UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2017March 31, 2018
 
or
 
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                                                    to

Commission File Number 000-50266


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

New Mexico 85-0242376
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
   
1200 Trinity Drive
Los Alamos, New Mexico
 87544
(Address of principal executive offices) (Zip Code)

(505) 662-5171
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒  Yes    ☐  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 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. (Check one):

Large accelerated filer ☐
Accelerated filer              ☐
Non-accelerated filer   ☐  (do not check if a smaller reporting company) 
Smaller reporting company ☒
Emerging growth company ☐
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ☐  Yes   ☒  No
 
As of October 31, 2017,April 30, 2018, there were 9,256,78511,651,173 shares of voting Common Stockcommon stock outstanding and 8,286,2008,044,292 shares of non-voting Common Stockcommon stock outstanding.
 
TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION 
Item 1. Financial Statements and Supplementary Data1
Item 2. Management's Discussions and Analysis of Financial Condition and Results of Operations2522
Item 3. Quantitative and Qualitative Disclosures About Market Risk3632
Item 4. Controls and Procedures3732
PART II – OTHER INFORMATION 
Item 1. Legal Proceedings3933
Item 1A. Risk Factors3933
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds3933
Item 3. Defaults Upon Senior Securities3933
Item 4. Mine Safety Disclosures3933
Item 5. Other Information3933
Item 6. Exhibits4034
Signatures4135

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

TRINITY CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)

(In thousands, except share and per share data)            
 September 30, 2017  December 31, 2016  
March 31, 2018
(Unaudited)
  December 31, 2017 
ASSETS            
Cash and due from banks $11,733  $13,537  $10,003  $12,893 
Interest-bearing deposits with banks  68,234   105,798   9,517   22,541 
Cash and cash equivalents  79,967   119,335   19,520   35,434 
Investment securities available for sale, at fair value  434,521   439,650   470,910   468,733 
Investment securities held to maturity, at amortized cost (fair value of $7,512 and $8,613 as of September 30, 2017 and December 31, 2016, respectively)  7,882   8,824 
Investment securities held to maturity, at amortized cost (fair value of $7,312 and $7,369 as of March 31, 2018 and December 31, 2017, respectively)  7,824   7,854 
Non-marketable equity securities  3,615   3,812   4,471   3,617 
Loans (net of allowance for loan losses of $13,200 and $14,352 as of September 30, 2017 and December 31, 2016, respectively)  721,817   771,138 
Loans (net of allowance for loan losses of $11,238 and $13,803 as of March 31, 2018 and December 31, 2017, respectively)  694,108   686,341 
Mortgage servicing rights ("MSRs"), net  5,499   6,905   -   - 
Bank owned life insurance ("BOLI")  10,462   10,191   25,874   25,656 
Premises and equipment, net  28,794   25,959   28,336   28,542 
Other real estate owned ("OREO"), net  8,199   8,436   6,449   6,432 
Deferred tax assets  12,008   10,143 
Other assets  21,730   31,187   13,567   14,781 
Total assets $1,322,486  $1,425,437  $1,283,067  $1,287,533 
                
LIABILITIES AND STOCKHOLDERS' EQUITY        
LIABILITIES AND SHAREHOLDERS' EQUITY        
Liabilities                
Deposits:                
Noninterest-bearing $183,881  $174,305  $163,134  $161,677 
Interest-bearing  983,438   1,033,115   980,960   965,670 
Total deposits  1,167,319   1,207,420   1,144,094   1,127,347 
Borrowings  2,300   2,300 
Long-term borrowings  2,300   2,300 
Junior subordinated debt  36,937   36,927   26,764   36,941 
Other liabilities  15,566   41,491   8,414   15,399 
Total liabilities  1,222,122   1,288,138   1,181,572   1,181,987 
                
Stock owned by Employee Stock Ownership Plan ("ESOP") participants; 671,578 shares and 671,962 shares as of September 30, 2017 and December 31, 2016, respectively, at fair value $3,192  $3,192 
Stock owned by Employee Stock Ownership Plan ("ESOP") participants; 831,645 shares and 831,645 shares as of March 31, 2018 and December 31, 2017, respectively, at fair value $5,961  $5,961 
                
Commitments and contingencies (Note 13)                
                
Stockholders' equity        
Preferred stock, no par, 1,000,000 shares authorized        
Series A, 9% cumulative perpetual, 0 shares and 35,539 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively; $1,000 liquidation value per share, at amortized cost $-  $35,068 
Series B, 9% cumulative perpetual, 0 shares and 1,777 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively; $1,000 liquidation value per share, at amortized cost  -   1,850 
Series C, 0% convertible cumulative perpetual, 0 shares and 82,862 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively; $475 liquidation value per share, at amortized cost  -   37,089 
Common stock voting, no par; 20,000,000 shares authorized; 9,256,785 and 9,199,306 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively  9,567   9,510 
Common stock non-voting, no par; 20,000,000 shares authorized; 8,286,200 shares and 0 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively  8,286   - 
Shareholders' equity        
Common stock, voting, no par; 20,000,000 shares authorized; 11,631,064 shares and 11,364,862 shares issued and outstanding as of March 31, 2018 and December 31, 2017, respectively  11,631   11,365 
Common stock, non-voting, no par; 20,000,000 shares authorized; 8,044,292 shares and 8,286,200 shares issued and outstanding as of March 31, 2018 and December 31, 2017, respectively  8,044   8,286 
Additional paid-in capital  29,724   694   35,332   35,071 
Retained earnings  52,935   55,391   56,279   54,587 
Accumulated other comprehensive loss  (3,340)  (5,495)  (9,791)  (3,763)
Total stockholders' equity  97,172   134,107 
Total liabilities and stockholders' equity $1,322,486  $1,425,437 
Common stock related to ESOP  (5,961)  (5,961)
Total shareholders' equity  95,534   99,585 
Total liabilities and shareholders' equity $1,283,067  $1,287,533 
 
The accompanying notes are an integral part of these consolidated financial statements.



-1-- 1 -


TRINITY CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

(In thousands, except per share data)  Three Months Ended September 30,  Nine Months Ended September 30,  Three Months Ended March 31, 
 2017  2016  2017  2016  2018  2017 
Interest income:                  
Loans, including fees $9,016  $9,413  $27,613  $29,532  $8,079  $9,307 
Interest and dividends on investment securities:                        
Taxable  1,665   2,163   5,143   5,769   1,582   1,672 
Nontaxable  506   175   1,085   323   1,038   246 
Other interest income  275   98   567   524   113   161 
Total interest income  11,462   11,849   34,408   36,148   10,812   11,386 
                        
Interest expense:                        
Deposits  432   556   1,333   1,770   412   459 
Borrowings  37   37   114   110   53   36 
Junior subordinated debt  599   742   1,912   2,179   787   720 
Total interest expense  1,068   1,335   3,359   4,059   1,252   1,215 
Net interest income  10,394   10,514   31,049   32,089   9,560   10,171 
(Benefit) provision for loan losses  (250)  -   (1,220)  - 
Provision for loan losses  220   30 
Net interest income after provision for loan losses  10,644   10,514   32,269   32,089   9,340   10,141 
                        
Noninterest income:                        
Mortgage loan servicing fees  446   456   1,394   1,546   (2)  486 
Trust and investment services fees  643   654   1,953   1,900   797   651 
Service charges on deposits  202   153   784   719   254   295 
Net gain on sale of OREO  130   316   800   1,159   41   328 
Net gain on sale of loans  -   630   -   1,853 
Net (loss) gain on sale of securities  -   130   (1,248)  184 
BOLI income  88   98   271   98   218   91 
Mortgage referral fee income  431   123   1,175   123   245   327 
Interchange fees  496   630 
Other fees  598   684   1,732   1,240   303   288 
Other noninterest income  12   (176)  71   25   6   (21)
Total noninterest income  2,550   3,068   6,932   8,847   2,358   3,075 
                        
Noninterest expenses:                        
Salaries and employee benefits  5,668   6,536   17,913   19,460   5,551   6,037 
Occupancy  805   671   2,360   2,414   590   491 
Data processing  1,132   872   3,557   2,232   1,029   1,374 
Legal, professional and accounting fees  541   1,539   4,488   4,949 
Legal, professional, and accounting fees  525   2,212 
Change in value of MSRs  677   (95)  1,406   1,830   -   238 
Other noninterest expense  2,568   3,268   7,675   8,044   2,118   3,564 
Total noninterest expenses  11,391   12,791   37,399   38,929   9,813   13,916 
Income before provision for income taxes  1,803   791   1,802   2,007 
Provision for income taxes  1,398   -   3,487   - 
Income (loss) before provision (benefit) for income taxes  1,885   (700)
Provision (benefit) for income taxes  193   (214)
Net income (loss)  405   791   (1,685)  2,007   1,692   (486)
Dividends and discount accretion on preferred shares  -   1,083   771   3,176   -   770 
Net income (loss) attributable to common stockholders $405  $(292) $(2,456) $(1,169)
Net income (loss) available to common shareholders $1,692  $(1,256)
Basic earnings (loss) per common share $0.02  $(0.04) $(0.16) $(0.18) $0.09  $(0.10)
Diluted earnings (loss) per common share $0.02  $(0.04) $(0.16) $(0.18) $0.09  $(0.10)

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

-2-- 2 -
TRINITY CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)

  Three Months Ended September 30,  Nine Months Ended September 30, 
  2017  2016  2017  2016 
  (In thousands) 
Net income (loss) $405  $791  $(1,685) $2,007 
Other comprehensive income:                
Unrealized gains on securities available for sale  229   (969)  2,343   5,957 
Securities losses (gains) reclassified into earnings  -   (130)  1,248   (184)
Related income tax (benefit) expense  (106)  -   (1,436)  - 
Other comprehensive income (loss)  123   (1,099)  2,155   5,773 
Total comprehensive income (loss) $528  $(308) $470  $7,780 
  Three Months Ended March 31, 
  2018  2017 
       
Net income (loss) $1,692  $(486)
Other comprehensive income (loss):        
Unrealized (losses) gains on securities available for sale  (8,108)  630 
Securities losses (gains) reclassified into earnings  -   - 
Related income tax benefit (expense)  2,080   (249)
Other comprehensive (loss) income  (6,028)  381 
Total comprehensive loss $(4,336) $(105)

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

-3-- 3 -
TRINITY CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'SHAREHOLDERS' EQUITY
(Unaudited)
 
  Common stock                
 
(In thousands, except per share data)
 Voting Issued  
Held in
treasury, at
cost
  
Preferred
stock
  
Additional
paid-in
capital
  
Retained
earnings
  
Accumulated other
comprehensive
income (loss)
  
