, however, the OCC may prohibit the payment of dividends by the Bank if it determines such payment would constitute an unsafe or unsound practice.  Additionally, by virtue of express restrictions set forth in the Agreement, the Bank may not pay any dividend unless it complies with certain provisions of the Agreement and receives a prior written determination of no supervisory objection from the OCC.
 
Insider Transactions.  The Bank is subject to certain restrictions imposed by federal law on “covered transactions” between the Bank and its “affiliates.”  Trinity is an affiliate of the Bank for purposes of these restrictions, and covered transactions subject to the restrictions include extensions of credit to Trinity, investments in the stock or other securities of Trinity and the acceptance of the stock or other securities of Trinity as collateral for loans made by the Bank.  The Dodd-Frank Act enhances the requirements for certain transactions with affiliates as of July 21, 2011, including an expansion of the definition of “covered transactions” and an increase in the amount of time for which collateral requirements regarding covered transactions must be maintained.
 
Certain limitations and reporting requirements are also placed on extensions of credit by the Bank to its directors and officers, to directors and officers of Trinity and its subsidiaries, to principal shareholders of Trinity and to “related interests” of such directors, officers and principal shareholders.  In addition, federal law and regulations may affect the terms upon which any person who is a director or officer of Trinity or the Bank or a principal shareholder of Trinity may obtain credit from banks with which the Bank maintains a correspondent relationship.
 

Safety and Soundness Standards.  The federal banking agencies have adopted guidelines that establish operational and managerial standards to promote the safety and soundness of federally insured depository institutions.  The guidelines set forth standards for internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, asset quality and earnings.
 
In general, the safety and soundness guidelines prescribe the goals to be achieved in each area, and each institution is responsible for establishing its own procedures to achieve those goals.  If an institution fails to comply with any of the standards set forth in the guidelines, the institution’s primary federal regulator may require the institution to submit a plan for achieving and maintaining compliance.  If an institution fails to submit an acceptable compliance plan, or fails in any material respect to implement a compliance plan that has been accepted by its primary federal regulator, the regulator is required to issue an order directing the institution to cure the deficiency.  Until the deficiency cited in the regulator’s order is cured, the regulator may restrict the institution’s rate of growth, require the institution to increase its capital, restrict the rates the institution pays on deposits or require the institution to take any action the regulator deems appropriate under the circumstances.  Noncompliance with the standards established by the safety and soundness guidelines may also constitute grounds for other enforcement action by the federal banking regulators, including cease and desist orders and civil money penalty assessments.
 
Branching Authority.  National banks headquartered in New Mexico, such as the Bank, have the same branching rights in New Mexico as banks chartered under New Mexico law, subject to OCC approval.  New Mexico law grants New Mexico-chartered banks the authority to establish branches anywhere in the State of New Mexico, subject to receipt of all required regulatory approvals.
 
Federal law permits state and national banks to merge with banks in other states subject to: (i) regulatory approval; (ii) federal and state deposit concentration limits; and (iii) state law limitations requiring the merging bank to have been in existence for a minimum period of time (not to exceed five years) prior to the merger.  The establishment of new interstate branches or the acquisition of individual branches of a bank in another state (rather than the acquisition of an out-of-state bank in its entirety) has historically been permitted only in those states the laws of which expressly authorize such expansion.  However, the Dodd-Frank Act permits well-capitalized banks to establish branches across state lines without these impediments.
 
Financial Subsidiaries.  Under federal law and OCC regulations, national banks are authorized to engage, through “financial subsidiaries,” in any activity that is permissible for a financial holding company and any activity that the Secretary of the Treasury, in consultation with the Federal Reserve, determines is financial in nature or incidental to any such financial activity, except (i) insurance underwriting, (ii) real estate development or real estate investment activities (unless otherwise permitted by law), (iii) insurance company portfolio investments and (iv) merchant banking.  The authority of a national bank to invest in a financial subsidiary is subject to a number of conditions, including, among other things, requirements that the bank must be well-managed and well-capitalized (after deducting from capital the bank’s outstanding investments in financial subsidiaries).  The Bank has not applied for approval to establish any financial subsidiaries.
 
Transaction Account Reserves.  Federal Reserve regulations require depository institutions to maintain reserves against their transaction accounts (primarily NOW and regular checking accounts.  For 2012 these requirements provide: the first $11.5 million of otherwise reservable balances are exempt from the reserve requirements; for transaction accounts aggregating more than $11.5 million to $71.0 million, the reserve requirement is 3% of total transaction accounts; and for net transaction accounts in excess of $71.0 million, a 10% reserve ratio will be assessed.  These reserve requirements are subject to annual adjustment by the Federal Reserve.  The Bank is in compliance with the foregoing requirements.
 

Consumer Financial Services.  There are numerous developments in federal and state laws regarding consumer financial products and services that impact the Bank’s business.  Importantly, the current structure of federal consumer protection regulation applicable to all providers of consumer financial products and services changed significantly on July 21, 2011, when the new Consumer Financial Protection Bureau (the “Bureau”) commenced operations to supervise and enforce consumer protection laws.  The Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all providers of consumer products and services, including the Bank, as well as the authority to prohibit “unfair, deceptive or abusive” acts and practices.  The Bureau has examination and enforcement authority over providers with more than $10 billion in assets.  Banks and savings institutions with $10 billion or less in assets, like the Bank, will continue to be examined by their applicable bank regulators.  The Dodd-Frank Act also generally weakens the federal preemption available for national banks and federal savings associations, and gives state attorneys general the ability to enforce applicable federal consumer protection laws.  It is unclear what changes will be promulgated by the Bureau and what effect, if any, such changes would have on the Bank.
 
The Dodd-Frank Act contains additional provisions that affect consumer mortgage lending.  First, the new law significantly expands underwriting requirements applicable to loans secured by 1-4 residential real property and augments federal law combating predatory lending practices.  In addition to numerous new disclosure requirements, the Dodd-Frank Act imposes new standards for mortgage loan originations on all lenders, including banks and savings associations, in an effort to strongly encourage lenders to verify a borrower’s ability to repay.  Most significantly, the new standards limit the total points and fees that the Bank and/or a broker may charge on conforming and jumbo loans to 3% of the total loan amount.  Also, the Dodd-Frank Act, in conjunction with the Federal Reserve’s final rule on loan originator compensation effective April 1, 2011, prohibits certain compensation payments to loan originators and prohibits steering consumers to loans not in their interest because it will result in greater compensation for a loan originator.  These standards may result in a myriad of new systems, pricing and compensation controls in order to ensure compliance and to decrease repurchase requests and foreclosure defenses.  In addition, the Dodd-Frank Act generally requires lenders or securitizers to retain an economic interest in the credit risk relating to loans the lender sells and other asset-backed securities that the securitizer issues if the loans have not complied with the ability to repay standards.  The risk retention requirement generally will be 5%, but could be increased or decreased by regulation.
 
Foreclosure and Loan Modifications.  Federal and state laws further impact foreclosures and loan modifications, many of which laws have the effect of delaying or impeding the foreclosure process on real estate secured loans in default.  Mortgages on commercial property can be modified, such as by reducing the principal amount of the loan or the interest rate or by extending the term of the loan, through plans confirmed under Chapter 11 of the Bankruptcy Code.  In recent years legislation has been introduced in Congress that would amend the Bankruptcy Code to permit the modification of mortgages secured by residences, although at this time the enactment of such legislation is not  imminent.  The scope, duration and terms of potential future legislation with similar effect continue to be discussed.
 
Title Guaranty & Insurance Company
 
General. Title Guaranty is a title insurance company organized under the laws of New Mexico and doing business in Los Alamos and Santa Fe Counties.  Trinity acquired Title Guaranty in May of 2000 to provide services related to the lending activities of the Bank.  Title Guaranty has provided services to the Los Alamos community since its founding in 1963 and handled approximately 67% of the mortgages recorded in Los Alamos County in 2011 and 71% in 2010.  Title Guaranty has one competitor in Los Alamos County, which handled approximately 33% of the mortgages recorded in Los Alamos County in 2011.  Title Guaranty opened a second office in the Bank’s Downtown Santa Fe facility in February 2005, and currently leases a title plant for Santa Fe County to provide title services and products.  Title Guaranty faces strong competition in Santa Fe County from nine other title companies.  In 2011, Title Guaranty handled approximately 10% of the mortgages recorded in Santa Fe County and 14% in 2010.  Title Guaranty is regulated by the New Mexico Public Regulation Commission’s Department of Insurance with which Title Guaranty is required to file annual experience reports and who audits Title Guaranty annually.  The annual experience report requires that Title Guaranty be audited annually by a certified public accountant.
 
 
Products and Services. The products and services offered by Title Guaranty include: title insurance; closings, including purchase/sale, commercial, construction, refinance, tax deferred exchange, relocation, and courtesy; escrow and notary services; title searches; and title reports.  Title insurance covers lenders, investors, and property owners from potential losses that can arise in real estate ownership and is typically required for loans collateralized by real property.  To streamline its processes, Title Guaranty employs current technology allowing customers to view the status of their file online.  Title Guaranty’s national underwriters are Chicago Title Insurance Company, Commonwealth Land Title Insurance Company, Fidelity National Title Insurance Company and Lawyers Title Insurance Corporation.
 
Employees. As of December 31, 2011, Title Guaranty had 12 full time-equivalent employees.  Title Guaranty is not a party to any collective bargaining agreements.  Employee relations are excellent as evidenced by the results of our annual employee satisfaction surveys.
 
