Entrust Financial Services, Inc. (the “Company”) was incorporated on November 8, 1996, under the laws of the State of Colorado as Centennial Banc Share Corporation. The name of the Company was changed to Entrust Financial Services, Inc. as of April 6, 2001. The Company was formed for the purpose of developing and maintaining the business associated with mortgage banking.

Entrust Mortgage, Inc. was incorporated in Colorado in 1999 and is a wholly owned subsidiary of the Company. The Company’s headquarters is located in Denver, Colorado.

The Company, through its subsidiary, Entrust Mortgage, Inc. is engaged in mortgage banking activities in 38 states. The Company’s mortgage banking business is principally focused on wholesale and retail residential mortgage origination activities. The Company primarily originates non-conforming mortgage loans, which are loans that do not conform to FNMA, FHLMC, FHA and VA requirements. The principal deviation from such standards relate to the lower documentation standards where there is a lower loan-to-value ratio, although some do not conform because of the size of the mortgage loan. The Company’s underwriting guidelines are based upon the underwriting standards established by investors to whom such loans are sold.

Wholesale loan origination involves the funding by the Company of loans submitted by non-affiliated mortgage brokers. The Company has active contractual relationships with over 600 brokers firms and supports this clientele with traditional telemarketing and a web-based, proprietary automated underwriting system that supports the loan application process 24 hours a day, 7 days a week. The Company typically realizes revenue from the sale of such loans to investors for a price greater than the amount paid to the mortgage broker.

Retail loan origination involves the direct solicitation of realtors, builders and prospective borrowers for the origination of mortgage loans. The Company derives revenues from the loan origination fees and the loan premium fee that is received from the purchaser of the loan. Generally, the revenue is shared on a negotiated basis with loan officers and others who procure the loan and assist in the loan origination process. The financial benefits to the Company of the retail division is both as a source of loans for the wholesale division and as a source of loan fees to improve total profits.

Company’s management monitors the revenue streams of the various products and services. Operations are managed and financial performance is evaluated on a company-wide basis. Accordingly, all of the Company’s mortgage banking operation is considered by management to be aggregated in one reportable operating segment.

The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-QSB and Regulation S-B. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements and should be read in conjunction with the Company’s Annual Report on Form 10-KSB for the fiscal year ended December 31, 2003. In the opinion of management, all adjustments considered necessary for a fair presentation of the results of operations have been included. Operating results for the three months ended and nine months ended September 30, 2004 are not necessarily indicative of the results that might be expected for the 12 months ending December 31, 2004.

The accompanying financial statements include the accounts of the Company and its wholly owned subsidiary, Entrust Mortgage, Inc. All intercompany balances and transactions have been eliminated.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.

In connection with the $2,000,000 convertible promissory note agreement between Entrust Financial Services, Inc. and the lender, the Company has created a cash escrow account. Under an agreement entered into with the lender, the Company has ceased making further deposits into the escrow account and will only be required to make such deposits should the Company have a covenant violation with the lender.

Mortgage loans held for sale are stated at the lower of cost or market determined on an aggregate loan basis. Mortgage loans are stated net of premiums or discounts and deferred net loan costs. Market value for mortgage loans covered by investor commitments is based on commitment prices. Market value for uncommitted loans is based upon current delivery prices.

Loans sold to investors by the Company and which met investor and agency underwriting guidelines at the time of sale may be subject to repurchase in the event of specific default by the borrower or subsequent discovery that underwriting standards were not met. The Company may, upon mutual agreement, indemnify the investor against future losses on such loans. The Company has established a reserve for losses related to these representations and warranties.

As of September 30, 2004, the Company has outstanding indemnification agreements with investors totaling $405,086, requiring current aggregate monthly payments of $54,316 and expiring October 2004 through July 2006. These liabilities are included as part of the loan indemnification reserve.

Loan origination fees, net of direct costs, are deferred and recognized over the term of the loan or at the time the loan is sold. Gains or losses from the sale of mortgages are recognized when the proceeds are received from the purchaser. Interest income is accrued and credited to income based on the principal amount outstanding.

Certain reclassifications have been made to prior year balances to conform to the current year financial statement presentation.

The Securities and Exchange Commission (SEC) has issued Staff Accounting Bulletin (SAB) 105, Loan commitments, on valuing mortgage loan rate lock commitment derivatives. The SAB states that a rate lock commitments are written options that should be recorded at zero or recorded as a liability if market interest rates move above the rate committed to the borrower.

The SAB is effective for loan commitments entered into April 1, 2004 or later. The SEC view is consistent with the Company’s accounting policy in a stable or rising interest rate environment and would have no effect on the Company in such rate environments. However, the Company generally records a rate lock derivative asset in a falling rate environment, and this asset would not be recordable under the SAB. Accordingly, the impact is immaterial as of September 30, 2004. The Company expects that net income would decline during periods of falling interest rates due to the inability to record rate lock derivative assets.