Total
stockholders'
equity
 
Balance, December 31, 2015 $6,836  $(9,880) $36,740  $1,153  $44,232  $(2,781) $76,300 
Net income                  2,007       2,007 
Other comprehensive income                      5,773   5,773 
Dividends declared on preferred shares                  (3,176)      (3,176)
Amortization of preferred stock issuance      costs          134       (134)      - 
Treasury shares issued for board   compensation      897       (759)          138 
Net change in the fair value of stock owned by ESOP participants                  1       1 
Balance, September 30, 2016 $6,836  $(8,983) $36,874  $394  $42,930  $2,992  $81,043 
  Common stock                   
(In thousands, except per share data) Issued  Held in treasury, at cost  Non-voting issued  Preferred stock  Additional paid-in capital  Retained earnings  Accumulated other comprehensive income (loss)  Common Stock Related to ESOP  Total shareholders' equity 
Balance, December 31, 2016 $9,509  $-  $-  $74,007  $(1,373) $60,651  $(5,495) $(3,192) $134,107 
Net income                      (486)          (486)
Other comprehensive income                          381       381 
Redemption of Series A preferred shares              (35,539)                  (35,539)
Redemption of Series B preferred shares              (1,777)                  (1,777)
Dividends declared on preferred shares                      (372)          (372)
Series C preferred shares converted to non-voting common stock          8,286   (37,089)  28,803               - 
Common stock issued for board compensation  34               124               158 
Amortization of preferred stock issuance costs              398       (398)          - 
RSUs compensation expense                  15               15 
Balance, March 31, 2017 $9,543  $-  $8,286  $-  $27,569  $59,395  $(5,114) $(3,192) $96,487 


  Common stock                
 
(In thousands, except per share data)
 Voting Issued  Non-voting Issued  
Preferred
stock
  
Additional
paid-in
capital
  
Retained
earnings
  
Accumulated other
comprehensive
income (loss)
  
Total
stockholders'
equity
 
Balance, December 31, 2016 $9,510  $-  $74,007  $694  $55,391  $(5,495) $134,107 
Net loss                  (1,685)      (1,685)
Other comprehensive income                      2,155   2,155 
Redemption of Series A Preferred shares          (35,539)              (35,539)
Redemption of Series B Preferred shares          (1,777)              (1,777)
Dividends declared on preferred shares                  (373)      (373)
Series C preferred shares converted to non-voting common stock      8,286   (37,089)  28,803           - 
Common stock issued for board compensation  40           153           193 
Amortization of preferred stock          398       (398)      - 
Restricted stock units ("RSUs") vested  17           (17)          - 
Restricted stock units ("RSUs") compensation expense              91           91 
Balance, September 30, 2017 $9,567  $8,286  $-  $29,724  $52,935  $(3,340) $97,172 
  Common stock                   
(In thousands, except per share data) Voting Issued  Held in treasury, at cost  Non-voting issued  Preferred stock  Additional paid-in capital  Retained earnings  Accumulated other comprehensive income (loss)  Common Stock Related to ESOP  Total shareholders' equity 
Balance, December 31, 2017 $11,365  $-  $8,286  $-  $35,071  $54,587  $(3,763) $(5,961) $99,585 
Net income                      1,692           1,692 
Other comprehensive loss                          (6,028)      (6,028)
Rights offering costs                  (2)              (2)
Common stock issued to board  10               60               70 
Q1 RSU compensation expense                  217               217 
Common stock issued for vested RSUs  14               (14)              - 
Conversion from non-voting to voting common stock  242       (242)                      - 
Balance, March 31, 2018 $11,631  $-  $8,044  $-  $35,332  $56,279  $(9,791) $(5,961) $95,534 

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

-4-- 4 -
TRINITY CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 
 
Nine Months Ended
September 30,
  
Three Months Ended
March 31,
 
 2017  2016  2018  2017 
Cash Flows From Operating Activities (Dollars in thousands)  (Dollars in thousands) 
Net (loss) income $(1,685)  2,007 
Net income (loss) $1,692   (486)
Adjustments to reconcile net income to net cash provided by operating activities:                
Depreciation and amortization  5,104   4,509   2,062   1,904 
Benefit for loan losses  (1,220)  - 
Net loss (gain) on sale of investment securities  1,248   (184)
Net gain on sale of loans  -   (1,853)
Provision for loan losses  220   30 
Gains and write-downs on OREO, net  (166)  (1,036)  (21)  (321)
(Gain) loss on disposal of premises and equipment  (37)  1 
Loss on disposal of premises and equipment  2   - 
Decrease in deferred income tax assets  1,081   -   215   (739)
Federal Home Loan Bank stock dividends received  (5)  1 
Change in escrow liabilities  (5,209)  2,158 
Change in value of MSRs  1,406   1,830   -   238 
BOLI income  (271)  (98)
BOLI Income  (218)  (91)
Compensation expense recognized for restricted stock units  91   -   217   16 
Change in escrow liabilities  712   2,710 
Decrease in accrued interest payable on sub debt  (9,676)  -   -   (9,676)
Changes in operating assets and liabilities:                
Other Assets  4,708   505   1,185   482 
Other Liabilities  (2,158)  6,076   (1,775)  (872)
Net cash (used in) provided by operating activities before origination and gross sales of loans held for sale  (868)  14,468 
Gross sales of loans held for sale  -   (51,746)
Origination of loans held for sale  -   55,770 
Net cash (used in) provided by operating activities $(868)  18,492 
Net cash provided by operating activities before origination and gross sales of loans held for sale  (1,630)  (7,357)
Net cash used in operating activities $(1,630)  (7,357)
 
Continued next page

-5-- 5 -
TRINITY CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS CONTINUED
(Unaudited)

 
Nine Months Ended
September 30,
  
Three Months Ended
March 31,
 
 2017  2016  2018  2017 
Cash Flows From Investing Activities (Dollars in thousands)  (Dollars in thousands) 
Proceeds from maturities and paydowns of investment securities, available for sale $38,647  $46,694  $9,905  $14,264 
Proceeds from sale of investment securities, available for sale  56,543   98,259 
Purchase of investment securities, available for sale  (92,437)  (225,741)  (21,824)  (26,823)
Proceeds from maturities and paydowns of investment securities, held to maturity  26   822 
Proceeds from sale of other real estate owned  509   1,117 
Purchase of investment securities, other  (2)  -   (857)  - 
Proceeds from maturities and paydowns of investment securities, held to maturity  884   104 
Proceeds from sale of investment securities, other  33   - 
Purchase bank owned life insurance  -   (10,000)
Proceeds from sale of other real estate owned  3,251   3,724 
Loans paid down (funded), net  48,608   39,598   (8,424)  6,615 
Purchases of premises and equipment  (3,907)  (4,745)  (122)  (390)
Proceeds from sale of premises and equipment  69   - 
Net cash provided by (used in) investing activities  51,689   (52,107)  (20,787)  (4,395)
Cash Flows From Financing Activities                
Net decrease in demand deposits, NOW accounts and savings accounts  (2,770)  39,303 
Net increase in demand deposits, NOW accounts and savings accounts  26,268   9,614 
Net decrease in time deposits  (37,331)  (42,781)  (9,523)  (20,377)
Redemption of Preferred stock  (37,316)  - 
Decrease in dividends payable on Preferred Stock  (12,965)  - 
Issuance of common stock for board compensation  193   138 
Net cash used in financing activities  (90,189)  (3,340)
Partial repayment of subordinated debt  (10,310)  - 
Redemption of preferred stock  -   (37,316)
Issuance of common stock for stock option plan  68   158 
Decrease in dividends payable on preferred stock  -   (12,965)
Net cash provided by (used in) financing activities  6,503   (60,886)
Net decrease in cash and cash equivalents  (39,368)  (36,955)  (15,914)  (72,638)
Cash and cash equivalents:                
Beginning of period  119,335   188,875   35,434   119,335 
End of period $79,967  $151,920  $19,520  $46,697 
Supplemental Disclosures of Cash Flow Information                
Cash payments for:                
Interest $13,118  $1,987  $1,601  $10,928 
Non-cash investing and financing activities:                
Transfers from loans to other real estate owned  2,848   2,944   473   433 
Sales of other real estate owned financed by loans by the Bank  -   1,548 
Transfer from Venture Capital to loans  150   - 
Conversion of Preferred C stock to non-voting common stock  37,089   - 
Transfer from venture capital to loans  -   150 
Conversion of Series C preferred stock to non-voting common stock  -   37,089 
Dividends declared on preferred stock  373   3,176   -   373 
Conversion of non-voting common stock to voting common stock  242   - 

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

-6-- 6 -
Note 1. Basis of Presentation

Consolidation:  The accompanying unaudited consolidated financial statements include the consolidated balances and results of operations of Trinity Capital Corporation ("Trinity" or the "Company") and its wholly owned subsidiaries: Los Alamos National Bank (the "Bank"), and TCC Advisors Corporation ("TCC Advisors"), and TCC Funds, collectively referred to as the "Company." Trinity Capital Trust I ("Trust I"), Trinity Capital Trust III ("Trust III"), Trinity Capital Trust IV ("Trust IV") and Trinity Capital Trust V ("Trust V"), collectively referred to as the "Trusts," are trust subsidiaries of Trinity. Trinity owns all of the outstanding common securities of the Trusts. The Trusts are considered variable interest entities ("VIEs") under Accounting Standards Codification ("ASC") Topic 810, "Consolidation."  Because Trinity is not the primary beneficiary of the Trusts, the financial statements of the Trusts are not included in the consolidated financial statements of the Company.  Title Guaranty & Insurance Company ("Title Guaranty") was acquired in 2000TCC Advisors Corporation and its assetsTrust I were subsequently sold in August 2012.  As of December 31, 2013, all operations of Title Guaranty had ended and Title Guaranty was dissolved in September 2017.  TCC Funds was dissolved in January 2017.March 2018. 

Basis of presentation: The accompanying unaudited consolidated financial statements include the accounts of the Company and its subsidiaries. Significant intercompany items and transactions have been eliminated in consolidation.  The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America ("GAAP") and general practices within the financial services industry.  In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the year then ended.  Actual results could differ from those estimates.

The accompanying unaudited consolidated financial statements have been prepared in accordance with GAAP for financial information and with the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the statements reflect all adjustments necessary for a fair presentation of the financial position, results of operations and cash flows of the Company on a consolidated basis, and all such adjustments are of a normal recurring nature. These financial statements and the notes thereto should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 20162017 (the "2016"2017 Form 10-K"). Operating results for the three and nine monthsthree-month period ended September 30, 2017March 31, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 20172018 or any other period.

Reclassifications: Some items in the prior year financial statements have beenwere reclassified to conform to the current presentation.  Reclassifications had no effect on prior year net income or shareholders' equity.