Cottonwood Technology Group, LLC
 
In August 2008, the Bank obtained a 26% interest in Cottonwood.  This entity is owned by the Bank, the Los Alamos Commerce & Development Corporation and an individual not otherwise associated with the Company.  Cottonwood is focused on assisting new technologies, primarily those developed at New Mexico’s research and educational institutions, reach the market by providing management advice and capital consulting.  Cottonwood is also engaged in the management and solicitation of funds for a venture capital fund, Cottonwood Technology Fund, in which the Bank is an investor.  The Bank currently holds a 24% interest following the Bank’s assignment 2% of its interests to the other members of Cottonwood on July 13, 2009.  The Bank has fully funded its $150 thousand capital investment in Cottonwood.
 
FNM Investment Fund IV, LLC and FNM CDE IV, LLC
 
In 2009, the Bank created FNM Investment Fund IV to acquire a 99.99% interest in FNM CDE IV.  Both entities were created to facilitate loans to, and to participate in, investments in a New Market Tax Credit project in downtown Albuquerque, New Mexico.  The other member of FNM CDE IV is the New Mexico Finance Authority, a state instrumentality, which serves as manager.
 
Southwest Medical Technologies, LLC
 
In September of 2010, the Bank invested in 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 capital investment will be $250 thousand of which approximately $186 thousand had been paid, as of December 31, 2011.
 
Trinity Capital Trust I, III, IV and V
 
Trinity Capital Trust I, Trinity Capital Trust III, Trinity Capital Trust IV, and Trinity Capital Trust V (the “Trusts”) are Delaware statutory business trusts formed in 2000, 2004, 2005, and 2006, for the purpose of issuing $10 million, $6 million, $10 million, and $10 million in trust preferred securities and lending the proceeds to Trinity.  Trinity redeemed all amounts due under Trinity Capital Trust II in December 2006 and dissolved the entity.  Trinity guarantees, on a limited basis, payments of distributions on the trust preferred securities and payments on redemption of the trust preferred securities.  All trust preferred securities are currently included in the Tier 1 Capital of Trinity for regulatory capital purposes.
 

 
In addition to the other information in this Annual Report on Form 10-K, shareholders or prospective investors should carefully consider the following risk factors:
 
Difficult economic and market conditions have adversely affected our industry. Dramatic declines in the housing market in recent years, with decreasing home prices and increasing delinquencies and foreclosures, have negatively impacted the credit performance of mortgage and construction real estate loans and resulted in significant write-downs of assets by many financial institutions across the United States.  General economic conditions, reduced availability of commercial credit and historically elevated unemployment have negatively impacted the credit performance of commercial and consumer credit, resulting in write-downs.  Concerns over the stability of the financial markets and the economy have resulted in decreased lending by many financial institutions to their customers and to each other.  These conditions have generally led to increased commercial and consumer deficiencies, inconsistent customer confidence, increased market volatility and reductions in certain business activities.  The resulting economic pressure on consumers and businesses has adversely affected our industry and may adversely affect our business, results of operations and financial condition.  Although we believe that these difficult economic conditions in the financial markets have recently improved, worsening of these conditions would likely exacerbate the adverse effects of these market conditions on us and others in the financial institutions industry.  In particular, we may face the following risks in connection with these events:
 
·  
We may face further increased regulation of our industry especially as a result of increased rule making called for by the Dodd-Frank Act and compliance with such regulation may increase our costs and limit our ability to pursue business opportunities.
·  
Customer demand for loans secured by real estate could be reduced due to weaker economic conditions, an increase in unemployment, a decrease in real estate values or an increase in interest rates.
·  
The process we use to estimate losses inherent in our credit exposure requires difficult, subjective and complex judgments, including forecasts of economic conditions and how these economic conditions might impair the ability of our borrowers to repay their loans. The level of uncertainty concerning economic conditions may adversely affect the accuracy of our estimates which may, in turn, impact the reliability of the process.
·  
The value of the portfolio of investment securities that we hold may be adversely affected.
·  
Our ability to assess the creditworthiness of our customers may be impaired if the models and approaches we use to select, manage and underwrite the loans become less predictive of future behaviors.
·  
Our ability to borrow from other financial institutions or to engage in sales of mortgage loans to third parties on favorable terms, or at all, could be adversely affected by disruptions in the capital markets or other events, including deteriorating investor expectations.
·  
We expect to face increased capital requirements, both at the Trinity level and at the Bank level.  In this regard, the Collins Amendment to the Dodd-Frank Act requires the federal banking agencies to establish minimum leverage and risk-based capital requirements that will apply to both insured banks and their holding companies.  Furthermore, the Group of Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking Supervision, announced an agreement to a strengthened set of capital requirements for internationally active banking organizations, known as Basel III.  We expect U.S. banking authorities to follow the lead of Basel III and require all U.S. banking organizations to maintain significantly higher levels of capital, which may limit our ability to pursue business opportunities and adversely affect our results of operations and growth prospects.
·  
We may be required to pay significantly higher FDIC premiums because market developments have significantly depleted the Deposit Insurance Fund, or DIF, and reduced the ratio of reserves to insured deposits.  Furthermore, the Dodd-Frank Act requires the FDIC to increase the DIF’s reserves against future losses, which will necessitate increased assessments on depository institutions.  Although the precise impact on us will not be clear until implementing rules are issued, any future increases in assessments applicable to us will decrease our earnings and could have a material adverse effect on the value of, or market for, our common stock.
 

If current levels of market disruption and volatility continue or worsen, there can be no assurance that we will not experience an adverse effect, which may be material, on our ability to access capital and on our business, financial condition and results of operations.
 
Our profitability is dependent upon the health of the markets in which we operate.  We operate our banking offices in Los Alamos, White Rock, Santa Fe and Albuquerque, New Mexico.  In recent years, the United States has suffered from historically difficult economic conditions.  As discussed in the section above entitled “Los Alamos National Bank – Market Area, ” the effects of these conditions have not been as bad in our markets as other parts of the country, however, our markets have still experienced significant difficulties due to the downturn in the national economy.  If the overall economic climate in the United States, generally, and our market areas, specifically, fails to improve, this could result in a decrease in demand for our products and services, an increase in loan delinquencies and defaults and high or increased levels of problem assets and foreclosures.  Moreover, because of our geographic concentration, we are less able than other regional or national financial institutions to diversify our credit risks across multiple markets.
 
As the largest employer in Northern New Mexico, the health of the Laboratory is central to the economic health of both Northern and Central New Mexico.  The main indicator of the Laboratory’s health is its funding.  The Laboratory’s 2012 fiscal budget saw a decrease of approximately $300 million from the federal government and future budgets are forecasted to be flat.  As a result, the Laboratory announced on February 21, 2012, plan for workforce reduction of approximately 400-800 employees through a voluntary separation program.  A similar program was conducted at the end of 2007, resulting in an overall reduction of 570 employees through voluntary separation program and natural attrition, with minimal effect on the Bank.  However, any material decrease in the Laboratory’s funding may affect our customers’ business and financial interests, adversely affect economic conditions in our market area, affect the ability of our customers to repay their loans to us and generally affect our financial condition and results of operations.
 
Interest rates and other conditions impact our results of operations. Our profitability is in part a function of net interest margin.  Like most banking institutions, our net interest margin will be affected by general economic conditions and other factors, including fiscal and monetary policies of the federal government, that influence market interest rates and our ability to respond to changes in such rates.  At any given time, our assets and liabilities will be such that they are affected differently by a given change in interest rates.  As a result, an increase or decrease in rates, the length of loan terms or the mix of adjustable and fixed rate loans in our portfolio could have a positive or negative effect on our net income, capital and liquidity.  We measure interest rate risk under various rate scenarios and using specific criteria and assumptions.  A summary of this process, along with the results of our net interest income simulations is presented at “Quantitative and Qualitative Disclosures About Market Risk” included under Item 7A of Part II of this report.  Although we believe our current level of interest rate sensitivity is reasonable and effectively managed, significant fluctuations in interest rates may have an adverse effect on our business, financial condition and results of operations.
 
Changes in future rules applicable to CPP participants could adversely affect our business, results of operations and financial condition.  On March 27, 2009, we issued $35.5 million of our Fixed Rate Cumulative Perpetual Preferred Stock, Series A, to the U.S. Treasury pursuant to the Capital Purchase Program (“CPP”), along with warrants to purchase 1,777 shares of our Fixed Rate Cumulative Perpetual Preferred Stock, Series B (“CPP Preferred Stock”), which the Treasury immediately exercised.  The rules and policies applicable to recipients of capital under the CPP have evolved since we first elected to participate in the program and their scope, timing and effect may continue to evolve in the future.  Any redemption of the securities sold to the U.S. Treasury to avoid these restrictions would require prior OCC, Federal Reserve and U.S. Treasury approval.  Based on Federal Reserve guidelines, institutions seeking to redeem CPP Preferred Stock must demonstrate an ability to access the long-term debt markets, successfully demonstrate access to public equity markets and meet a number of additional requirements and considerations before such institutions can redeem any securities sold to the U.S. Treasury.
 

Our ability to attract and retain management and key personnel may affect future growth and earnings, and legislation imposing compensation restrictions could adversely affect our ability to do so.  Much of our success and growth has been influenced strongly by our ability to attract and retain management experienced in banking and financial services and familiar with the communities in our market areas.  Our ability to retain executive officers, the current management teams, branch managers and loan officers of our bank subsidiary will continue to be important to the successful implementation of our strategy.  It is also critical, as we grow, to be able to attract and retain qualified additional management and loan officers with the appropriate level of experience and knowledge about our market areas to implement our community-based operating strategy.  The unexpected loss of services of any key management personnel, or the inability to recruit and retain qualified personnel in the future, could have an adverse effect on our business, results of operations and financial condition.
 