The Company has a $12,500,000 warehouse line of credit agreement dated September 7, 2004, expiring September 30, 2005, which provides financing for the Company’s origination of mortgage loans. The line of credit bears interest at LIBOR plus 2.50% to 3.75% depending on the underlying collateral. Purchase proceeds are withdrawn from the Company’s bank account as funding proceeds from investors are deposited. The underlying mortgages and related documents and instruments collateralize the line of credit. At September 30, 2004, the outstanding principal balance of the warehouse line of credit amounted to $7,172,334.

The agreement contains certain financial covenants, including maintenance of minimum tangible net worth and equity base, maximum debt to tangible net worth and equity base ratios, minimum current ratio, and limitations on transactions with affiliates and stockholder distributions, as defined in the agreement.

The Company entered into a $30,000,000 Loan Purchase Agreement dated January 9, 2004, expiring on December 31, 2004, which provides 100% funding of the Company’s mortgage loans originated. Entrust receives a fee for providing interim servicing functions until the ultimate sale of such loans to the ultimate investor and a service release premium paid by the ultimate investor. The Company has not recorded these loans as Mortgages Loans Held for Sale because these loans are being assigned and transferred at the time of closing. At September 30, 2004, the mortgage loans originated and held by the lender for sale to the ultimate investors is $33,155,050. On September 9, 2004, Guaranty Bank and Trust Company notified the Company that the Loan Purchase Agreement would terminate on October 1, 2004. On September 29, 2004, Guaranty Bank and Trust Company extended the termination date to October 23, 2004. The Loan Purchase Agreement was terminated as of October 23, 2004.

As of December 31, 2003, the Convertible Promissory Note (“Note”) had interest payable at 12% per annum, payable monthly, in arrears, and a 33% final interest payment only upon maturity or prepayment of the Note. The Note is secured by all the assets (e.g. accounts, contracts, intangible assets, furniture & fixtures) of Entrust Mortgage, Inc. In addition, the Company entered into a Pledge Agreement, whereby all the shares of the common stock of Entrust Mortgage, Inc. are held by the lender to ensure timely payment and performance of the obligation. The Note contains financial covenants, which as of the end of the year the Company was not in compliance with. In accordance with the Note, the Company had deposited $500,000 into the sinking fund. As of April 1, 2004, the Company and the Note Holder agreed to restructure the Note by amending and restating the Note. In exchange for the restructuring, the Holder agrees to waive the Company’s uncured Events of Default existing under the Note. In addition, the outstanding Principal Amount will bear interest at a rate of 12% per annum, payable monthly in arrears. The Principal Amount will be paid in 20 installments and ending on May 1, 2006 ($50,000 shall be paid on the first day of each month commencing on April 1, 2004 and ending on September 1, 2004; and $100,000 shall be paid on the first day of each month commencing on January 1, 2005 and ending on May 1, 2006). The Final Interest Payment had accrued interest of $822,000 as of the date of the restructure. The Company agreed to pay the Note Holder $500,000 upon execution of the agreement, $22,000 before July 1, 2004 and $100,000 on the first day of each month commencing on October 1, 2004 and ending on December 1, 2004. The Note Holder will have the right to convert the principal amount to common stock at $.50 per share in lieu of payment of principal amount. The Company has the right to prepay the Note at any time.

Intangible assets represent the excess of acquisition costs over the fair value of the net assets of acquired businesses, which have been allocated to identifiable intangible assets as follows at September 30, 2004:

Amortization expense will amount to $90,000 for each of the next five years.

The Company has net operating losses of approximately $4,585,323 available to offset future consolidated federal and state taxable income through 2023. Based upon the Company’s current operating losses and the uncertainty as to future taxable income, a full valuation allowance has been provided for the Company’s net deferred tax asset as of September 30, 2004.

The Company regularly enters into commitments to originate loans at a future date subject to compliance with stated conditions. These commitments have off-balance sheet risk to the extent the Company does not have matching commitments to sell the loans, which expose the Company to market risk if interest rates change. The Company is also exposed to credit loss if the loan is originated and the mortgagor does not perform. The collateral upon extension of credit typically consists of a deed of trust in the mortgagor’s residential property.

On July 5, 2002, the Company’s Chairman of the Board resigned. Beginning in July 2002 and continuing for a period of forty-eight months, he shall be entitled to an amount equivalent to 15 basis points on the first $12,500,000 in monthly funding and 5 basis points on the remaining monthly funding on wholesale and retail loans funded by the Company or the Company’s lenders on behalf of the Company. The Company and/or Entrust Mortgage shall make payments on the15th day of each month thereafter for forty-eight consecutive months.