Note 2. Earnings (Loss) Per Share Data

AverageThe average number of shares used in calculation ofcalculating basic and diluted earnings (loss) per common share were as follows for the three and nine months ended September 30, 2017March 31, 2018 and 2016:2017:
 
 Three Months Ended September 30,  Nine Months Ended September 30,  Three Months Ended March 31, 
 2017  2016  2017  2016  2018  2017 
 (In thousands, except share data)  (In thousands, except share and per share data) 
Net income (loss) $405  $791  $(1,685) $2,007  $1,692  $(486)
Dividends and discount accretion on preferred shares  -   1,083   771   3,176   -   770 
Net income (loss) attributable to common stockholders $405  $(292) $(2,456) $(1,169)
Net income (loss) available to common shareholders $1,692  $(1,256)
Weighted average common shares issued  17,539,689   6,856,800   15,647,178   6,856,800   19,665,543   13,017,045 
LESS: Weighted average treasury stock shares  -   (330,498)  -   (331,002)  -   - 
Weighted average common shares outstanding, net  17,539,689   6,526,302   15,647,178   6,525,798   19,665,543   13,017,045 
Basic earnings (loss) per common share $0.02  $(0.04) $(0.16) $(0.18)
Basic income (loss) per common share $0.09  $(0.10)
Dilutive effect of stock-based compensation  13,134   -   -   -   45,133   - 
Weighted average common shares outstanding including dilutive shares  17,552,823   6,526,302   15,647,178   6,525,798   19,710,676   13,017,045 
Diluted earnings (loss) per common share $0.02  $(0.04) $(0.16) $(0.18)
Diluted income (loss) per common share $0.09  $(0.10)
 
Certain restricted stock units ("RSUs") were not included in the above calculation, as they would have had an anti-dilutive effect.  The total number ofThere were no shares excluded shares relating to such RSUs was approximately 62,000 for the three months ended September 30, 2016.  There were no shares excluded from the calcualtion for the three months ended September 30, 2017.March 31, 2018.  The total number of excluded shares relating to such RSUsexcluded was approximately 97,000 shares and 62,00033,000 shares for the ninethree months ended September 30, 2017 and 2016, respectively.March 31, 2017.

Note 3. Recent Accounting Pronouncements

Newly Issued But Not Effective Accounting Standards

effective standards:In May 2014, the FASBFinancial Accounting Standards Board ("FASB") issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). This update requires an entity to recognize revenue as performance obligations are met, in order to reflect the transfer of promised goods or services to customers in an amount that reflects the consideration the entity is entitled to receive for those goods or services. The following steps are applied in the updated guidance: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the entity satisfies a performance obligation. TheIn August 2015, the FASB later issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606) – Deferral of the Effective Date.  This update deferred the effective date of ASU 2014-09 by one year.  The amendedyear,  making it effective date isfor annual reporting periods beginning after December 15, 2017 including interim reporting periods within that reporting period. The Company's revenue is comprised of net interest income on financial assets and liabilities, which is explicitly excluded from the scope of this guidance, and non-interest income.  The Company plans to adopt ASU 2014-09has reviewed non-interest income, such as deposit fees, assets management and investment advisory fees, OREO gains and losses on sale, and credit card interchange fees.  The Company completed its overall assessment of revenue streams and related contracts affected by the guidance and adopted ASC 606 on January 1, 2018 utilizing the modified retrospective approach.  with no impact on total shareholders' equity or net income.
Revenue Recognition
The Company's analysis suggests thatCompany recognizes revenue as it is earned and determined no change to its revenue recognition policies as a result of the adoption of ASC 606.  The following is a discussion of revenues within the scope of the new revenue guidance:
·
Service charges on deposit accounts - Revenue from service charges on deposit accounts is earned through deposit-related services; as well as overdraft, non-sufficient funds, account management and other deposit related fees.  Revenue is recognized either over time, corresponding with deposit accounts' monthly cycle, or at a point in time for transactional related services and fees.
·
Debit and credit card interchange fee income - Card processing fees consist of interchange fees from consumer debit and credit card networks and other card related services.  Interchange fees are based on purchase transactions and other factors and are recognized as transactions occur.
·
Wealth management and investment brokerage fees - The Company earns wealth management and investment brokerage fees from its contracts with trust and brokerage customers for management of assets, and/or transactions on their accounts.  These fees are primarily earned over time as the Company provides the contracted monthly or quarterly services and are generally assessed based on a tiered scale of the market value of the assets under management.  Fees that are transactional based are recognized at the point in time that the transaction is executed.  Other related services provided and the fees the Company earns are based on a fixed schedule and are recognized when the services are rendered.
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·
Gains/Losses on sales of OREO - The Company records a gain or loss from the sale of OREO when control of the property transfers to the buyer, which generally occurs at the time the deed is executed.  When the Company finances the sale of OREO to the buyer, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable.  Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer.  In determining the gain or loss on the sale, the Company may adjust the transaction price and related gain (loss) on sale if a significant financing component is present.
·
Mortgage referral fees - The Company earns and records fee income from mortgage referrals to unaffiliated third parties.  This fee income is earned and recognized once the referred loan is closed.
In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (Topic 825).  The amendments in this update require that public entities measure equity investments with readily determinable fair values, at fair value, with changes in their fair value recorded through net income.  This ASU clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available for sale securities in combination with the entity's other deferred tax assets. This ASU also prescribes an exit price be used to determine the fair value of financial instruments not measured at fair value for disclosure in the fair value note.  The amendments within the update are effective for fiscal years and all interim periods beginning after December 15, 2017.  The Company has determined that the evaluation of deferred tax asset ("DTA") valuation allowance and the exit price for financial instruments are within scope for the Company.  The Company adopted this standard on January 1, 2018 and used a third-party to provide the exit pricing for Note 16, Fair Value Measurements, as required under ASU 2016-01.  The adoption of ASU 2016-01 did not have an impact on the Company's financial statements.   
In May 2017, the FASB issues ASU 2017-09, Compensation - Stock Compensation (Topic 718).  ASU 2017-09 was effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.  This ASU provides clarity on the guidance related to stock compensation when there have been changes to the terms or conditions of a share-based payment award to which an entity would be required to apply modification accounting standardunder ASC 718.  The ASU provides the three following criteria must be met in order to not account for the effect of the modification of terms or conditions: the fair value, the vesting conditions and the classification as an equity or liability instrument of the modified award is the same as the original award immediately before the original award is modified. The Company adopted ASU 2017-09 on January 1, 2018.  The adoption of ASU 2017-09 did not expected to have a material impact on the timing or amounts of income recognized, as we have determined the majority of the revenues earned by the Company are not within the scope of ASU 2014-09.  The Company is currently reviewing disclosures for any changes needed.  The FASB continues to release new accounting guidance related to the adoption of this standard, which could impact the Company's preliminary materiality analysis and may change the conclusions reached as to the application of this new guidance.Consolidated Financial Statements.

Newly Issued But Not Effective Accounting Standards: In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those periods using a modified retrospective approach and early adoption is permitted. This ASU requires a lessee to record a right-to-use asset and liability representing the obligation to make lease payments for long-term leases.  It is expected that assets and liabilities will increase based on the present value of remaining lease payments for leases in place at the adoption date; however, this is not expected to be material to the Company's results of operations or financial position.  The Company is currently incontinues to evaluate the processextent of evaluatingpotential impact the impact of adoption of ASU 2016-02new guidance will have on itsthe Company's consolidated financial statements and disclosures.

statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.  This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.  The Company has created an internal committee focused on the implementation of ASU 2016-13 and is currently in the process of evaluating data needs and the effects of ASU 2016-13 on its financial statements and disclosures.

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.  This ASU is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years.  The Company does not expect any impact from this ASU on the Company's financial statements.is also working with a third party ALLL software provider to help with implementation.


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Note 4. Restrictions on Cash and Due From Banks

The Bank is required to maintain reserve balances in cash or on deposit with the Board of Governors of the Federal Reserve System ("FRB"), based on a percentagethe level of certain of its deposits.  This reserve requirement may be met by funds on deposit with the FRB and cash on hand.  As of September 30, 2017March 31, 2018 and December 31, 2016,2017, the reserve requirement on deposit at the FRB was $0 due to the large balance maintained at the FRB.$0.

The Company maintains some of its cash in bank deposit accounts at financial institutions other than its subsidiaries that, at times, may exceed federally insured limits.  The Company may lose all uninsured balances if one of the correspondent banks fails without warning.  The Company has not experienced any losses in such accounts.  The Company believes it is not exposed to any significant credit risk on cash and cash equivalents as the Company reviews this risk on a quarterly basis.equivalents.

Note 5. Investment Securities

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

Securities Available for Sale: 
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
  Fair Value 
  (In thousands) 
September 30, 2017            
U.S. Government sponsored agencies $74,321  $170  $(262) $74,229 
State and political subdivision  111,127   660   (1,015)  110,772 
Residential mortgage backed securities  131,099   112   (1,473)  129,738 
Residential collateralized mortgage obligation  10,313   56   (65)  10,304 
Commercial mortgage backed securities  110,720   176   (2,017)  108,879 
SBA pools  606   -   (7)  599 
Totals $438,186  $1,174  $(4,839) $434,521 
                 
December 31, 2016                
U.S. Government sponsored agencies $69,306  $20  $(498) $68,828 
State and political subdivision  38,718   42   (1,417)  37,343 
Residential mortgage backed securities  206,101   42   (2,324)  203,819 
Residential collateralized mortgage obligation  14,828   77   (89)  14,816 
Commercial mortgage backed securities  117,272   57   (3,157)  114,172 
SBA pools  681   -   (9)  672 
Totals $446,906  $238  $(7,494) $439,650 

Securities Held to Maturity 
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
  Fair Value 
Securities Available for Sale: 
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
  Fair Value 
 (In thousands)  (In thousands) 
September 30, 2017            
March 31, 2018            
U.S. government sponsored agencies $69,310  $-  $(1,633) $67,677 
State and political subdivisions  163,991   177   (3,690)  160,478 
Residential mortgage backed securities  120,195   2   (2,086)  118,111 
Residential collateralized mortgage obligations  18,294   50   (180)  18,164 
Commercial mortgage backed securities  110,244   -   (4,303)  105,941 
SBA pools $7,882  $-  $(370) $7,512   554   -   (15)  539 
Totals $7,882  $-  $(370) $7,512  $482,588  $229  $(11,907) $470,910 
                                
December 31, 2016                
December 31, 2017                
U.S. government sponsored agencies $69,315  $-  $(764) $68,551 
State and political subdivisions  157,652   1,306   (252)  158,706 
Residential mortgage backed securities  124,578   98   (1,593)  123,083 
Residential collateralized mortgage obligations  9,715   51   (80)  9,686 
Commercial mortgage backed securities  110,483   67   (2,388)  108,162 
SBA pools $8,824  $-  $(211) $8,613   560   -   (15)  545 
Totals $8,824  $-  $(211) $8,613  $472,303  $1,522  $(5,092) $468,733 

Realized
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Securities Held to Maturity 
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
  Fair Value 
  (In thousands) 
March 31, 2018            
SBA pools $7,824  $-  $(512) $7,312 
Totals $7,824  $-  $(512) $7,312 
                 
December 31, 2017                
SBA pools $7,854  $-  $(485) $7,369 
Totals $7,854  $-  $(485) $7,369 

 As of March 31, 2018 and 2017, there were no realized net gains (losses)or losses on sale and call of securities available for sale are summarized as follows:

 Three Months Ended September 30,  Nine Months Ended September 30, 
 2017  2016  2017  2016 
 (In thousands) 
Gross realized gains $-  $620  $6  $674 
Gross realized losses  -   (490)  (1,254)  (490)
Net gains (losses) $-  $130  $(1,248) $184 

There was a tax benefit of $482 thousand for the nine months ended September 30, 2017 related to these net realized gains and losses.sale.  There was no tax benefit (provision)or provision related to these net realized gains and losses for the three and nine months ended September 30, 2016 due to the full valuation allowance on deferred tax asset ("DTA").