Further, we are subject to extensive restrictions on our ability to pay retention awards, bonuses and other incentive compensation during the period in which we have any outstanding securities held by the U.S. Treasury that were issued under the CPP.  Many of the restrictions are not limited to our senior executives and cover other employees whose contributions to revenue and performance can be significant.  The limitations may adversely affect our ability to recruit and retain key employees in addition to our senior executive officers, especially if we are competing for talent against institutions that are not subject to the same restrictions.  The Dodd-Frank Act also directed the Federal Reserve to promulgate rules prohibiting excessive compensation paid to bank holding company executives.  These rules, if adopted, may level the playing field within the industry but may also make it more difficult to attract and retain the people we need to operate our businesses and limit our ability to promote our objectives through our compensation and incentive programs.
 
We must effectively manage our credit risk, including risks specific to real estate value due to the large concentration of real estate loans in our loan portfolio. There are risks inherent in making any loan, including risks of nonpayment, risks resulting from uncertainties as to the future value of collateral and risks resulting from changes in economic and industry conditions.  We attempt to minimize our credit risk through prudent loan underwriting procedures, careful monitoring of the concentration of our loans within specific industries, monitoring of our collateral values and market conditions, stress testing and periodic independent reviews of outstanding loans by our audit department, a third-party loan review as well as external auditors.  However, we cannot assure such approval and monitoring procedures will eliminate these credit risks.  If the overall economic climate in the United States, generally, and our market areas, specifically, do not continue to improve, our borrowers may experience difficulties in repaying their loans, and the level of nonperforming loans, charge-offs and delinquencies could rise and require increases in the provision for loan losses, which would cause our net income and return on equity to decrease.
 
Further, the Bank’s loan portfolio is invested in commercial real estate, residential real estate, construction, general commercial and consumer lending.  The maximum amount we can loan to any one customer and their related entities (our “legal lending limit”) is smaller than the limits of our national and regional competitors with larger lending limits.  While there is little demand for loans over our legal lending limit ($27.7 million), we can and have engaged in participation loans with other financial institutions to respond to customer requirements.  However, there are some loans and relationships that we cannot effectively compete for due to our size.
 
Real estate lending (including commercial, construction and residential) is a large portion of our loan portfolio.  These categories constitute $996.2 million, or approximately 81.8% of our total loan portfolio as of December 31, 2011.  The market value of real estate can fluctuate significantly in a short period of time as a result of market conditions in the geographic area in which the real estate is located.  Although a significant portion of such loans is secured by real estate as a secondary form of collateral, adverse developments affecting real estate values in one or more of our markets could increase the credit risk associated with our loan portfolio.  Additionally, commercial real estate lending typically involves larger loan principal amounts and the repayment of the loans generally is dependent, in large part, on sufficient income from the properties securing the loans to cover operating expenses and debt service.  Economic events or governmental regulations outside of the control of the borrower or lender could negatively impact the future cash flow and market values of the affected properties.
 

The Bank’s residential mortgage loan operations include origination, sale and servicing.  The Bank’s residential mortgage loan portfolio does not include subprime mortgages and contains a limited number of non-traditional residential mortgages.  The Bank employs prudent underwriting standards in making residential mortgage loans.  The Bank purchased mortgage-backed securities in 2009, 2010 and 2011 based upon the returns and quality of these assets.  Neither Trinity nor the Bank engaged in the packaging and selling of loan pools, such as CDOs, SIVs, or other instruments which contain subprime mortgage loans and have seen significant losses in value.  As such, Trinity does not foresee any charge-offs, write-downs or other losses outside the ordinary course of business with respect to our residential mortgage operations.  The majority of the residential mortgage loans originated by the Bank are sold to third-party investors, primarily to Fannie Mae.  The Bank continues to service the majority of loans that are sold to third-party investors, to build on our relationship with the customers and provide a continuing source of income through mortgage servicing right fees.
 
The real estate market in New Mexico slowed during the past few years. However, the New Mexico real estate market has not suffered the same extent as other areas of the nation.  If loans collateralized by real estate become troubled during a time when market conditions are declining or have declined, we may not be able to realize the amount of security anticipated at the time of originating the loan, which could cause us to increase our provision for loan losses and adversely affect our operating results and financial condition.  To mitigate such risk, we employ the use of independent third parties to conduct appraisals on our real estate collateral and adhere to limits set on the percentages for the loan amount to the appraised value of the collateral.  We continually monitor the real estate markets and economic conditions in the areas in which our loans are concentrated.
 
Our ability to continue extensive residential real estate lending in our market area is heavily dependent on the ability to sell these loans to Fannie Mae.  As of December 31, 2011, the Bank serviced a total of $973.1 million in loans that were sold to Fannie Mae, in addition to the $385.4 million in residential real estate loans maintained on the balance sheet.  In the event Fannie Mae was no longer able or willing to purchase residential real estate loans from the Bank, in the absence of a new secondary market purchaser, our ability to originate such loans may be limited to those loans we could fund on the Bank’s balance sheet or through other means not traditionally undertaken by the Bank.  If we were unable to identify a new partner or fund the loans on our balance sheet, it could have the effect of limiting the Company’s mortgage loan service fee income, as well as fees and premiums associated with originating and selling such loans.
 
Our construction and development loans are based upon estimates of costs and value associated with the complete project. These estimates may be inaccurate and we may be exposed to more losses on these projects than on other loans. At December 31, 2011, construction loans, including land acquisition and development, totaled $161.8 million, or 13.3%, of our total loan portfolio.  Construction, land acquisition and development lending involve additional risks because funds are advanced based upon the value of the project, which is of uncertain value prior to its completion.  Because of the uncertainties inherent in estimating construction costs, as well as the market value of the completed project and the effects of governmental regulation of real property and the general effects of the national and local economies, it is relatively difficult to evaluate accurately the total funds required to complete a project and the related loan-to-value ratio.  As a result, construction loans often involve the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project and the ability of the borrower to sell or lease the property, rather than the ability of the borrower or guarantor to repay principal and interest.  If our appraisal of the value of the completed project proves to be overstated, we may have inadequate security for the repayment of the loan upon completion of construction of the project.  If we are forced to foreclose on a project prior to or at completion due to a default, there can be no assurance that we will be able to recover all of the unpaid balance of, and accrued interest on, the loan as well as related foreclosure, sale and holding costs.  In addition, we may be required to fund additional amounts to complete the project and may have to hold the property for an unspecified period of time.  We have attempted to address these risks through our underwriting procedures, compliance with applicable regulations, requiring that advances typically be made on a percentage of completion basis as determined by independent third party inspectors, and by limiting the amount of construction development lending.
 

Our allowance for loan losses may prove to be insufficient to absorb losses in our loan portfolio.  Lending money is the heart of our business.  Every loan carries a certain risk that it will not be repaid in accordance with its terms or that any underlying collateral will not be sufficient to assure repayment.  This risk is affected by, among other things:
 
·  
cash flow of the borrower and/or the project being financed;
·  
the changes and uncertainties as to the future value of the collateral, in the case of a collateralized loan;
·  
the credit history of a particular borrower;
·  
changes in economic and industry conditions; and
·  
the duration of the loan.
 
We maintain an allowance for loan losses, which is a reserve established through a provision for loan losses charged to expense, which we believe is appropriate to provide for probable losses in our loan portfolio.  The amount of this allowance is determined by our management through a periodic review and consideration of several factors, including, but not limited to:
 
·  
our general reserve, based on our historical default and loss experience;
·  
our specific reserve, based on our evaluation of non-performing loans and their underlying collateral; and
·  
current macroeconomic factors and model imprecision factors.
 
The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and requires us to make significant estimates of current credit risks and future trends, all of which may undergo material changes.  A deterioration or lack of improvement in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of our control, may require an increase in the allowance for loan losses.  In addition, bank regulatory agencies periodically review our allowance for loan losses and may require an increase in the provision for possible loan losses or the recognition of further loan charge-offs, based on judgments different than those of management.  In addition, if charge-offs in future periods exceed the allowance for loan losses, we will need additional provisions to increase the allowance for loan losses.  Any increases in the allowance for loan losses will result in a decrease in net income and, possibly, capital, and may have a material negative effect on our financial condition and results of operations.
 
Our pace of growth may be limited due to current economic conditions in the United States in general and the financial services industry specifically. We anticipate that our existing capital resources will satisfy our capital requirements for the foreseeable future and will support our ability to increase our lending and grow.  However, our ability to support continued growth in the future, both internally and through acquisitions, may be dependent on our ability to raise additional capital.  Due to current conditions in the U.S. economy in general, and the financial services industry specifically, it may be difficult to raise inexpensive capital in the near future.  Accordingly, until economic conditions in the United States, particularly for financial services companies, improve significantly, our ability to further expand our operations through internal growth and acquisitions may be limited.
 
We may need to raise additional capital in the future, which may not be available when it is needed. We are required by federal and state regulatory authorities to maintain adequate levels of capital to support our operations.  We manage our growth rate and risk profile to ensure that our existing capital resources will satisfy our capital requirements for the foreseeable future.  However, regulatory requirements, growth in assets outpacing growth in capital or our growth strategy may present conditions that would create a need for additional capital from the capital markets.  Our ability to raise additional capital depends on conditions in the capital markets, general economic conditions and a number of other factors, including investor perceptions regarding the banking industry, market conditions and governmental activities, and on our financial condition and performance.  There may not always be capital available or available on favorable terms.  These conditions may alter our strategic direction and require us to manage our growth to remain within capital limits relying solely on our earnings for capital formation, thereby materially reducing our growth rate.
 

Our growth must be effectively managed and our growth strategy involves risks that may impact our net income. As part of our general growth strategy, we may expand into additional communities or attempt to strengthen our position in our current markets to take advantage of expanding market share by opening new offices.  To the extent that we undertake additional office openings, we are likely to experience the effects of higher operating expenses relative to operating income from the new operations for a period of time, which may have an adverse effect on our levels of reported net income, return on average equity and return on average assets.  Our current growth strategies involve internal growth from our current offices, rather than growth through the acquisition of other financial institutions.  The newest office (opened in Albuquerque in November of 2011) is approximately 1,500 square feet which provides additional space for serving our customers, including the provision of deposit services.  Our historical experience is rapid absorption of new offices, with offices becoming profitable well ahead of budget; however, such rapid absorption is not guaranteed in the future.
 