Some of the statements in this Form 10-QSB, including some statements in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business” are forward-looking statements about what may happen in the future. They include statements regarding our current beliefs, goals, and expectations about matters such as our expected financial position and operating results, our business strategy, and our financing plans. These statements can sometimes be identified by our use of forward-looking words such as “anticipate,” “estimate,” “expect,” “intend,” “may,” “will,” and similar expressions. We cannot guarantee that our forward-looking statements will turn out to be correct or that our beliefs and goals will not change. Our actual results could be very different from and worse than our expectations for various reasons. You are urged to carefully consider these factors, as well as other information contained in this Form 10-QSB and in our other periodic reports and documents filed with the Securities and Exchange Commission.

In our Form 10KSB filed with the Securities and Exchange Commission for the year ended December 31, 2003 and in the Footnotes to the unaudited Financial Statements for this report, we have identified critical accounting policies and estimates for our business.

Loan origination fees and gain on sale of loans increased from $3.4 million for 2003 to $5.5 million in 2004. The increase is attributable to the wholesale division increased funding from $59.8 million in 2003 to $107.8 million in 2004. In addition, the Company’s retail division increased funding to $33.5 million for 2004 compared to $26.1 million in 2003. Direct cost increased from $1.6 million in 2003 to $2.9 million in 2004. Revenue realized on each wholesale loan sold during this period decreased by $144 per unit compared to loans sold in the same period of 2003. The Company reduced the underwriting fee charged on each loan during this quarter. Direct cost on each wholesale loan increased $134 per unit compared to the same period of 2003, primarily because of the increase fees paid to brokers.

Interest income increased from $498,878 for 2003 to $682,218 for 2004. Warehouse line of credit interest expense increased from $317,194 in 2003 to $491,598 in 2004.

Salaries, commissions and benefits increased from $1.2 million in 2003 to $1.7 million in 2004. This 38% increase is consistent with the increase in the numbers of employees and the continued investment in the expansion of the Company’s wholesale organization.

The loan loss provision increased to $438,284 in 2004 from $299,270 in 2003. The Company’s loan loss reserve increased because the wholesale loan volume increased during the period. The Company’s loan loss reserve is based on management’s most current estimate of risk exposure, using past experience and the most available economic circumstances.

Interest expense related to corporate borrowings decreased from $251,157 in 2003 to $72,268 in 2004. The decrease is the result of restructuring the $2 million convertible promissory note from an effective annual interest rate of 45% to 12%.

General and administrative expenses decreased from $357,715 in 2003 compared to $262,107 in 2004. This decrease was primarily attributable to the Company spending less on third party services such as consultants.

The Company reported net income for the three months ending September 30, 2004 of $128,699 (approximately $0.04 per share on a fully diluted basis) compared to a net loss of $305,693 (approximately $0.12 per share on a fully diluted basis) for this same period in 2003.

Loan origination fees and gain on sale of loans increased from $8.9 million for 2003 to $13.9 million in 2004. The increase is attributable to the wholesale division increased funding from $162.2 million in 2003 to $256 million in 2004. In addition, the Company’s retail division increased funding to $93.0 million for 2004 compared to $68.1 million in 2003. Direct cost increased from $4.0 million in 2003 to $7.0 million in 2004. Revenue realized on each wholesale loan sold during this period increased by $136 per unit compared to loans sold in the same period of 2003. Direct cost on each wholesale loan increased approximately $300 per unit compared to the same period of 2003 primarily because of the increase fees paid to brokers. Revenue realized on each retail loan sold during this period increased by $250 per unit compared to loans sold in the same period of 2003. Direct cost on each retail loan increased approximately $900 per unit compared to the same period of 2003 primarily because of the increase fees paid to affiliates and brokers.

Interest income increased from $1.4 million for 2003 to $1.5 million for 2004. Warehouse line of credit interest expense increased from $881,611 in 2003 to $1,055,209 in 2004.

Salaries, commissions and benefits increased from $3.5 million in 2003 to $4.3 million in 2004. This increase is consistent with the increase in the numbers of employees and loan officers originating loans. In addition, the Company continues to invest in the expansion of the Company’s sales and operations organization.

The loan loss provision decreased to $1.2 million in 2004 from $2.2 million in 2003. The Company’s loan loss reserve can fluctuate from time to time based on management’s most current estimate of risk exposure, using past experience and the most available economic circumstances. The decrease is primarily attributable to the $1.4 million change in estimate for the loan loss reserve recorded during this period in 2003. In addition, the decrease was offset by an increase in wholesale loan fundings during the period compared to the same period last year.

Interest expense related to corporate borrowings decreased from $754,643 in 2003 to $389,666 in 2004. The decrease is the result of restructuring the $2 million convertible promissory note from an effective annual interest rate of 45% to 12%.

General and administrative expenses decreased from $1,009,975 in 2003 compared to $679,801 in 2004. This decrease was primarily attributable to the Company spending less on third party services such as consultants.