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March 31, 2018 and 2017. 
A summary of unrealized loss information for investment securities, categorized by security type, as of September 30, 2017March 31, 2018 and December 31, 20162017 was as follows:

 Less than 12 Months  12 Months or Longer  Total 
 
Fair
Value
  
Unrealized
Losses
  
Fair
Value
  
Unrealized
Losses
  
Fair
Value
  
Unrealized
Losses
  Less than 12 Months  12 Months or Longer  Total 
 (In thousands)  
Fair
Value
  
Unrealized
Losses
  
Fair
Value
  
Unrealized
Losses
  
Fair
Value
  
Unrealized
Losses
 
Securities Available for Sale:
                                    
September 30, 2017                  
U.S. Government sponsored agencies $24,647  $(262) $-  $-  $24,647  $(262)
State and political subdivision  53,485   (537)  27,812   (478)  81,297   (1,015)
March 31, 2018                  
U.S. government sponsored agencies $48,412  $(979) $19,265  $(654) $67,677  $(1,633)
State and political subdivisions  115,741   (2,913)  24,041   (777)  139,782   (3,690)
Residential mortgage backed securities  34,651   (276)  78,039   (1,197)  112,690   (1,473)  37,193   (512)  82,865   (1,574)  120,058   (2,086)
Residential collateralized mortgage obligation  8,286   (57)  518   (8)  8,804   (65)
Residential collateralized mortgage obligations  12,521   (156)  4,271   (24)  16,792   (180)
Commercial mortgage backed securities  68,137   (1,242)  22,747   (775)  90,884   (2,017)  24,331   (536)  79,377   (3,767)  103,708   (4,303)
SBA pools  -   -   599   (7)  599   (7)  -   -   539   (15)  539   (15)
Totals $189,206  $(2,374) $129,715  $(2,465) $318,921  $(4,839) $238,198  $(5,096) $210,358  $(6,811) $448,556  $(11,907)
                                                
December 31, 2016                        
U.S. Government sponsored agencies $53,877  $(498) $-  $-  $53,877  $(498)
State and political subdivision  33,833   (1,417)  -   -   33,833   (1,417)
December 31, 2017                        
U.S. government sponsored agencies $49,070  $(331) $19,481  $(433) $68,551  $(764)
State and political subdivisions  23,217   (95)  24,774   (157)  47,991   (252)
Residential mortgage backed securities  143,344   (1,539)  50,474   (785)  193,818   (2,324)  18,771   (199)  88,100   (1,394)  106,871   (1,593)
Residential collateralized mortgage obligation  8,413   (87)  122   (2)  8,535   (89)
Residential collateralized mortgage obligations  4,761   (67)  3,502   (13)  8,263   (80)
Commercial mortgage backed securities  96,222   (3,157)  -   -   96,222   (3,157)  6,961   (94)  81,042   (2,294)  88,003   (2,388)
SBA pools  -   -   673   (9)  673   (9)  -   -   545   (15)  545   (15)
Totals $335,689  $(6,698) $51,269  $(796) $386,958  $(7,494) $102,780  $(786) $217,444  $(4,306) $320,224  $(5,092)
                                                
Securities Held to Maturity:                                                
September 30, 2017                        
SBA Pools $-  $-  $7,512  $(370) $7,512  $(370)
March 31, 2018                        
SBA pools $-  $-  $7,312  $(512) $7,312  $(512)
Totals $-  $-  $7,512  $(370) $7,512  $(370) $-  $-  $7,312  $(512) $7,312  $(512)
                                                
December 31, 2016                        
SBA Pools $8,613  $(211) $-  $-  $8,613  $(211)
December 31, 2017                        
SBA pools $-  $-  $7,369  $(485) $7,369  $(485)
Totals $8,613  $(211) $-  $-  $8,613  $(211) $-  $-  $7,369  $(485) $7,369  $(485)

As of September 30, 2017,March 31, 2018, the Company's security portfolio consisted of 131156 securities, 88133 of which were in an unrealized loss position. As of September 30, 2017, $326.4March 31, 2018, $468.3 million in investment securities had unrealized losses with aggregate depreciation of 1.57%2.58% of the Company's amortized cost basis.  Of these securities, $137.2$225.0 million in amortized cost had a continuous unrealized loss position for twelve months or longer with an aggregate depreciation of 2.02%3.15%.  The unrealized losses relate principally to the general change in interest rates and illiquidity, and not credit quality, that has occurred since the securitiessecurities' purchase dates, and such unrecognized losses or gains will continue to vary with general interest rate level fluctuations in the future.  As management does not intend to sell the securities, and it is likely that it will not be required to sell the securities before their anticipated recovery, no declines are deemed to be other than temporary.

At  March 31, 2018 and 2017, there were no holdings of securities of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of shareholders' equity.
The amortized cost and fair value of investment securities, as of September 30, 2017,March 31, 2018, by contractual maturity are shown below.  Maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties.

 Available for Sale  Held to Maturity  Available for Sale  Held to Maturity 
 Amortized Cost  Fair Value  Amortized Cost  Fair Value  Amortized Cost  Fair Value  Amortized Cost  Fair Value 
 (In thousands)  (In thousands) 
One year or less $5,201  $5,200  $-  $-  $201  $200  $-  $- 
One to five years  55,421   55,270   -   -   65,540   64,008   -   - 
Five to ten years  16,710   16,863   -   -   6,578   6,487   -   - 
Over ten years  108,722   108,267   7,882   7,512   161,536   157,999   7,824   7,312 
Subtotal  186,054   185,600   7,882   7,512   233,855   228,694   7,824   7,312 
Residential mortgage backed securities  131,099   129,738   -   - 
Residential mortgage backed security  120,195   118,111   -   - 
Residential collateralized mortgage obligation  10,313   10,304   -   -   18,294   18,164   -   - 
Commercial mortgage backed securities  110,720   108,879         
Commercial mortgage backed security  110,244   105,941         
Total $438,186  $434,521  $7,882  $7,512  $482,588  $470,910  $7,824  $7,312 

Securities with carrying amounts of $87.9$83.8 million and $87.9$87.4 million as of September 30, 2017March 31, 2018 and December 31, 2016,2017, respectively, were pledged as collateral on public deposits and for other purposes as required or permitted by law.

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Note 6. Loans and Allowance for Loan Losses

As of September 30, 2017March 31, 2018 and December 31, 2016,2017, loans consisted of:

 September 30, 2017  December 31, 2016  March 31, 2018  December 31, 2017 
 (In thousands)  (In thousands) 
Commercial $65,157  $69,161  $67,557  $61,388 
Commercial real estate  389,831   405,900   384,247   378,802 
Residential real estate  186,934   214,726   169,559   178,296 
Construction real estate  76,399   75,972   68,002   63,569 
Installment and other  17,676   21,053   16,794   18,952 
Total loans  735,997   786,812   706,159   701,007 
Unearned income  (980)  (1,322)  (813)  (863)
Gross loans  735,017   785,490   705,346   700,144 
Allowance for loan losses  (13,200)  (14,352)  (11,238)  (13,803)
Net loans $721,817  $771,138  $694,108  $686,341 

Loan Origination/Risk Management. The Company has certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk.  Management and the Board of Directors review and approve these policies and procedures on an annual basis.  A reporting system supplements the review process by providing management with reports related to loan production, loan quality, concentrations of credit, loan delinquencies and non-performing and potential problem loans.  Management has identified the following categories in its loan portfolios:

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

Commercial real estate loans: These loans are subject to underwriting standards and processes similar to commercial loans, in addition to those of other real estate loans.  These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate.  Commercial real estate lending typically involves higher original amounts than other types of loans and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan.  Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy.  The properties securing the Company's commercial real estate portfolio are geographically concentrated in the markets in which the Company operates.  Management monitors and evaluates commercial real estate loans based on collateral, location and risk grade criteria.  The Company also utilizes third-party sources to provide insight and guidance about economic conditions and trends affecting market areas it serves.  In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans.  As of September 30, 2017, 25.9%March 31, 2018, 25.2% of the outstanding principal balances of the Company's commercial real estate loans were secured by owner-occupied properties.

With respect to loans to developers and builders that are secured by non-owner occupied properties that the Company may originate from time to time, the Company generally requires the borrower to have had an existing relationship with the Company and have a proven record of success.

Residential real estate loans: Underwriting standards for residential real estate and home equity loans are heavily influenced by statutory requirements, which include, but are not limited to, maximum loan-to-value levels, debt-to-income levels, collection remedies, the number of such loans a borrower can have at one time and documentation requirements.
Construction real estate loans: These loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analysis of absorption and lease rates and financial analysis of the developers and property owners.  Construction real estate loans are generally based upon estimates of costs and values associated with the completed project and often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project.  Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained.  These loans are monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing.

Residential real estate loans: Underwriting standards for residential real estate and home equity loans are heavily influenced by statutory requirements, which include, but are not limited to, maximum loan-to-value levels, debt-to-income levels, collection remedies, the number of such loans a borrower can have at one time and documentation requirements.

Installment loans: The Company originates consumer loans utilizing a credit scoring analysis to supplement the underwriting process.  To monitor and manage consumer loan risk, policies and procedures are developed and modified, as needed.  This activity, coupled with relatively small loan amounts that are spread across many individual borrowers, minimizes risk.  Additionally, trend and outlook reports are reviewed by management on a regular basis.

The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Company's policies and procedures, which include periodic internal reviews and reports to identify and address risk factors developing within the loan portfolio. The Company engages external independent loan reviews that assess and validate the credit risk program on a periodic basis.  Results of these reviews are presented to and reviewed by management and the Board of Directors.