We must compete with other banks and financial institutions in all lines of business. The banking and financial services business in our market is highly competitive.  Our competitors include large regional banks, local community banks, savings institutions, securities and brokerage companies, mortgage companies, insurance companies, finance companies, money market mutual funds, credit unions and other non-bank financial service providers.  Many of these competitors are not subject to the same regulatory restrictions and may therefore enable them to provide customers with an alternative to traditional banking services.
 
Increased competition in our market and market changes, such as interest rate changes, force management to better control costs in order to absorb any resultant narrowing of our net interest margin, i.e., the spread between the interest rates earned on investments and loans and the interest rates paid on deposits and other interest-bearing liabilities.  Without effective management and cost controls, net income may be adversely impacted by changing conditions and competition.  Our efficiency leads to a decreased cost of operation that allows us to effectively anticipate and respond to market and competitive changes without adversely affecting net income.
 
In January of 2010, the Bank entered into an Agreement with the OCC as described in Item 1 above.  The Agreement is focused on reducing our classified loans and reducing our loan concentration in commercial real estate.  As part of the Agreement, we agreed to develop and maintain a number of initiatives and policies, most of which were already implemented or have since been implemented.  We have been deemed in compliance with the Agreement but if we were to fail to continue our compliance with, or adherence to, all of the provisions in the Agreement while it is effective, we could become subject to further regulatory enforcement actions, which could affect our business and operations and our ability to remain eligible for financial holding company status.
 
Technology is continually changing and we must effectively implement new innovations in providing services to our customers. The financial services industry is undergoing rapid technological changes with frequent innovations in technology-driven products and services.  In addition to better serving customers, the effective use of technology increases our efficiency and enables us to reduce costs.  Our future success will depend, in part, upon our ability to address the needs of our customers using innovative methods, processes and technology to provide products and services that will satisfy customer demands for convenience as well as to create additional efficiencies in our operations as we continue to grow and expand our market areas.  In order to anticipate and develop new technology, we employ a full staff of internal information system developers and consider this area a core part of our business.  In the past, we have been able to respond to technological changes faster and with greater flexibility than our competitors.  However, we must continue to make substantial investments in technology, which may affect our net income. 
 
There is a limited trading market for our common shares and, as with all companies, shareholders may not be able to resell shares at or above the price shareholders paid for them. Our common stock is not listed on any automated quotation system or securities exchange and no firm makes a market in our stock.  The trading in our common shares has less liquidity than many other companies quoted on the national securities exchanges or markets.  A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the market of willing buyers and sellers of our common shares at any given time.  This presence depends on the individual decisions of investors and general economic and market conditions over which we have no control.  We cannot ensure the volume of trading in our common shares will increase in the future.
 

System failure or breaches of our network security could subject us to increased operating costs, damage to our reputation, litigation and other liabilities. The computer systems and network infrastructure we use could be vulnerable to unforeseen problems.  Our operations are dependent upon our ability to protect our computer equipment against damage from physical theft, fire, power loss, telecommunications failure or a similar catastrophic event, as well as from security breaches, denial of service attacks, viruses, worms and other disruptive problems caused by hackers.  Any damage or failure that causes an interruption in our operations could have a material adverse effect on our financial condition and results of operations.  Computer break-ins, phishing and other disruptions could also jeopardize the security of information stored in, and transmitted through, our computer systems and network infrastructure, which may result in significant liability to us and may cause existing and potential customers to refrain from doing business with us, as well as damage to our reputation in general.
 
The Federal Financial Institutions Examination Council (“FFIEC”) issued guidance for “Strong Authentication/Two Factor Authentication” in the Internet banking environment.  All financial institutions were required to make changes to their online banking systems to meet the FFIEC requirements.  In response to this guidance, Trinity incorporated multiple layers of security to protect our customers’ financial data.  We further employ external information technology auditors to conduct extensive auditing and testing for any weaknesses in our systems, controls, firewalls and encryption to reduce the likelihood of any security failures or breaches.  Although we, with the help of third-party service providers and auditors, intend to continue implementing security technology and establish operational procedures to prevent such damage, there can be no assurance that these security measures will be successful.  In addition, advances in computer capabilities, new discoveries in the field of cryptography or other developments could result in a compromise or breach of the algorithms we, and our third-party service providers, use to encrypt and protect customer transaction data.  A failure of such security measures could have a material adverse affect on our financial condition and results of operations.
 
We are subject to certain operational risks, including, but not limited to, customer or employee fraud and data processing system failures and errors. Employee errors and employee and customer misconduct could subject us to financial losses or regulatory sanctions and seriously harm our reputation.  Employee errors could include data processing system failures and errors.  Misconduct by our employees could include hiding unauthorized activities from us, improper or unauthorized activities on behalf of our customers or improper use of confidential information.  It is not always possible to prevent employee errors and misconduct, and the precautions we take to prevent and detect this activity may not be effective in all cases.  Employee errors could also subject us to financial claims for negligence.  To mitigate operational risks, we maintain a system of internal controls and insurance coverage.  Should our internal controls fail to prevent or detect an occurrence, or if any resulting loss is not insured or exceeds applicable insurance limits, it could have a material adverse affect on our business, financial condition and results of operations.
 
Our ability to pay dividends is limited. In August of 2010, the Company, in accordance with the respective indenture agreements, began to defer interest payments on its Trust Preferred Securities and the dividends on the CPP Preferred Stock issued to Treasury.  On April 26, 2011, the Company declared a dividend to pay all of the previously deferred interest payments on the junior subordinated debentures and dividends on CPP Preferred Stock issued to the Treasury. The Company is current with all dividend and interest payments and the Company expects to continue to make these payments.  However, there is no guarantee the Company will not have to defer future interest or principal payments.  If such a deferral takes place, under the terms of both the CPP and the Trust Preferred Securities issuances, we will not be able to pay dividends on our common shares until the deferred interest payments and all accrued dividends on the CPP Preferred Stock have been paid in full.
 
In addition, under the terms of the CPP, we may not increase the dividends payable on our common stock beyond the $0.40 semi-annual dividend that we had most recently declared prior to Treasury’s investment until March of 2012 without the consent of Treasury, provided Treasury still holds the CPP Preferred Stock.  After March of 2012, we may increase the dividends by 3.0% per year without consent of Treasury, provided Treasury still holds the CPP Preferred Stock.
 
Finally, dividends from the Bank have traditionally served as a major source of the funds with which Trinity pays dividends and interest payments due.  However, pursuant to the written Agreement with the OCC, the Bank may not pay dividends to Trinity without first obtaining prior regulatory approval.
 

Legislative and regulatory actions taken now or in the future may increase our costs and impact our business, governance structure, financial condition or results of operations.  Trinity and the Bank are subject to extensive regulation by multiple regulatory bodies.  These regulations may affect the manner and terms of delivery of our services.  If we do not comply with governmental regulations, we may be subject to fines, penalties, lawsuits or material restrictions on our businesses in the jurisdiction where the violation occurred, which may adversely affect our business operations.  Changes in these regulations can significantly affect the services that we provide as well as our costs of compliance with such regulations.  In addition, adverse publicity and damage to our reputation arising from the failure or perceived failure to comply with legal, regulatory or contractual requirements could affect our ability to attract and retain customers.
 
The recent economic environment, particularly in the financial markets, resulted in government regulatory agencies and political bodies placing increased focus and scrutiny on the financial services industry.  The U.S. government intervened on an unprecedented scale by temporarily enhancing the liquidity support available to financial institutions, establishing a commercial paper funding facility, temporarily guaranteeing money market funds and certain types of debt issuances and increasing insurance on bank deposits.
 
These programs have subjected financial institutions to additional restrictions, oversight and costs.  In addition, new proposals for legislation continue to be introduced in the U.S. Congress that could further substantially increase regulation of the financial services industry, impose restrictions on the operations and general ability of firms within the industry to conduct business consistent with historical practices, including in the areas of compensation, interest rates, financial product offerings and disclosures, and have an effect on bankruptcy proceedings with respect to consumer residential real estate mortgages, among other things.  Federal and state regulatory agencies also frequently adopt changes to their regulations or change the manner in which existing regulations are applied.
 
In recent years, regulatory oversight and enforcement have increased substantially, imposing additional costs and increasing the potential risks associated with our operations. If these regulatory trends continue, they could adversely affect our business and, in turn, our consolidated results of operations.
 
Monetary policies and regulations of the Federal Reserve could adversely affect our business, financial condition and results of operations.  In addition to being affected by general economic conditions, our earnings and growth are affected by the policies of the Federal Reserve.  An important function of the Federal Reserve is to regulate the money supply and credit conditions.  Among the instruments used by the Federal Reserve to implement these objectives are open market operations in U.S. government securities, adjustments of the discount rate and changes in reserve requirements against bank deposits.  These instruments are used in varying combinations to influence overall economic growth and the distribution of credit, bank loans, investments and deposits.  Their use also affects interest rates charged on loans or paid on deposits.
 
The monetary policies and regulations of the Federal Reserve have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future.  The effects of such policies upon our business, financial condition and results of operations cannot be predicted.
 
Legislative and regulatory reforms applicable to the financial services industry may have a significant impact on our business, financial condition and results of operations.  On July 21, 2010, the Dodd-Frank Act was signed into law, which significantly changed the regulation of financial institutions and the financial services industry.  The Dodd-Frank Act, together with the regulations to be developed thereunder, included provisions affecting large and small financial institutions alike, including several provisions that will affect how community banks, thrifts and small bank and thrift holding companies will be regulated in the future.
 