The Company reported net income for the nine months ending September 30, 2004 of $179,877 (approximately $0.06 per share on fully diluted basis) compared to a net loss of $2,801,527 (approximately $1.11 per share on a fully diluted basis) in 2003.

Loan origination increased substantially for the quarter ending in 2004 compared to 2003. The increase is attributable to the wholesale division increased funding from $162.2 million in 2003 to $256 million in 2004. In addition, the Company’s retail division increased funding to $93.0 million for 2004 compared to $68.1 million in 2003.

As a consequence, during the nine months ended September 30, 2004, net cash provided by operating activities was $17.7 million compared to net cash used by operating activities of $2.2 million in 2003. Net cash provided in operating activities in 2004 is impacted primarily by the origination of and proceeds from the sale of mortgage loans held for sale.

Net cash used by investing activities to purchase property and equipment was approximately $108,000 in 2003 compared to approximately $112,327 in 2004. In addition, there was a decrease in restricted cash during 2004 of approximately $200,000, which was used to pay accrued interest.

Net cash used for financing activities in 2004 was $17.85 million and in 2003 net cash provided by financing activities was $1.6 million.

The decrease in net cash flow from operating, financing, and investing activities was less than $90,000 in 2004 compared to a decrease in cash of approximately $900,000 for the same period in 2003.

The Company’s warehouse credit facility provides for a maximum borrowing capacity of $12.5 million.  We currently have $7.1 million outstanding on this facility.

The Company entered into a $30,000,000 Loan Purchase Agreement dated January 9, 2004, expiring on December 31, 2004, which provides 100% funding of the Company’s mortgage loans originated. Entrust receives a fee for providing interim servicing functions until the ultimate sale of such loans to the ultimate investor and a service release premium paid by the ultimate investor. The Company has not recorded these loans as Mortgages Loans Held for Sale because these loans are being assigned and transferred at the time of closing. At September 30, 2004, the mortgage loans originated and held by the lender for sale to the ultimate investors is $33,155,050. On September 9, 2004, Guaranty Bank and Trust Company notified the Company that the Loan Purchase Agreement would terminate on October 1, 2004. On September 29, 2004, Guaranty Bank and Trust Company extended the termination date to October 23, 2004. The Loan Purchase Agreement was terminated as of October 23, 2004.

At the present time, the Company is using a combination of sources for placement of its mortgages while it searches for a replacement loan purchase arrangement. The Company considers such a replacement to be necessary for its long-term growth.

Short term capital has been sufficient to meet our current growth trends, but to continue to grow at our projected pace, we will need to seek equity investments to keep our debt to equity ratios in line with our warehouse credit facilities. There are no plans, proposals, arrangements or understandings with respect to the sale or issuance of additional securities or for the acquisition of additional equity investments. We do not intend to pay dividends in the foreseeable future.

As of April 1, 2004, the Company and the Convertible Promissory Note Holder agreed to restructure the Note by amending and restating the Note. In exchange for the restructuring, the Holder agrees to waive the Company’s uncured Events of Default existing under the Note. In addition, the outstanding Principal Amount will bear interest at a rate of 12% per annum, payable monthly in arrears. The Principal Amount will be paid in 20 installments and ending on May 1, 2006 ($50,000 shall be paid on the first day of each month commencing on April 1, 2004 and ending on September 1, 2004; and $100,000 shall be paid on the first day of each month commencing on January 1, 2005 and ending on May 1, 2006). The Final Interest Payment had accrued interest of $822,000. The Company agreed to pay the Note Holder $500,000 upon execution of the agreement, $22,000 before July 1, 2004 and $100,000 on the first day of each month commencing on October 1, 2004 and ending on December 1, 2004. The Note Holder will have the right to convert the principal amount to common stock at $.50 per share in lieu of payment of principal amount. The Company has the right to prepay the Note at any time.

As of the end of the period covered by this quarterly report on Form 10-QSB, we evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)). That evaluation was performed under the supervision and with the participation of its management, including its Chief Executive Officer and its Chief Financial Officer. Based on that evaluation, our Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting him to material information relating to Entrust Financial Services required to be included in its periodic SEC filings.

The Company has made no significant change in its internal control over financial reporting during the most recent fiscal quarter covered by this report on Form 10-QSB that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.

There are no material pending legal proceedings, which the Company is a party other than ordinary routine litigation incidental to its business.

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Entrust Financial Services Inc.

By: /s/ Scott J. Sax                                    
      Scott J. Sax
      Chief Executive Officer

By: /s/ Jeffrey D. Rudolph                                   
      Jeffrey D. Rudolph
      Chief Financial Officer

Description

Certification of CEO pursuant to Sec. 302

Certification of CFO pursuant to Sec. 302

Certification of CEO pursuant to Sec. 906

Certification of CFO pursuant to Sec. 906