-10-- 10 -
The following table presents the contractual aging of the recorded investment in current and past due loans by categoryclass of loans as of September 30, 2017March 31, 2018 and December 31, 2016,2017, including nonaccrual loans:

 Current  
30-59 Days
Past Due
  
60-89 Days
Past Due
  
Loans past
due 90 days
or more
  
Total Past
Due
  Total  Current  
30-59 Days
Past Due
  
60-89 Days
Past Due
  
Loans past
due 90 days
or more
  
Total Past
Due
  Total 
September 30, 2017 (In thousands) 
March 31, 2018 (In thousands) 
Commercial $64,256  $89  $381  $431  $901  $65,157  $67,214  $318  $25  $-  $343  $67,557 
Commercial real estate  387,717   420   323   1,371   2,114   389,831   380,993   1,292   -   1,962   3,254   384,247 
Residential real estate  183,740   1,403   45   1,746   3,194   186,934   166,462   1,314   387   1,396   3,097   169,559 
Construction real estate  71,194   424   75   4,706   5,205   76,399   64,114   338   -   3,550   3,888   68,002 
Installment and other  17,460   99   31   86   216   17,676   16,673   29   -   92   121   16,794 
Total loans $724,367  $2,435  $855  $8,340  $11,630  $735,997  $695,456  $3,291  $412  $7,000  $10,703  $706,159 
                                                
Nonaccrual loan classification, included above $7,073  $344  $368  $7,946  $8,658  $15,731  $4,729  $484  $412  $7,000  $7,896  $12,625 
                                                
December 31, 2016                        
December 31, 2017                        
Commercial $67,562  $1,010  $221  $368  $1,599  $69,161  $59,703  $173  $1,475  $37  $1,685  $61,388 
Commercial real estate  399,861   4,564   -   1,475   6,039   405,900   371,640   5,490   -   1,672   7,162   378,802 
Residential real estate  208,200   3,089   1,355   2,082   6,526   214,726   174,388   1,899   -   2,009   3,908   178,296 
Construction real estate  67,310   378   43   8,241   8,662   75,972   59,291   423   74   3,781   4,278   63,569 
Installment and other  20,860   135   38   20   193   21,053   18,705   80   81   86   247   18,952 
Total loans $763,793  $9,176  $1,657  $12,186  $23,019  $786,812  $683,727  $8,065  $1,630  $7,585  $17,280  $701,007 
                                                
Nonaccrual loan classification, included above $8,331  $249  $712  $12,186  $13,147  $21,478  $3,858  $5,859  $38  $7,585  $13,482  $17,340 

The following table presents the recorded investment in nonaccrual loans and loans past due 90 days or more and still accruing interest by categoryclass of loans as of September 30, 2017March 31, 2018 and December 31, 2016:2017:

 September 30, 2017  December 31, 2016  March 31, 2018  December 31, 2017 
 Nonaccrual  
Loans past
due 90 days
or more and
still accruing
interest
  Nonaccrual  
Loans past
due 90 days
or more and
still accruing
interest
  Nonaccrual  
Loans past
due 90 days
or more and
still accruing
interest
  Nonaccrual  
Loans past
due 90 days
or more and
still accruing
interest
 
 (In thousands)  (In thousands)          
Commercial $108  $394  $1,192  $-  $58  $-  $102  $- 
Commercial real estate  6,202   -   5,823   -   5,056   -   8,617   - 
Residential real estate  4,364   -   4,247   -   3,774   -   4,599   - 
Construction real estate  4,921   -   10,159   -   3,645   -   3,911   - 
Installment and other  136   -   57   -   92   -   111   - 
Total $15,731  $394  $21,478  $-  $12,625  $-  $17,340  $- 

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

Loans not meeting the criteria above that are analyzed individually are considered to be pass-rated loans.  The following table presents the risk category by categoryclass of loans based on the most recent analysis performed as of September 30, 2017March 31, 2018 and December 31, 2016:2017:

 Pass  Special Mention  Substandard  Doubtful  Total  Pass  Special Mention  Substandard  Doubtful  Total 
September 30, 2017 (In thousands) 
March 31, 2018 (In thousands) 
Commercial $62,631  $157  $2,369  $-  $65,157  $64,757  $225  $2,575  $-  $67,557 
Commercial real estate  373,901   5,472   10,458   -   389,831   369,163   4,507   10,577   -   384,247 
Residential real estate  180,522   152   6,260   -   186,934   164,280   -   5,279   -   169,559 
Construction real estate  68,413   936   7,050   -   76,399   61,717   898   5,387   -   68,002 
Installment and other  17,528   -   148   -   17,676   16,386   -   408   -   16,794 
Total $702,995  $6,717  $26,285  $-  $735,997  $676,303  $5,630  $24,226  $-  $706,159 
                                        
December 31, 2016                    
December 31, 2017                    
Commercial $56,611  $1,046  $11,504  $-  $69,161  $58,769  $2  $2,617  $-  $61,388 
Commercial real estate  380,777   11,573   13,550   -   405,900   359,768   4,762   14,272   -   378,802 
Residential real estate  209,049   588   5,089   -   214,726   172,101   -   6,195   -   178,296 
Construction real estate  60,848   5,378   9,746   -   75,972   56,661   917   5,991   -   63,569 
Installment and other  20,983   4   66   -   21,053   18,523   -   429   -   18,952 
Total $728,268  $18,589  $39,955  $-  $786,812  $665,822  $5,681  $29,504  $-  $701,007 

-11-- 11 -
The following table shows all loans, including nonaccrual loans, by risk category and aging as of September 30, 2017March 31, 2018 and December 31, 2016:2017:

Pass  Special Mention  Substandard  Doubtful  Total Pass  Special Mention  Substandard  Doubtful  Total 
September 30, 2017(In thousands) 
March 31, 2018(In thousands) 
Current $700,893  $6,297  $17,177  $-  $724,367  $673,557  $5,630  $16,269  $-  $695,456 
Past due 30-59 days  1,517   420   498   -   2,435   2,746   -   545   -   3,291 
Past due 60-89 days  191   -   664   -   855   -   -   412   -   412 
Past due 90 days or more  394   -   7,946   -   8,340   -   -   7,000   -   7,000 
Total $702,995  $6,717  $26,285  $-  $735,997  $676,303  $5,630  $24,226  $-  $706,159 
                                        
December 31, 2016  
December 31, 2017(In thousands) 
Current $724,075  $13,956  $25,762  $-  $763,793  $662,445  $5,681  $15,601  $-  $683,727 
Past due 30-59 days  3,383   4,633   1,160   -   9,176   1,785   -   6,280   -   8,065 
Past due 60-89 days  810   -   847   -   1,657   1,592   -   38   -   1,630 
Past due 90 days or more  -   -   12,186   -   12,186   -   -   7,585   -   7,585 
Total $728,268  $18,589  $39,955  $-  $786,812  $665,822  $5,681  $29,504  $-  $701,007 

As of September 30, 2017March 31, 2018 and December 31, 2016,2017, nonaccrual loans totaling $15.7$12.6 million and $18.4$17.3 million were classified as Substandard,"Substandard," respectively.

The following table presents loans individually evaluated for impairment by class of loans as of September 30, 2017March 31, 2018 and December 31, 2016,2017, showing the unpaid principal balance, the recorded investment of the loan (reflecting any loans with partial charge-offs), and the amount of allowance for loan losses specifically allocated for these impaired loans (if any):

 September 30, 2017  December 31, 2016  March 31, 2018  December 31, 2017 
 
Unpaid
Principal
Balance
  
Recorded
Investment
 
Allowance
for Loan
Losses
Allocated
  
Unpaid
Principal
Balance
  
Recorded
Investment
 
Allowance
for Loan
Losses
Allocated
  
Unpaid
Principal
Balance
  
Recorded
Investment
 
Allowance
for Loan
Losses
Allocated
  
Unpaid
Principal
Balance
  
Recorded
Investment
 
Allowance
for Loan
Losses
Allocated
 
 (In thousands)  (In thousands) 
With no related allowance recorded:                                
Commercial $12,626  $12,624    $2,203  $2,166    $99  $96    $184  $182   
Commercial real estate  6,962   6,455     6,368   6,136     8,014   5,056     4,294   4,154   
Residential real estate  5,485   4,911     5,176   4,494     5,809   5,012     6,585   5,808   
Construction real estate  8,934   7,091     7,522   6,031     6,804   5,429     7,471   6,049   
Installment and other  405   404     313   313     309   308     349   348   
With an allowance recorded:                                        
Commercial  1,575   1,574  $223   13,988   13,988  $350   13,267   13,266  $243   13,361   13,359  $211 
Commercial real estate  6,326   6,326   865   6,376   6,376   911   6,474   6,474   1,199   10,987   10,987   3,735 
Residential real estate  7,682   7,678   1,381   8,601   8,598   1,424   6,641   6,641   857   6,774   6,774   943 
Construction real estate  3,282   3,282   202   5,288   5,251   237   3,206   3,206   227   3,244   3,244   231 
Installment and other  272   272   34   433   433   88   243   243   37   236   236   32 
Total $53,549  $50,617  $2,705  $56,268  $53,786  $3,010  $50,866  $45,731  $2,563  $53,485  $51,141  $5,152 

The table above includes $39.8$39.9 million in troubleof troubled debt restructurings, ("TDRs")or restructured loans, at September 30, 2017,March 31, 2018 and $43.1$38.9 million of restructured loans at December 31, 2016.2017.

The following table presents loans individually evaluated for impairment by class of loans for the three and nine months ended September 30,March 31, 2018 and 2017, and 2016, showing the average recorded investment and the interest income recognized:

 Three Months Ended  Nine Months Ended  Three Months Ended 
 September 30, 2017  September 30, 2016  September 30, 2017  September 30, 2016  March 31, 2018  March 31, 2017 
 
Average
Recorded
Investment
  
Interest
Income
Recognized
  
Average
Recorded
Investment
  
Interest
Income
Recognized
  
Average
Recorded
Investment
  
Interest
Income
Recognized
  
Average
Recorded
Investment
  
Interest
Income
Recognized
  
Average
Recorded
Investment
  
Interest
Income
Recognized
  
Average
Recorded
Investment
  
Interest
Income
Recognized
 
 (In thousands)  (In thousands) 
With no related allowance recorded:                                    
Commercial $6,834  $184  $9,648  $103  $4,411  $543  $9,715  $307  $139  $1  $1,989  $14 
Commercial real estate  5,133   99   10,279   18   5,084   295   10,668   53   4,605   -   5,035   10 
Residential real estate  4,712   54   5,955   10   4,586   162   6,541   31   5,410   15   4,459   22 
Construction real estate  7,397   104   6,213   5   7,189   308   6,587   16   5,739   22   6,982   88 
Installment and other  399   5   341   4   353   14   339   12   328   3   308   3 
With an allowance recorded:                                                
Commercial  7,547   22   14,338   196   10,741   66   14,451   584   13,313   187   13,935   186 
Commercial real estate  6,350   69   9,003   92   6,352   205   9,056   273   8,730   70   6,353   67 
Residential real estate  7,695   81   9,652   81   8,019   240   9,860   242   6,708   75   8,343   81 
Construction real estate  3,302   43   4,443   45   3,755   129   4,178   134   3,225   42   4,209   40 
Installment and other  289   2   529   4   347   7   554   13   239   2   405   3 
Total $49,658  $663  $70,401  $558  $50,837  $1,969  $71,949  $1,665  $48,436  $417  $52,018  $514 

If nonaccrual loans outstanding had been current in accordance with their original terms, approximately $197.1$188.3 thousand and $517.3$211.4 thousand would have been recorded as loan interest income during the three months ended September 30,March 31, 2018 and 2017, and 2016, respectively, and $584.8 thousand and $1.2 million during the nine months ended September 30, 2017 and 2016, respectively.  Interest income recognized in the above table was primarily recognized on a cash basis was not material.basis.