The Dodd-Frank Act, among other things, imposed new capital requirements on bank holding companies; changed the base for FDIC insurance assessments to a bank’s average consolidated total assets minus average tangible equity, rather than upon its deposit base, and permanently raised the current standard deposit insurance limit to $250,000; and expanded the FDIC’s authority to raise insurance premiums.  The legislation also called for the FDIC to raise the ratio of reserves to deposits from 1.15% to 1.35% for deposit insurance purposes by September 30, 2020 and to “offset the effect” of increased assessments on insured depository institutions with assets of less than $10 billion.  The Dodd-Frank Act also authorized the Federal Reserve to limit interchange fees payable on debit card transactions, established the Bureau of Consumer Financial Protection as an independent entity within the Federal Reserve, which will have broad rulemaking, supervisory and enforcement authority over consumer financial products and services, including deposit products, residential mortgages, home-equity loans and credit cards, and contained provisions on mortgage-related matters, such as steering incentives, determinations as to a borrower’s ability to repay and prepayment penalties.  The Dodd-Frank Act also included provisions that affect corporate governance and executive compensation at all publicly-traded companies and allowed financial institutions to pay interest on business checking accounts.
 
The Collins Amendment to the Dodd-Frank Act, among other things, eliminated certain trust preferred securities from Tier 1 capital, but certain trust preferred securities issued prior to May 19, 2010 by bank holding companies with total consolidated assets of $15 billion or less will continue to be includible in Tier 1 capital.  This provision also required the federal banking agencies to establish minimum leverage and risk-based capital requirements that will apply to both insured banks and their holding companies. 
 
These provisions, or any other aspects of current or proposed regulatory or legislative changes to laws applicable to the financial industry, if enacted or adopted, may impact the profitability of our business activities or change certain of our business practices, including the ability to offer new products, obtain financing, attract deposits, make loans, and achieve satisfactory interest spreads, and could expose us to additional costs, including increased compliance costs.  These changes also may require us to invest significant management attention and resources to make any necessary changes to operations in order to comply, and could therefore also materially and adversely affect our business, financial condition and results of operations.  Our management is actively reviewing the provisions of the Dodd-Frank Act, many of which are to be phased-in over the next several months and years, and assessing its probable impact on our operations.  However, the ultimate effect of the Dodd-Frank Act on the financial services industry in general, and us in particular, is uncertain at this time.
 
The U.S. Congress has also recently adopted additional consumer protection laws such as the Credit Card Accountability Responsibility and Disclosure Act of 2009, and the Federal Reserve has adopted numerous new regulations addressing banks’ credit card, overdraft and mortgage lending practices.  Additional consumer protection legislation and regulatory activity is anticipated in the near future.
 
The Group of Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking Supervision, adopted Basel III in September 2010, which is a strengthened set of capital requirements for banking organizations in the United States and around the world.  Basel III is currently supported by the U.S. federal banking agencies.  As agreed to, Basel III is intended to be fully-phased in on a global basis on January 1, 2019.  However, the ultimate timing and scope of any U.S. implementation of Basel III remains uncertain.  As agreed to, Basel III would require, among other things: (i) an increase in the minimum required common equity to 7% of total assets; (ii) an increase in the minimum required amount of Tier 1 capital from the current level of 4% of total assets to 8.5% of total assets; and (iii) an increase in the minimum required amount of total capital, from the current level of 8% to 10.5%.  Each of these increased requirements includes 2.5% attributable to a capital conservation buffer to position banking organizations to absorb losses during periods of financial and economic stress.  Basel III also calls for certain items that are currently included in regulatory capital to be deducted from common equity and Tier 1 capital.  The Basel III agreement calls for national jurisdictions to implement the new requirements beginning January 1, 2013.  At that time, the U.S. federal banking agencies will be expected to have implemented appropriate changes to incorporate the Basel III concepts into U.S. capital adequacy standards.  Basel III changes, as implemented in the United States, will likely result in generally higher regulatory capital standards for all banking organizations.
 

Such proposals and legislation, if finally adopted, would change banking laws and our operating environment and that of our subsidiaries in substantial and unpredictable ways.  We cannot determine whether such proposals and legislation will be adopted, or the ultimate effect that such proposals and legislation, if enacted, or regulations issued to implement the same, would have upon our business, financial condition or results of operations.
 
 
None
 
Item 2. Properties.
 
As of March 15, 2012, the Company conducted operations through seven locations as shown below.  Trinity is headquartered in the main Bank office in Los Alamos, New Mexico.  Four banking offices are owned by the Bank and are not subject to any mortgages or material encumbrances.  The Bank’s Albuquerque offices are in leased office space and the Cerrillos Road office is subject to a ground lease as further discussed in Note 12 – “Description of Leasing Arrangements.”  In addition to our offices, the Bank operates 30 automatic teller machines (“ATMs”) throughout northern New Mexico.  The ATMs are housed either on bank properties or on leased property.
 
Properties
 
Address
 
Entity
Company Headquarters
 
1200 Trinity Drive
Los Alamos, New Mexico 87544
 
Trinity
Los Alamos Office
 
1200 Trinity Drive
Los Alamos, New Mexico 87544
 
Bank, Title Guaranty
White Rock Office
 
77 Rover
White Rock, New Mexico 87544
 
Bank
Santa Fe Office I (Galisteo)
 
2009 Galisteo Street
Santa Fe, New Mexico 87505
 
Bank
Santa Fe Office II (Downtown)
 
301 Griffin Street
Santa Fe, New Mexico 87501
 
Bank, Title Guaranty
Santa Fe Office III (Cerrillos Road)
 
3674 Cerrillos Road
Santa Fe, New Mexico 87507
 
Bank
Albuquerque Office I
 
6301 Indian School Road N.E.
Albuquerque, New Mexico 87110
 
Bank
Albuquerque Office II
 
6801 Jefferson NE
Albuquerque, New Mexico 87109
 
Bank

Item 3. Legal Proceedings.
 
The Company and its subsidiaries are not involved in any pending legal proceedings, other than routine legal proceedings occurring in the normal course of business and those otherwise specifically stated herein, which, in the opinion of management, are material to our consolidated financial condition.
 
Item 4. Mine Safety Disclosures.

Not applicable.
 

 
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Market Information
 
Trinity’s common stock is not listed on any automated quotation system or securities exchange.  No firm makes a market in our stock.  As of March 15, 2012, there were 6,449,726 shares of common stock outstanding and approximately 1,584 shareholders of record.  The most recent reported sale price of Trinity’s stock as of December 31, 2011 was $12.75 per share.
 
The tables below show the reported high and low sales prices of the common stock during the periods indicated.  The prices below are only the trades where the price was disclosed to the Company.  Sales where the value of the shares traded was not given to us are not included.  The following figures have been adjusted for all stock splits:
 
Quarter ending
 
High sales price
   
Low sales price
 
December 31, 2011
  $ 13.25     $ 10.00  
September 30, 2011
    16.00       10.00  
June 30, 2011
    16.50       8.00  
March 31, 2011
    11.00       8.50  
                 
December 31, 2010
  $ 10.00     $ 8.50  
September 30, 2010
    14.50       10.00  
June 30, 2010
    17.00       13.50  
March 31, 2010
    20.00       17.75  

A table presenting the shares issued and available to be issued under stock-based benefit plans and arrangements can be found under Item 12—“Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” of this Form 10-K.
 
Dividend Policy
 
Since January 2010, Trinity paid dividends on our common stock as follows:
 
Date paid
 
Amount per share
 
January 13, 2012
  $ 0.15  
October 14, 2011
    0.10  
January 15, 2010
    0.27  

Trinity’s ability to pay dividends to shareholders is largely dependent upon the dividends it receives from the Bank and the Bank is subject to regulatory limitations on the amount of cash dividends it may pay.  The Bank’s ability to pay dividends is subject to the prior approval of the OCC under the terms of the Agreement entered into on January 26, 2010.  Please see Business—Trinity Capital Corporation—Supervision and Regulation—Dividendsand Business—Los Alamos National Bank—Supervision and Regulation—Dividend Payments under Item 1 of this Form 10-K for a more detailed description of these limitations.
 

We have the right to, and may from time to time, enter into borrowing arrangements or issue other debt instruments, the provisions of which may contain restrictions on payment of dividends and other distributions on Trinity common stock and Trinity preferred stock.  We have issued in the aggregate approximately $37.1 million in junior subordination debentures to the Trusts.  All of the common stock of the Trusts is owned by Trinity and the debentures are the only assets of the Trusts.  Pursuant to the respective indentures governing the subordinated debentures, we have the right to defer interest payments up to 20 consecutive quarters for a portion of the debentures and up to 10 consecutive semi-annual periods for the remaining portion; however, interest payments on the debentures, including all such deferred interest payments, must be paid before we pay dividends on our capital stock, including our common stock and the preferred stock issued to Treasury pursuant to the CPP.  Therefore, we may not pay dividends unless all accrued interest payments on the junior subordinated debentures have been paid in full.
 
The terms of the CPP Preferred Stock issued in March of 2009 also place certain restrictions on the Trinity’s ability to pay dividends on its common stock.  First, no dividends on Trinity’s common stock can be paid unless all accrued dividends on Treasury’s CPP Preferred Stock have been paid in full  Therefore, we may not pay dividends on common stock unless all accrued interest payments on the preferred stock have been paid in full.  Second, until the third anniversary of the date of Treasury’s investment, March 27, 2012, Trinity may not increase the dividends paid on its common stock above a semi-annual dividend of $0.40 per share without first obtaining the consent of Treasury.  After the third anniversary date, Trinity may increase dividends on common stock no more than 3% per year without first obtaining the consent of Treasury.  After the tenth anniversary date, Trinity may not pay dividends on common stock until Treasury’s investment is repaid
 
In August of 2010, Trinity, in accordance with the respective indenture agreements and terms of the CPP, began to defer interest payments on its trust preferred securities and the dividends on the CPP Preferred Stock issued to Treasury.  On April 26, 2011, Trinity declared a dividend to pay all of the previously deferred interest payments on the junior subordinated debentures and dividends on CPP Preferred Stock issued to the Treasury.  As of March 15, 2012 and December 31, 2011, all interest payments due on the junior subordinated debentures and all dividend payments due under the CPP Preferred Stock were current.
 
Finally, due to the Agreement and the circumstances leading to its issuance by the OCC, we must seek approval from the Federal Reserve and the OCC prior to the Company and the Bank paying dividends on its common stock or distributions by the Company on the trust preferred securities and the CPP Preferred Stock.
 
Issuer Purchases of Equity Securities
 
During the fourth quarter of 2011, we made no repurchases of any class of our equity securities.
 

Shareholder Return Performance Graph
 
The following graph and related information shall not be deemed to be filed, but rather furnished to the SEC by inclusion herein.
 
The following graph shows a comparison of cumulative total returns for Trinity, the NASDAQ Stock Market, an index of all bank stocks followed by SNL, an index of bank stock for banks with $1 billion to $5 billion in total assets followed by SNL, and an index of bank stocks for banks in asset size over $500 million that are quoted on the Pink Sheets followed by SNL.  The cumulative total shareholder return computations assume the investment of $100.00 on December 31, 2006 and the reinvestment of all dividends.  Figures for Trinity’s common stock represent inter-dealer quotations, without retail markups, markdowns or commissions and do not necessarily represent actual transactions.  The graph was prepared using data provided by SNL Securities LC, Charlottesville, Virginia.
 
TOTAL RETURN GRAPH
 
   
Period Ending
 
Index
 
12/31/06
   
12/31/07
   
12/31/08
   
12/31/09
   
12/31/10
   
12/31/11
 
Trinity Capital Corporation
 
$
100.00
   
$
96.44
   
$
80.44
   
$
76.35
   
$
37.22
   
$
49.63
 
NASDAQ Composite
   
100.00
     
110.73
     
62.53
     
94.75
     
110.42
     
108.22
 
SNL Bank
   
100.00
     
77.45
     
41.59
     
43.59
     
49.31
     
38.35
 
SNL Bank $1B to $5B
   
100.00
     
72.90
     
56.91
     
43.17
     
49.70
     
45.14
 
SNL >$500M Pink Banks
   
100.00
     
91.72
     
65.47
     
56.88
     
60.07
     
59.10
 
 

 
The following table sets forth certain consolidated financial and other data of Trinity at the dates and for the periods indicated.
 
   
Year Ended December 31,
 
   
2011
   
2010
   
2009
   
2008
   
2007
 
   
(Dollars in thousands, except per share data)
 
Statement of Income Data:
                             
Interest income
 
$
67,381
   
$
72,497
   
$
77,768
   
$
83,200
   
$
96,989
 
Interest expense
   
12,506
     
17,815
     
23,977
     
35,936
     
47,998
 
Net interest income
   
54,875
     
54,682
     
53,791
     
47,264
     
48,991
 
Provision for loan losses
   
8,245
     
20,258
     
26,024
     
8,183
     
4,200
 
Net interest income after provision for loan losses
   
46,630
     
34,424
     
27,767
     
39,081
     
44,791
 
Other income
   
15,903
     
16,125
     
20,489
     
11,544
     
10,508
 
Other expense
   
52,446
     
48,606
     
43,317
     
38,043
     
34,605
 
Income before income taxes
   
10,087
     
1,943
     
4,939
     
12,582
     
20,694
 
Income taxes
   
2,998
     
260
     
1,763
     
4,583
     
7,365
 
Net income
 
$
7,089
   
$
1,683
   
$
3,176
   
$
7,999
   
$
13,329
 
Dividends on preferred shares
   
2,142
     
2,127
     
1,604
     
-
     
-
 
Net income (loss) available to common shareholders
 
$
4,947
   
$
(444
)
 
$
1,572
   
$
7,999
   
$
13,329
 
                                         
Common Share Data:
                                       
Earnings (loss) per common share
 
$
0.77
   
$
(0.07
)
 
$
0.24
   
$
1.23
   
$
2.05
 
Diluted earnings (loss) per common share
   
0.77
     
(0.07
)
   
0.24
     
1.23
     
2.03
 
Book value per common share (1)
   
13.98
     
13.58
     
13.54
     
14.16
     
13.58
 
Shares outstanding at end of period
   
6,449,726
     
6,449,726
     
6,440,784
     
6,448,548
     
6,482,650
 
Weighted average common shares outstanding
   
6,449,726
     
6,445,542
     
6,444,268
     
6,478,395
     
6,514,613
 
Diluted weighted average common shares outstanding
   
6,449,726
     
6,445,542
     
6,449,134
     
6,498,211
     
6,555,865
 
Dividend payout ratio (2)
   
32.47
%
   
N/A
     
279.17
%
   
65.04
%
   
36.59
%
Cash dividends declared per common share (3)
 
$
0.25
   
$
0.00
   
$
0.67
   
$
0.80
   
$
0.75
 

_________________________

(1)
 
Computed by dividing total stockholders’ equity, including net stock owned by Employee Stock Ownership Plan (“ESOP”), by shares outstanding at end of period.
     
(2)
 
Computed by dividing dividends declared per common share by earnings per common share.
     
(3)
 
Computed by dividing dividends on consolidated statements of changes in stockholders’ equity by weighted average common shares outstanding.
 

The following table reconciles net interest income on a fully tax-equivalent basis for the periods presented:
 
   
Year Ended December 31,
 
   
2011
   
2010
   
2009
   
2008
   
2007
 
   
(In thousands)
 
Net interest income
 
$
54,875
   
$
54,682
   
$
53,791
   
$
47,264
   
$
48,991
 
Tax-equivalent adjustment to net interest income
   
638
     
721
     
634
     
441
     
558
 
Net interest income, fully tax-equivalent basis
 
$
55,513
   
$
55,403
   
$
54,425
   
$
47,705
   
$
49,549
 
 
   
As of or for the year ended December 31,
 
   
2011
   
2010
   
2009
   
2008
   
2007
 
   
(Dollars in thousands)
 
Balance Sheet Data:
                             
Investment securities
 
$
154,603
   
$
183,033
   
$
157,760
   
$
117,577
   
$
116,129
 
Loans, gross
   
1,215,857
     
1,189,938
     
1,239,786
     
1,230,534
     
1,171,106
 
Allowance for loan losses
   
27,909
     
28,722
     
24,504
     
15,230
     
13,533
 
Total assets
   
1,523,469
     
1,565,442
     
1,676,741
     
1,417,727
     
1,379,723
 
Deposits
   
1,327,127
     
1,358,345
     
1,468,445
     
1,251,594
     
1,175,458
 
Short-term and long-term borrowings, including ESOP borrowings and capital lease obligations
   
24,511
     
35,663
     
35,704
     
25,743
     
66,051
 
Junior subordinated debt owed to unconsolidated trusts
   
37,116
     
37,116
     
37,116
     
37,116
     
37,116
 
Stock owned by ESOP participants, net of unearned ESOP shares
   
8,245
     
6,132
     
12,541
     
13,105
     
16,656
 
Stockholders' equity
   
117,969
     
117,323
     
110,361
     
78,180
     
71,371
 
                                         
Performance Ratios:
                                       
Return on average assets (1)
   
0.47
%
   
0.11
%
   
0.20
%
   
0.57
%
   
0.96
%
Return on average equity (2)
   
5.64
%
   
1.37
%
   
2.62
%
   
8.76
%
   
15.56
%
Return on average common equity (3)
   
5.52
%
   
(0.51
)%
   
1.72
%
   
8.76
%
   
15.56
%
Net interest margin on a fully tax-equivalent basis (4)
   
3.83
%
   
3.66
%
   
3.64
%
   
3.52
%
   
3.73
%
Loans to deposits
   
91.62
%
   
87.60
%
   
84.43
%
   
98.32
%
   
99.63
%
Efficiency ratio (5)
   
74.10
%
   
68.65
%
   
58.32
%
   
64.69
%
   
58.16
%
_________________________
(1)
 
Calculated by dividing net income by average assets.
     
(2)
 
Calculated by dividing net income by the average stockholders’ equity, including stock owned by ESOP participants, net of unearned ESOP shares, during the year.
     
(3)
 
Calculated by dividing net income by the average stockholders’ equity, including stock owned by ESOP participants, net of unearned ESOP shares, during the year, less preferred stock and associated amortization and accretion.
     
(4)
 
Calculated by dividing net interest income (adjusted to a fully tax-equivalent basis, adjusting for federal and state exemption of interest income and certain other permanent income tax differences) by average earning assets.
     
(5)
 
Calculated by dividing operating expense by the sum of net interest income and other income.
 