Recorded investment balances in the above tables exclude accrued interest income and unearned income as such amounts were immaterial.

-12-- 12 -
Allowance for Loan Losses:

For the three and nine months ended September 30,March 31, 2018 and 2017, and 2016, activity in the allowance for loan losses was as follows:

 Commercial  Commercial real estate  Residential real estate  Construction real estate  Installment and other  Unallocated  Total  Commercial  Commercial real estate  Residential real estate  Construction real estate  Installment and other  Unallocated  Total 
 (In thousands)  (In thousands) 
Three Months Ended September 30, 2017:                     
Three Months Ended March 31, 2018:                     
Beginning balance $1,377  $6,205  $3,805  $1,117  $635  $28  $13,167  $536  $8,573  $2,843  $1,030  $315  $506  $13,803 
Provision (benefit) for loan losses  (297)  461   (117)  1,731   (2,073)  45   (250)  46   1,046   (323)  (53)  (95)  (401)  220 
                            
Charge-offs  (7)  (612)  -   (1,385)  (19)  -   (2,023)  (9)  (2,736)  (105)  (112)  (28)  -   (2,990)
Recoveries  56   88   125   37   2,000   -   2,306   24   22   47   49   63   -   205 
Net recoveries (charge-offs)  49   (524)  125   (1,348)  1,981   -   283 
Net charge-offs  15   (2,714)  (58)  (63)  35   -   (2,785)
Ending balance $1,129  $6,142  $3,813  $1,500  $543  $73  $13,200  $597  $6,905  $2,462  $914  $255  $105  $11,238 
                                                        
Three Months Ended September 30, 2016:                            
Three Months Ended March 31, 2017:                            
Beginning balance $2,220  $7,919  $5,629  $1,039  $758  $27  $17,592  $1,449  $6,472  $4,524  $1,119  $715  $73  $14,352 
Provision (benefit) for loan losses  (193)  1   10   155   3   24   -   320   13   (209)  (27)  4   (71)  30 
                            
Charge-offs  (206)  (46)  (174)  -   (98)  -   (524)  (186)  -   (244)  (16)  (137)  -   (583)
Recoveries  260   377   56   5   35   -   733   173   88   55   10   62   -   388 
Net recoveries (charge-offs)  54   331   (118)  5   (63)  -   209 
Net charge-offs  (13)  88   (189)  (6)  (75)  -   (195)
Ending balance $2,081  $8,251  $5,521  $1,199  $698  $51  $17,801  $1,756  $6,573  $4,126  $1,086  $644  $2  $14,187 
                                                        
Nine Months Ended September 30, 2017:                            
Beginning balance $1,449  $6,472  $4,524  $1,119  $715  $73  $14,352 
Provision (benefit) for loan losses  (356)  123   (626)  1,739   (2,100)  -   (1,220)
                            
Charge-offs  (270)  (639)  (309)  (1,409)  (253)  -   (2,880)
Recoveries  306   186   224   51   2,181   -   2,948 
Net recoveries (charge-offs)  36   (453)  (85)  (1,358)  1,928   -   68 
Ending balance $1,129  $6,142  $3,813  $1,500  $543  $73  $13,200 
                            
Nine Months Ended September 30, 2016:                            
Beginning balance $2,442  $6,751  $6,082  $1,143  $940  $34  $17,392 
Provision (benefit) for loan losses  (629)  1,039   (300)  (44)  (83)  17   - 
                            
Charge-offs  (481)  (46)  (576)  (22)  (333)  -   (1,458)
Recoveries  749   507   315   122   174   -   1,867 
Net recoveries (charge-offs)  268   461   (261)  100   (159)  -   409 
Ending balance $2,081  $8,251  $5,521  $1,199  $698  $51  $17,801 
                            

-13-
Allocation of the allowance for loan losses (as well as the total loans in each allocation method), disaggregated on the basis of the Company's impairment methodology, is as follows:

 Commercial  Commercial real estate  Residential real estate  Construction real estate  Installment and other  Unallocated  Total  Commercial  Commercial real estate  Residential real estate  Construction real estate  Installment and other  Unallocated  Total 
September 30, 2017 (In thousands) 
March 31, 2018 (In thousands) 
Allowance for loan losses allocated to:                                          
Loans individually evaluated for impairment $223  $865  $1,381  $202  $34  $-  $2,705  $243  $1,199  $857  $227  $37  $-  $2,563 
Loans collectively evaluated for impairment  906   5,277   2,432   1,298   509   73   10,495   354   5,706   1,605   687   218   105   8,675 
Ending balance $1,129  $6,142  $3,813  $1,500  $543  $73  $13,200  $597  $6,905  $2,462  $914  $255  $105  $11,238 
Loans:                                                        
Individually evaluated for impairment $14,198  $12,781  $12,589  $10,373  $676  $-  $50,617  $13,362  $11,530  $11,653  $8,635  $551  $-  $45,731 
Collectively evaluated for impairment  50,959   377,050   174,345   66,026   17,000   -   685,380   54,195   372,717   157,906   59,367   16,243   -   660,428 
Total ending loans balance $65,157  $389,831  $186,934  $76,399  $17,676  $-  $735,997  $67,557  $384,247  $169,559  $68,002  $16,794  $-  $706,159 
                                                        
December 31, 2016                            
December 31, 2017                            
Allowance for loan losses allocated to:                                                        
Loans individually evaluated for impairment $350  $911  $1,424  $237  $88  $-  $3,010  $211  $3,735  $943  $231  $32  $-  $5,152 
Loans collectively evaluated for impairment  1,099   5,561   3,100   882   627   73   11,342   325   4,838   1,900   799   283   506   8,651 
Ending balance $1,449  $6,472  $4,524  $1,119  $715  $73  $14,352  $536  $8,573  $2,843  $1,030  $315  $506  $13,803 
Loans:                                                        
Individually evaluated for impairment $16,154  $12,512  $13,092  $11,282  $746  $-  $53,786  $13,541  $15,141  $12,582  $9,293  $584  $-  $51,141 
Collectively evaluated for impairment  53,007   393,388   201,634   64,690   20,307   -   733,026   47,847   363,661   165,714   54,276   18,368   -   649,866 
Total ending loans balance $69,161  $405,900  $214,726  $75,972  $21,053  $-  $786,812  $61,388  $378,802  $178,296  $63,569  $18,952  $-  $701,007 

In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification.  The evaluation is performed under the Company's internal underwriting policy.
Troubled Debt Restructurings:

TDRs are defined as those loans where: (1) the borrower is experiencing financial difficulties and (2) the restructuring includes a concession by the Bank to the borrower.

- 13 -
The following tables present thetable presents loans restructured as TDRs during the three months ended September 30,March 31, 2018 and 2017, and the nine months ended September 30, 2017 and 2016.  There were no loans restructured during the three months ended September 30, 2016.respectively.

 Three Months Ended March 31, 2018 
 
Number of
Contracts
  
Pre-
Modification
Outstanding
Recorded
Investment
  Post-Modification Outstanding Recorded Investment  
Specific
reserves
allocated
 
 (Dollars in thousands) 
Commercial  1  $171  $171  $1 
Commercial real estate  2   2,356   2,356   - 
Total  3  $2,527  $2,527  $1 

Three Months Ended September 30, 2017 Three Months ended March 31, 2017 
Number of
Contracts
 
Pre-
Modification
Outstanding
Recorded
Investment
  Post-Modification Outstanding Recorded Investment 
Specific
reserves
allocated
 Number of Contracts 
Pre-Modification
Outstanding
Recorded
Investment
 Post-Modification Outstanding Recorded Investment 
Specific
reserves
allocated
 
   (Dollars in thousands) (Dollars in thousands) 
Commercial  2  $105  $105  $29 
Construction real estate  1  $10  $10  $- 
Total  2  $105  $105  $29   1  $10  $10  $- 


  Nine Months Ended September 30, 2017 
  
Number of
Contracts
 
Pre-
Modification
Outstanding
Recorded
Investment
  Post-Modification Outstanding Recorded Investment  
Specific
reserves
allocated
 
    (Dollars in thousands) 
Commercial  4  $135  $135  $30 
Residential real estate  2   187   187   - 
Construction real estate  1   10   10   - 
Total  7  $332  $332  $30 


 Nine Months Ended September 30, 2016 
 
Number of
Contracts
 
Pre-
Modification
Outstanding
Recorded
Investment
  Post-Modification Outstanding Recorded Investment 
Specific
reserves
allocated
 
    (Dollars in thousands) 
Installment and other  1  $43  $43  $- 
Total  1  $43  $43  $- 

-14-
The following table presents loans by class modified as TDRs for which there was a payment default within 12 months following the modification during the nine months ended September 30, 2017 and 2016:


 Nine Months Ended September 30, 2017 
 
Number of
Contracts
 
Recorded
Investment
 
Specific
reserves
allocated
 
    (Dollars in thousands) 
Construction real estate  1  $61  $- 
Total  1  $61  $- 

 Nine Months Ended September 30, 2016 
 
Number of
Contracts
 
Recorded
Investment
 
Specific
reserves
allocated
 
    (Dollars in thousands) 
Construction real estate  2  $807  $10 
Total  2  $807  $10 

There were no loans modified as TDRs for which there was a payment default within 12twelve months following the modification during the three months ended September 30, 2017March 31, 2018 and 2016.2017:

 Three Months Ended March 31, 2018 
 
Number of
Contracts
 
Pre-
Modification
Outstanding
Recorded
Investment
 
Specific
reserves
allocated
 
 (Dollars in thousands) 
Commercial  1  $25  $25 
Total  1  $25  $25 

 Three Months Ended March 31, 2017 
 
Number of
Contracts
 
Pre-
Modification
Outstanding
Recorded
Investment
 
Specific
reserves
allocated
 
 (Dollars in thousands) 
Construction real estate  1  $61  $- 
Total  1  $61  $- 

Impairment analyses are prepared on TDRs in conjunction with the normal allowance for loan loss process. TDRs required a specific reserve of $29 thousand for loans restructured during the three months ended September 30, 2017.  TDRsMarch 31, 2018 and 2017 required a specific reserve of $30$1 thousand for loans restructured during the nine months ended September 30, 2017.  TDRs did not require anyand $0 in specific reserves, at the three and nine months ended September 30, 2016.respectively. TDRs resulted in charge-offs of $402.7$147 thousand and $172.8$20 thousand during the three months ended September 30,March 31, 2018 and 2017, and 2016, respectively.  For the nine months ended September 30, 2017 and 2016, TDRs resulted in charge-offs of $457.8 thousand and $356.3 thousand, respectively.  The TDRs that subsequently defaulted required a provision of $0$25 thousand and $10 thousand$0 to the allowance for loan losses for the ninethree months ended September 30,March 31, 2018 and 2017, and 2016, respectively.

The following table presents total TDRs, both in accrual and nonaccrual status:status as of the periods indicated:

September 30, 2017  December 31, 2016 March 31, 2018  December 31, 2017 
Number of contracts  Amount  Number of contracts  Amount Number of contracts  Amount  Number of contracts  Amount 
(Dollars in thousands) (Dollars in thousands) 
Accrual  117  $34,886  $127  $35,158  $104  $32,934  $108  $33,801 
Nonaccrual  20   4,924   23   7,909   17   6,844   19   5,146 
Total  137  $39,810  $150  $43,067  $121  $39,778  $127  $38,947 

              Specific reserves on TDRs at September 30, 2017March 31, 2018 and December 31, 20162017 were $2.1$2.6 million and $2.6$2.4 million, respectively.

As of September 30, 2017,March 31, 2018, the Bank had a total of $23$2.1 thousand in commitments to lend additional funds on one commercial loan and one commercial real estateresidential loan classified as TDRs.  As of December 31, 2016, the Bank had a total of $1.6 million in commitmentsTDR.

Loans to lend additional funds on six commercial loans classified as TDRs.Executive Officers and Directors:

Loan principal balances to executive officers and directors of the Company were $210.1$174.6 thousand and $347.8$198.4 thousand as of September 30, 2017March 31, 2018 and December 31, 2016,2017, respectively.  Total credit available, including companies in which these individuals have management control or beneficial ownership, was $335.1$300.6 thousand and $513.6$324.4 thousand as of September 30, 2017March 31, 2018 and December 31, 2016,2017, respectively.  An analysis of the activity related to these loans as of September 30, 2017March 31, 2018 and December 31, 20162017 is as follows:

 September 30, 2017  December 31, 2016  March 31, 2018  December 31, 2017 
 (In thousands)  (In thousands) 
Balance, beginning $348  $1,933  $198  $348 
Additions  8   158   -   13 
Changes in composition  (87)  (648)
Changes in Board composition  -   (76)
Principal payments and other reductions  (59)  (1,095)  (24)  (87)
Balance, ending $210  $348  $174  $198 

- 14 -
Note 7. Loan Servicing and Mortgage Servicing Rights ("MSRs")

Mortgage loans serviced for others are not included in the accompanying unaudited consolidated balance sheets.  The unpaid balance of theseCompany's mortgage loans as of September 30, 2017 andserviced for others portfolio was transferred to another Fannie Mae-approved servicer on December 31, 2016 is summarized as follows:2017.

 September 30, 2017 December 31, 2016 
 (In thousands) 
Mortgage loan portfolios serviced for:    
Federal National Mortgage Association ("Fannie Mae") $687,380  $780,348 
Totals $687,380  $780,348 

During the three and nine months ended September 30,March 31, 2017, and 2016, substantially all of the loans serviced for others had a contractual servicing fee of 0.25% on the unpaid principal balance.  These fees are recorded as "mortgage loan servicing fees" under "noninterest income" on the consolidated statements of operations.

Late fees on the loans serviced for others totaled $23 thousand and $11$18 thousand during the three months ended September 30, 2017 and 2016, respectively, and $59 thousand and $42 thousand for the nine months ended September 30, 2017 and 2016, respectively.March 31, 2017.  These fees are recorded included in "noninterest income" on the consolidated statements of operations.

-15-
Custodial balances on deposit at the Bank in connection with the foregoing loan servicing were approximately $8.4 million$0 and $4.8$4.2 million as of September 30, 2017March 31, 2018 and December 31, 2016,2017, respectively.  

An analysis of changes in the MSR asset for the three and nine months ended September 30, 2017 and 2016 is as follows:

 Three Months Ended September 30,  Nine Months Ended September 30, 
 2017  2016  2017  2016 
 (In thousands) 
Balance at beginning of period $6,176  $5,311  $6,905  $6,882 
Servicing rights originated and capitalized  -   209   -   563 
Change in value of MSRs  (677)  95   (1,406)  (1,830)
Balance at end of period $5,499  $5,615  $5,499  $5,615 

The fair values of the MSRsThere were $5.5 million and $5.6 millionno custodial balances on deposit with other financial institutions as of nine months ended September 30, 2017 and 2016, respectively.

Mortgage servicing rights are recorded at fair market value at origination and updated on a monthly basis. 

The following assumptions were used to calculate the fair value of the MSRs as of September 30, 2017March 31, 2018 and December 31, 2016:2017.

 September 30, 2017 December 31, 2016
Weighted Average Public Securities Association (PSA) speed 199.07%  193.93%
Weighted Average Discount rate 10.50  10.50
Weighted Average Delinquency rate 0.92  1.32

Note 8. Other Real Estate Owned ("OREO")

OREO consists of property acquired due to foreclosure on real estate loans. As of September 30, 2017March 31, 2018 and December 31, 2016,2017, total OREO consisted of:

  September 30, 2017  December 31, 2016 
  (In thousands) 
Commercial real estate $1,667  $2,181 
Residential real estate  1,532   2,734 
Construction real estate  5,000   3,521 
Total $8,199  $8,436 

Loans secured by residential real estate properties for which formal foreclosure proceedings were in process at September 30, 2017 and December 31, 2016 were $1.9 million and $2.1 million, respectively.
  March 31, 2018  December 31, 2017 
  (In thousands) 
Commercial real estate $1,649  $1,667 
Residential real estate  1,051   886 
Construction real estate  3,749   3,879 
Total $6,449  $6,432 

The following table presents a summary of OREO activity for the three and nine months ended September 30, 2017March 31, 2018 and 2016:2017:

 Three Months Ended September 30,  Nine Months Ended September 30,  Three Months Ended March 31, 
 2017  2016  2017  2016  2018  2017 
 (In thousands)  (In thousands) 
Balance at beginning of period $7,085  $8,653  $8,436  $8,346  $6,432  $8,436 
Transfers in at fair value  2,154   59   2,848   2,944   473   433 
Capitalized improvements  32   - 
Write-down of value  (29)  (23)  (615)  (23)  (18)  (82)
Gain on disposal  124   308   781   1,059   39   321 
Cash received upon disposition  (1,135)  (1,366)  (3,251)  (3,724)  (509)  (1,117)
Sales financed by loans by the Bank  -   (577)  -   (1,548)
Sales financed by loans  -   - 
Balance at end of period $8,199  $7,054  $8,199  $7,054  $6,449  $7,991 

Note 9. Deposits

As of September 30, 2017March 31, 2018 and December 31, 2016,2017, deposits consisted of:

 September 30, 2017  December 31, 2016  March 31, 2018  December 31, 2017 
 (In thousands )  (In thousands ) 
Demand deposits, noninterest bearing $183,881  $174,305  $163,134  $161,677 
NOW and money market accounts  401,269   405,268   428,436   404,225 
Savings deposits  399,258   407,606   388,901   388,300 
Time certificates, $250,000 or more  23,067   28,531   21,339   21,639 
Other time certificates  159,844   191,710   142,284   151,506 
Total $1,167,319  $1,207,420  $1,144,094  $1,127,347 

Deposits from executive officers, directors and their affiliates as of September 30,March 31, 2018 and December 31, 2017 were $1.7$1.8 million and $1.6$2.2 million, as of December 31, 2016.respectively.

Note 10. Borrowings

Notes payable to the Federal Home Loan Bank of Dallas ("FHLB") as of September 30, 2017March 31, 2018 and December 31, 20162017 were secured by ana blanket assignment of mortgage loans or other collateral acceptable to FHLB, and generally had a fixed rate of interest, interest payable monthly and principal due at end of term, unless otherwise noted. As of September 30, 2017,March 31, 2018, there was $341.6 thousandwere $328.6 million in collateral value from loans pledged loans. Investmentunder the blanket assignment and $76.1 million from investment securities are held in safekeeping at the FHLB withFHLB. At March 31, 2018, there were $2.3 million pledged as collateral forin advances outstanding advances.at the FHLB. An additional $75.8$402.4 million in advances is available based on the September 30, 2017March 31, 2018 value of the remaining unpledged loans and investment securities.  In the event that short-term liquidity is needed, the Bank has established a relationship with a large regional bank to provide short-term borrowings in the form of federal funds purchased.  The Bank has the ability to borrow up to $20 million for a short period (15 to 60 days) from this bank.

-16-
The following table details borrowings as of September 30, 2017March 31, 2018 and December 31, 2016:2017.

Maturity DateRate  Type Principal dueSeptember 30, 2017  December 31, 2016 Rate  Type Principal dueMarch 31, 2018  December 31, 2017 
       (In thousands)        (In thousands) 
April 27, 2021  6.343% Fixed At maturity  2,300   2,300   6.343% Fixed At maturity  2,300   2,300 
         Total $2,300  $2,300          Total $2,300  $2,300 

- 15 -
Note 11. Junior Subordinated Debt

The following table presents details on the junior subordinated debt as of September 30, 2017:March 31, 2018:

 Trust I  Trust III  Trust IV  Trust V  Trust I  Trust III  Trust IV  Trust V 
 (Dollars in thousands)     (Dollars in thousands)    
Date of Issue March 23, 2000  May 11, 2004  June 29, 2005  September 21, 2006  March 23, 2000  May 11, 2004  June 29, 2005  September 21, 2006 
Amount of trust preferred securities issued $10,000  $6,000  $10,000  $10,000  $10,000  $6,000  $10,000  $10,000 
Rate on trust preferred securities  10.875% 4.01611% (variable)   6.88% 2.9700% (variable)   10.875% 4.70625% (variable)   6.88% 3.7745% (variable) 
Maturity March 8, 2030  September 8, 2034  November 23, 2035  December 15, 2036  March 8, 2030  September 8, 2034  November 23, 2035  December 15, 2036 
Date of first redemption March 8, 2010  September 8, 2009  August 23, 2010  September 15, 2011  March 8, 2010  September 8, 2009  August 23, 2010  September 15, 2011 
Common equity securities issued $310  $186  $310  $310  $310  $186  $310  $310 
Junior subordinated deferrable interest debentures owed $10,310  $6,186  $10,310  $10,310  $-  $6,186  $10,310  $10,310 
Rate on junior subordinated deferrable interest debentures  10.875% 4.01611% (variable)   6.88% 2.9700% (variable)   10.875% 4.70625% (variable)   6.88% 3.7745% (variable) 

On the dates of issue indicated above, the Trusts, being Delaware statutory business trusts, issued trust preferred securities (the "trust preferred securities") in the amountsamount and at the ratesrate indicated above.  These trust preferred securities represent preferred beneficial interests in the assets of the Trusts.  The trust preferred securities will mature on the dates indicated, and are redeemable in whole or in part at the option of Trinity, with the approval of the FRB.  The Trusts also issued common equity securities to Trinity in the amounts indicated above.  The Trusts used the proceeds of the offering of the trust preferred securities to purchase junior subordinated deferrable interest debentures (the "debentures") issued by Trinity, which have terms substantially similar to the trust preferred securities.