   
Year Ended December 31,
 
   
2011
   
2010
   
2009
   
2008
   
2007
 
Asset Quality Ratios:
                             
Non-performing loans to total loans
   
4.88
%
   
4.19
%
   
5.24
%
   
2.71
%
   
1.01
%
Non-performing assets to total assets
   
4.87
%
   
4.62
%
   
4.90
%
   
2.57
%
   
0.95
%
Allowance for loan losses to total loans
   
2.29
%
   
2.41
%
   
1.97
%
   
1.24
%
   
1.15
%
Allowance for loan losses to non-performing loans
   
46.93
%
   
57.48
%
   
37.68
%
   
45.62
%
   
114.79
%
Net loan charge-offs to average loans
   
0.76
%
   
1.33
%
   
1.34
%
   
0.54
%
   
0.24
%
                                         
Capital Ratios: (1)
                                       
Tier 1 capital (to risk-weighted assets)
   
13.46
%
   
13.23
%
   
12.90
%
   
10.08
%
   
10.32
%
Total capital (to risk-weighted assets)
   
14.72
%
   
14.50
%
   
14.16
%
   
11.80
%
   
12.11
%
Tier 1 capital (to average assets)
   
10.68
%
   
9.82
%
   
9.58
%
   
8.35
%
   
8.19
%
Average equity, including junior subordinated debt owed to unconsolidated trusts, to average assets
   
10.68
%
   
9.96
%
   
10.15
%
   
9.12
%
   
8.81
%
Average equity, excluding junior subordinated debt owed to unconsolidated trusts, to average assets
   
8.25
%
   
7.64
%
   
7.78
%
   
6.48
%
   
6.15
%
                                         
Other:
                                       
Banking facilities
   
7
     
6
     
6
     
5
     
4
 
Full-time equivalent employees
   
331
     
322
     
315
     
280
     
283
 

_________________________

(1)
 
Ratios presented are for Trinity on a consolidated basis.  See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Capital Resources.”

Our summary consolidated financial information and other financial data contain information determined by methods other than in accordance with accounting principles generally accepted in the United States of America (“GAAP”).  These measures include net interest margin on a fully tax-equivalent basis and average equity including junior subordinated debt owed to unconsolidated trusts to average assets.  Management uses these non-GAAP measures in its analysis of the Company’s performance.  The tax-equivalent adjustment to net interest margin 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.  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.”  Banking and financial institution regulators include junior subordinated debt owed to unconsolidated trusts when assessing capital adequacy.  Management believes the presentation of the financial measures excluding the impact of these items provides useful supplemental information that is helpful in understanding our financial results, as they provide a method to assess management’s success in utilizing non-equity sources of capital.  Management also 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.
 

 
This discussion is intended to focus on certain financial information regarding Trinity and the Bank and is written to provide the reader with a more thorough understanding of its financial statements.  The following discussion and analysis of Trinity’s financial position and results of operations should be read in conjunction with the information set forth in Item 7A, “Quantitative and Qualitative Disclosures about Market Risk” and the consolidated financial statements and notes thereto appearing under Item 8 of this report.
 
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 this Form 10-K.  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.
 
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 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.
 

During 2011, the Company experienced some improvement in its asset quality when compared to the prior year, as measured by net charge-offs.  Management remains concerned about possible losses in its real estate loan portfolios.  Management deemed the allocations during 2011 to be a necessary and prudent step to reserve against probable losses.  Management will continue to closely monitor asset quality in general, and real estate loan quality in particular, and is committed to act aggressively to minimize further losses.
 
Mortgage Servicing Right (MSR) Assets:  Servicing residential mortgage loans for third-party investors represents a significant business activity of the Bank.  As of December 31, 2011, mortgage loans serviced for others totaled $973.1 million.  The net carrying amount of the MSRs on these loans totaled $6.3 million as of December 31, 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:
 
   
2011
   
2010
   
2009
 
   
(In thousands)
 
Balance at beginning of period
 
$
9,030
   
$
8,525
   
$
6,908
 
Servicing rights originated and capitalized
   
1,663
     
2,161
     
4,116
 
Amortization
   
(1,505
)
   
(1,656
)
   
(2,499
)
   
$
9,188
   
$
9,030
   
$
8,525
 

Below is an analysis of changes in the mortgage servicing right assets valuation allowance:
 
   
2011
   
2010
   
2009
 
   
(In thousands)
 
Balance at beginning of period
 
$
(1,070
)
 
$
(878
)
 
$
(1,637
)
Aggregate reductions credited to operations
   
227
     
1,556
     
2,144
 
Aggregate additions charged to operations
   
(2,095
)
   
(1,748
)
   
(1,385
)
   
$
(2,938
)
 
$
(1,070
)
 
$
(878
)

The aggregate fair values of the MSRs were $6.6 million, $8.6 million and $8.8 million on December 31, 2011, 2010 and 2009, respectively.
 
The primary risk characteristics of the underlying loans used to stratify the servicing assets for the purposes of measuring impairment are interest rate and original term.
 
Our valuation allowance is used to recognize impairments of our MSRs. An MSR is considered impaired when the market value of the MSR is below the amortized book value of the MSR.  The MSRs are accounted by risk tranche, with the interest rate and term of the underlying loan being the primary strata used in distinguishing the tranches. Each tranche is evaluated separately for impairment.
 
We have our MSRs analyzed for impairment on a monthly basis.  The underlying loans on all serviced loans are analyzed and, based upon the value of MSRs that are traded on the open market, a current market value for each risk tranche in our portfolio is assigned.  We then compare that market value to the current amortized book value for each tranche.  The change in market value (up to the amortized value of the MSR) is recorded as an adjustment to the MSR valuation allowance, with the offset being recorded as an addition or a reduction to income.
 

The impairment is analyzed for other than temporary impairment on a quarterly basis.  The MSRs would be considered other than temporarily impaired if there is likelihood that the impairment would not be recovered before the expected maturity of the asset.  If the underlying mortgage loans have been amortized at a rate greater than the amortization of the MSR, the MSR may be other than temporarily impaired.  As of December 31, 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 December 31, 2011, 2010 and 2009:
 
   
At December 31,
 
   
2011
   
2010
   
2010
 
Public Securities Association (PSA) speed
   
320.00
%
   
233.33
%
   
232.00
%
Discount rate
   
10.75
     
10.75
     
10.76
 
Earnings rate
   
1.22
     
2.17
     
2.75
 

Overview.  Despite a continued weak national recovery in 2011, the Company’s profitability increased over the prior year.  We remained the largest single market-share holder in our two markets (Santa Fe and Los Alamos Counties), as measured by the SOD reports compiled by the FDIC as of June 30, 2011.  Earnings were significantly higher in 2011 as compared to the prior two years.  Trinity had net income of $7.1 million before the required dividends on CPP Preferred Shares.
 
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 historical 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 OCC.
 
Regulatory Proceedings Against the Bank.  As previously disclosed, the Bank and the OCC entered into 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 December 31, 2011 and at March 15, 2012, the Bank has fully addressed the provisions of 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.
 

Income Statement Analysis
 
Net Income-General. Trinity’s net income available to common shareholders for the year ended December 31, 2011, totaled $4.9 million, or diluted earnings of $0.77 per common share, compared to a net loss available to common shareholders for the year ended December 31, 2010 of $(444) thousand, or $(0.07) diluted loss per common share, an increase of $5.4 million in net income available to common shareholders and an increase of $0.84 in diluted earnings per common share.  This increase in net income available to common shareholders was primarily due to a decrease in the provision for loan losses of $12.0 million, which was partially offset by an increase in non-interest expense of $3.8 million.  The decrease in the provision for loan losses was due to management’s analysis of the improvement in asset quality (based on a drop in net charge-offs) over the two periods.  The increase in non-interest expense was primarily due to an increase in the amortization and valuation of mortgage servicing rights, an increase in other non-interest expenses and an increase in salaries and employee benefits.  The increase in the amortization and valuation of mortgage servicing rights was due to an increase in the valuation allowance associated with mortgage servicing rights, which was due to the lower interest rate environment.  The increase in other non-interest expense was primarily due to an increase in the expense associated with interest rate lock commitments and an increase in the amortization of purchased tax credits.  The increase in salaries and employee benefits was due to increased staff costs partially associated with the opening of our newest office in Albuquerque during the fourth quarter of 2011.  In addition, other income decreased $222 thousand from 2010 to 2011 and net interest income increased $193 thousand during the same period.  Other income decreased primarily due to a decrease in the net gain on sale of loans, which was largely offset by a net gain on the sale of securities.  Net interest income increased slightly due to a decrease in interest expense due to lower interest rates in 2011 than compared to 2010.  Income tax expenses increased $2.7 million from 2010 to 2011 mainly due to greater 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, other losses 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:
 
   
Year Ended December 31,
 
   
2011
   
2010
   
2009
 
   
Average Balance
   
Interest
   
Yield/
Rate
   
Average
Balance
   
Interest
   
Yield/
Rate
   
Average
Balance
   
Interest
   
Yield/
Rate
 
   
(Dollars in thousands)
 
Interest-earning Assets:
                                                 
Loans(1)
 
$
1,191,905
   
$
63,481
     
5.33
%
 
$
1,208,892
   
$
68,512
     
5.67
%
 
$
1,247,073
   
$
73,297
     
5.88
%
Taxable investment securities
   
128,976
     
2,508
     
1.94
     
139,001
     
2,384
     
1.72
     
81,018
     
2,999
     
3.70
 
Investment securities exempt from federal income taxes (2)
   
28,288
     
1,636
     
5.78
     
34,937
     
1,882
     
5.39
     
31,489
     
1,690
     
5.37
 
Federal funds sold
   
11,759
     
103
     
0.88
     
276
     
-
     
0.12
     
865
     
1
     
0.12
 
Other interest-bearing deposits
   
88,713
     
214
     
0.24
     
131,414
     
357
     
0.27
     
134,969
     
332
     
0.25
 
Investment in unconsolidated trust subsidiaries
   
1,116
     
77
     
6.90
     
1,116
     
83
     
7.44
     
1,116
     
83
     
7.44
 
Total interest-earning assets
   
1,450,757
     
68,019
     
4.69
     
1,515,636
     
73,218
     
4.83
     
1,496,530
     
78,402
     
5.24
 
Non-interest-earning assets
   
72,582
                     
85,943
                     
63,770
                 
Total assets
 
$
1,523,339
                   
$
1,601,579
                   
$
1,560,300
                 
                                                                         
Interest-bearing Liabilities:
                                                                 
Deposits:
                                                                       
NOW deposits
 
$
142,283
   
$
262
     
0.18
%
 
$
120,522
   
$
269
     
0.22
%
 
$
109,035
   
$
425
     
0.39
%
Money market deposits
   
239,884
     
440
     
0.18
     
214,819
     
476
     
0.22
     
193,200
     
801
     
0.41
 
Savings deposits
   
316,114
     
526
     
0.17
     
360,805
     
932
     
0.26
     
348,593
     
1,371
     
0.39
 
Time deposits over $100,000
   
285,099
     
4,524
     
1.59
     
385,147
     
7,852
     
2.04
     
396,197
     
11,234
     
2.84
 
Time deposits under $100,000
   
205,067
     
2,819
     
1.37
     
215,226
     
4,103
     
1.91
     
211,623
     
5,601
     
2.65
 
Short-term borrowings
   
8,855
     
250
     
2.82
     
5,558
     
269
     
4.84
     
26,523
     
735
     
2.77
 
Long-term borrowings
   
22,985
     
781
     
3.40
     
27,923
     
887
     
3.18
     
17,210
     
762
     
4.43
 
Long-term capital lease obligations
   
2,211
     
268
     
12.12
     
2,211
     
268
     
12.12
     
2,211
     
268
     
12.12
 
Junior subordinated debt owed to unconsolidated trusts
   
37,116
     
2,636
     
7.10
     
37,116
     
2,759
     
7.43
     
37,116
     
2,780
     
7.49
 
Total interest-bearing liabilities
   
1,259,614
     
12,506
     
0.99
     
1,369,327
     
17,815
     
1.30
     
1,341,708
     
23,977
     
1.79
 
                                                                         
Demand deposits--non-interest-bearing
 
$
57,841
                   
$
48,706
                   
$
42,837
                 
Other non-interest-bearing liabilities
   
80,247
                     
61,119
                     
54,437
                 
Stockholders' equity, including stock owned by ESOP
   
125,637
                     
122,427
                     
121,318
                 
Total liabilities and stockholders equity
 
$
1,523,339
                   
$
1,601,579
                   
$
1,560,300
                 
Net interest income on a fully tax-equivalent basis/interest rate spread(3)
   
$
55,513
     
3.70
%
         
$
55,403
     
3.53
%
         
$
54,425
     
3.45
%
Net interest margin on a fully tax-equivalent basis(4)
     
3.83
%
                   
3.66
%
                   
3.64
%
Net interest margin(4)
             
3.78
%
                   
3.61
%
                   
3.59
%

_________________________

(1)  
Average loans include non-accrual loans of $57.6 million, $59.3 million and $53.8 million for 2011, 2010 and 2009.  Interest income includes loan origination fees of $1.8 million, $2.0 million and $2.8 million for the years ended December 31, 2011, 2010 and 2009, respectively.
 
(2)  
Non-taxable investment income is presented on a fully tax-equivalent basis, adjusting for federal and state exemption of interest income and certain other permanent income tax differences.  These adjustments were $638 thousand, $721 thousand and $634 thousand for 2011, 2010 and 2009, respectively.
 
(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.
 

In 2011, net interest income on a fully tax-equivalent basis remained relatively flat, with an increase of $110 thousand (0.2%) to $55.5 million from $55.4 million in 2010.  This slight increase resulted from a decrease in interest expense of $5.3 million (29.8%), which was partially offset by a decrease in interest income on a fully tax-equivalent basis of $5.2 million (7.1%).  The decrease in interest expense was primarily due to a decrease in the cost of interest-bearing liabilities of 31 basis points, which accounted for a $3.3 million decrease in interest expense.  There was a decrease in average interest-bearing liabilities of $109.7 million (8.0%), accounting for a $2.0 million decrease in interest expense.  Interest income on a fully tax-equivalent basis decreased primarily do to a decrease in the yield on interest-earning assets of 14 basis points, which accounted for a decrease of $3.6 million in interest income on a fully tax-equivalent basis.  There was a decrease in average interest-earning assets of $64.9 million (4.3%), which accounted for a decrease in interest income on a fully tax-equivalent basis of $1.6 million.  The net interest margin expressed on a fully tax-equivalent basis increased 17 basis points to 3.83% in 2011 from 3.66% in 2010.
 
In 2010, net interest income on a fully tax-equivalent basis increased $978 thousand (1.8%) to $55.4 million from $54.4 million in 2009.  This increase resulted from a decrease in interest expense of $6.2 million (25.7%), which was partially offset by a decrease in interest income on a fully tax-equivalent basis of $5.2 million (6.6%).  The decrease in interest expense was primarily due to a decrease in the cost of interest-bearing liabilities of 49 basis points, which accounted for a $5.7 million decrease in interest expense.  There was an increase in average interest-bearing liabilities of $27.6 million (2.1%), though lower cost deposits increased while higher cost deposits decreased, making the mix of deposits lower cost overall.  This accounted for a $464 thousand decrease in interest expense.  Interest income on a fully tax-equivalent basis decreased primarily due to a decrease in the yield on interest-earning assets of 41 basis points, which accounted for a decrease of $4.6 million in interest income on a fully tax-equivalent basis.  There was an increase in average interest-earning assets of $19.1 million (1.3%), though lower earning assets (investment securities) increased, while higher earning assets (loans) decreased, having a net overall effect of lowering the yield on interest earning assets in the mix.  This accounted for a decrease of $543 thousand in interest income on a fully tax-equivalent basis.  The net interest margin expressed on a fully tax-equivalent basis increased 2 basis points to 3.66% in 2010 from 3.64% in 2009.
 

Volume, Mix and Rate Analysis of Net Interest Income. The following table presents the extent to which changes in volume and interest rates of interest-earning assets and interest-bearing liabilities have affected our 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) and (ii) changes attributable to changes in interest rate (changes in rate times the prior period 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.
 
   
2011 Compared to 2010
 
2010 Compared to 2009
 
   
Change
Due to
Volume
   
Change
Due to
Rate
   
Total
Change
   
Change
Due to
Volume
   
Change
Due
to Rate
   
Total
Change
 
                                     
Interest-earning Assets:
             
 Loans
 
$
(952
)
 
$
(4,079
)
 
$
(5,031
)
 
$
(2,207
)
 
$
(2,578
)
 
$
(4,785
)
 Taxable investment securities
   
(180
)
   
304
     
124
     
1,488
     
(2,103
)
   
(615
)
 Investment securities exempt from federal income taxes(1)
   
(378
)
   
132
     
(246
)
   
186
     
6
     
192
 
 Federal funds sold
   
-
     
103
     
103
     
(1
)
   
-
     
(1
)
 Other interest bearing deposits
   
(106
)
   
(37
)
   
(143
)
   
(9
)
   
34
     
25
 
 Investment in unconsolidated trust subsidiaries
   
-
     
(6
)
   
(6
)
   
-
     
-
     
-
 
 Total increase (decrease) in interest income
 
$
(1,616
)
 
$
(3,583
)
 
$
(5,199
)
 
$
(543
)
 
$
(4,641
)
 
$
(5,184
)
Interest-bearing Liabilities:
                 
 Now deposits
 
$
45
   
$
(52
)
 
$
(7
)
 
$
41
   
$
(197
)
 
$
(156
)
 Money market deposits
   
52
     
(88
)
   
(36
)
   
82
     
(407
)
   
(325
)
 Savings deposits
   
(104
)
   
(302
)
   
(406
)
   
47
     
(486
)
   
(439
)
 Time deposits over $100,000
   
(1,796
)
   
(1,532
)
   
(3,328
)
   
(305
)
   
(3,077
)
   
(3,382
)
 Time deposits under $100,000
   
(186
)
   
(1,098
)
   
(1,284
)
   
93
     
(1,591
)
   
(1,498
)
 Short-term borrowings
   
121
     
(140
)
   
(19
)
   
(804
)
   
338
     
(466
)
 Long-term borrowings
   
(165
)
   
59
     
(106
)
   
382
     
(257
)
   
125
 
 Long-term capital lease obligations
   
-
     
-
     
-
     
-
     
-
     
-
 
 Junior subordinated debt owed to unconsolidated trusts
   
-
     
(123
)
   
(123
)
   
-
     
(21
)
   
(21
)
 Total increase (decrease) in interest expense
 
$
(2,033
)
 
$
(3,276
)
 
$
(5,309
)
 
$
(464
)
 
$
(5,698
)
 
$
(6,162
)
 Increase (decrease) in net interest income
 
$
417
   
$
(307
)
 
$
110
   
$
(79
)
 
$
1,057
   
$
978
 

 (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 2011 and 2010 and between 2010 and 2009 were as follows:
 
   
Year Ended
December 31,
         
Year Ended
December 31,
       
   
2011
   
2010
   
Net
difference
   
2010
   
2009
   
Net
difference
 
   
(In thousands)
 
Other income:
                                   
Mortgage loan servicing fees
 
$
2,637
   
$
2,630
   
$
7
   
$
2,630
   
$
2,519
   
$
111
 
Trust fees
   
1,903
     
1,722
     
181
     
1,722
     
1,463
     
259
 
Loan and other fees
   
3,256
     
2,998
     
258
     
2,998
     
2,699
     
299
 
Service charges on deposits
   
1,617
     
1,638
     
(21
)
   
1,638
     
1,718
     
(80
)
Net gain on sale of loans
   
4,027
     
5,473
     
(1,446
)
   
5,473
     
7,766
     
(2,293
)
Net gain on sale of securities
   
1,057
     
109
     
948
     
109
     
2,543
     
(2,434
)
Title insurance premiums
   
869
     
1,096
     
(227
)
   
1,096
     
1,364
     
(268
)
Other operating income
   
537
     
459
     
78
     
459