On March 8, 2018, Trinity consummated the early redemption of all $10.3 million principal amount of those certain Junior Subordinated Deferrable Interest Debentures due 2030 (the "Debt Securities") issued by Trust I.  The Debt Securities carried an interest rate of 10.875% and were scheduled to mature on March 8, 2030.  The Debt Securities were callable at a redemption rate of 101.088%,  plus accrued and unpaid interest, for a total redemption price of $11.0 million.  Prior deferred issuance costs related to Trust I of $131 thousand were realized as other noninterest expense on the consolidated statement of operations.

Trinity has the right to defer payments of interest on the debentures at any time or from time to time for a period of up to ten consecutive semi-annual periods (or twenty consecutive quarterly periods in the case of Trusts with quarterly interest payments) with respect to each interest payment deferred.  During a period of deferral, unpaid accrued interest is compounded.

Under the terms of the debentures, under certain circumstances of default or if Trinity has elected to defer interest on the debentures, Trinity may not, with certain exceptions, declare or pay any dividends or distributions on its common stock or purchase or acquire any of its common stock.

In the second quarter of 2013, Trinity began to defer the interest payments on $37.1 million of junior subordinated debentures that are held by the Trusts that it controls.  Interest accrued and unpaid to securities holders totaled $9.8 million as of December 31, 2016. In the first quarter of 2017, upon receiving regulatory approval, all deferred interest was paid in full and the Company is no longer deferring interest payments on the junior subordinated debentures.  As of September 30,March 31, 2018 and December 31, 2017, there was $173.9$110.7 thousand and $456.0 thousand, respectively, in interest accrued and unpaid to trust preferred security holders.

As of September 30, 2017March 31, 2018 and December 31, 2016,2017, the Company's trust preferred securities, subject to certain limitations, qualified as Tier 1 Capital for regulatory capital purposes.

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

Note 12. Income Taxes

For the three months ended September 30, 2017,March 31, 2018, the Company recorded a tax expense of $1.4 million which included an additional$193 thousand compared to a tax benefit of $214 thousand for the three months ended March 31, 2017.

Items causing differences between the Federal statutory tax rate and the effective tax rate are summarized as follows:

       
  Three Months Ended March 31, 2018  Three Months Ended March 31, 2017 
  Amount  Rate  Amount  Rate 
  (Dollars in thousands) 
Federal statutory tax rate $396   21.00% $(238)  34.00%
State income tax, net of federal benefit  61   3.23%  155   (22.22)%
Net tax exempt interest income  (211)  (11.18)%  (91)  13.08%
Other, net  (53)  (2.81)%  (40)  5.68%
Tax provision (benefit) before change in valuation allowance  193   10.24%  (214)  30.54%
Change in valuation allowance  -   -   -   - 
Provision (benefit) for income taxes $193   10.24% $(214)  30.54%

A deferred tax asset ("DTA") valuation allowance of $900 thousand.  For the nine months ended September 30, 2017, the Company recorded a tax expense of $3.5 million due to a number of one time items. There was no income tax expense or benefit recorded for the three and nine months ended September 30, 2016 because the Company had a full valuation allowance against the deferred tax assets on those dates.

A DTA or liability is recognized to reflect the net tax effects of temporary differences between the carrying amounts of existing assets and liabilities for financial reporting purposes and the amounts used for income tax reporting purposes.  A valuation allowance is established when it is more likely than not that all or a portion of a net deferred tax asset will not be realized.  As discussed in Note 14 "Income Taxes" in Item 8, "Financial Statements and Supplementary Data" of the 2016 Form 10-K, theThe Company had a valuation allowance at December 31, 2017 and March 31, 2018 of $2.5 million on part of the net DTAs, most of whichDTAs.  This valuation allowance was reversed during 2016.  In evaluating its deferred tax asset ("DTA") as of September 30,initially recorded in 2017 when it was determined that it was more likely than not that a portion$1.7 million and $645 thousand of the Company's federal and state tax credit carryforwards wouldare expected to expire unrealized.  Accordinglyunused as a result of loss usage limitations resulting from the DTA valuation was increased by a chargeCompany experiencing an "ownership change" under Section 382 of the Internal Revenue Code on December 19, 2016 which limits its ability to use pre-ownership change of control net operating losses and certain other pre-ownership change tax expense of $900 thousand.  As of September 30, 2017, there was a total of $2.4 million forattributes against the valuation allowance.Company's post-ownership change income. 

-17-
Items causing differences between the Federal statutory tax rate and the effective tax rate are summarized as follows:

  Three Months Ended September 30,  Nine Months Ended September 30, 
  2017  2017 
  (In thousands) 
Federal statutory tax rate $613   33,990% $613   34%
Net tax exempt interest income  (108)  (6,012)%  (372)  (21)%
Other, net  (73)  (4,050)%  (17)  (1)%
Uncollectable income tax receivables  -   -   431   24%
Tax credits not realizable  -   -   584   32%
State income tax, net of federal benefit  66   3,660%  235   13%
Tax provision before change in valuation allowance  498   27,606%  1,474   82%
Change in valuation allowance  900   49,894%  2,013   112%
Provision for income taxes $1,398   77,516% $3,487   194%



Note 13. Commitments and Off-Balance-Sheet Activities

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

- 16 -
The Company's exposure to credit loss is represented by the contractual amount of these credit-related commitments.  The Company follows the same credit policies in making credit-related commitments as it does for on-balance-sheet instruments.

As of September 30, 2017March 31, 2018 and December 31, 2016,2017, the following credit-related commitments were outstanding:

Contract Amount Contract Amount 
September 30, 2017  December 31, 2016 March 31, 2018  December 31, 2017 
(In thousands) (In thousands) 
Unfunded commitments under lines of credit $112,116  $118,252  $133,162  $122,910 
Commercial and standby letters of credit  5,249   7,152   5,277   5,377 
Commitments to make loans  1,554   5,835   15,444   1,909 

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

Commitments to make loans are generally made for periods of 90 days or less.  The Company had outstanding loan commitments, excluding undisbursed portionportions of loans in process and equity lines of credit, of approximately $117.4$138.4 million as of September 30, 2017March 31, 2018 and $125.4$128.3 million as of December 31, 2016.2017, respectively.  Of these commitments outstanding, the breakdown between fixed rate and adjustable rate loans is as follows:

September 30, 2017  December 31, 2016 March 31, 2018  December 31, 2017 
(In thousands) (In thousands) 
Fixed rate $18,888  $19,663  $16,878  $17,933 
Adjustable rate  98,477   105,741   121,561   110,354 
Total $117,365  $125,404  $138,439  $128,287 

The fixed loan commitments as of September 30, 2017March 31, 2018 have interest rates ranging from 0.0% to 6.5% and maturities ranging from on demand to 8 years.

The FHLB requires a blanket assignment of mortgage loans or other collateral acceptable to the FHLB to secure the Company's short and long-term borrowings from the FHLB.  The amountvalue of collateral with the FHLB at September 30, 2017March 31, 2018 was $78.1$404.7 million.

Commercial and standby letters of credit are conditional credit-related commitments issued by the Bank to guarantee the performance of a customer to a third party.  Those letters of credit are primarily issued to support public and private borrowing arrangements.  Essentially all letters of credit issued have expiration dates within one year.  The credit risk involved in issuing letters of credit is the same as that involved in extending loans to customers.  The Bank generally holds collateral supporting those credit-related commitments, if deemed necessary.  In the event the customer does not perform in accordance with the terms of the agreement with the third party, the Bank would be required to fund the credit-related commitment.  The maximum potential amount of future payments the Bank could be required to make is represented by the contractual amount shown in the summary above.  If the credit-related commitment is funded, the Bank would be entitled to seek recovery from the customer.  As of both September 30, 2017March 31, 2018 and December 31, 2016,2017, $575 thousand had been recorded as liabilities for the Company's potential losses under these credit-related commitments.  The fair value of these credit-related commitments is approximately equal to the fees collected when granting these letters of credit.  These fees collected were $17$24 thousand and $26$23 thousand as of September 30, 2017March 31, 2018 and December 31, 2016,2017, respectively, and are included in "other liabilities" on the consolidated balance sheets.

Note 14. Preferred Equity Issues

The Company had no outstanding preferred shares as of September 30, 2017 because all outstanding preferred shares were either redeemedMarch 31, 2018 or converted to non-voting common stock in the first quarter of 2017, as further described below.

-18-
On March 27, 2009, the Company issued two series of preferred stock to the U.S. Department of the Treasury ("Treasury") under the Capital Purchase Program ("CPP").  On December 19, 2016, the Company issued 82,862 shares of Series C Convertible Preferred Stock to certain institutional investors pursuant to a private placement.  Below is a table disclosing the information on the three series outstanding at December 31, 2016:

  
Number
of shares
issued
 Dividend rate  
Liquidation
value per
share
  
Original
cost, in
thousands
 
Series A cumulative perpetual preferred shares  35,539 5% for first 5 years; thereafter 9%  $1,000.00  $33,437 
Series B cumulative perpetual preferred shares  1,777   9%  1,000.00   2,102 
Series C cumulative perpetual convertible preferred shares  82,862   -   475   39,359 

The difference between the liquidation value of the preferred stock and the original cost is accreted (for the Series B Preferred Stock) or amortized (for the Series A Preferred Stock) over 10 years and is reflected, on a net basis, as an increase to the carrying value of preferred stock and decrease to retained earnings.  For the nine months ended September 30, 2017 and 2016, a net amount of $398 and $134 thousand, respectively, was recorded for amortization.

Dividends and discount accretion on preferred stock reduce the amount of net income available to common shareholders. For each of the three months ended September 30, 2017 and 2016 the total of these amounts was $0 and $1.1 million, respectively. For each of the nine months ended September 30, 2017 and 2016 the total of these amounts was $771.0 thousand and $3.2 million, respectively.

Private Placement to Certain Institutional and Accredited Investors

On December 19, 2016, the Company closed its previously announced $52 million private placement with Castle Creek Capital Partners VI, L.P. ("Castle Creek"), Patriot Financial Partners II, L.P., Patriot Financial Partners Parallel II, L.P. (collectively, "Patriot") and Strategic Value Bank Partners, L.P., through its fund Strategic Value Investors LP, pursuant to which the Company issued 2,661,239 shares of its common stock, no par value per share, at $4.75 per share, and 82,862 shares of a new series of convertible perpetual non-voting preferred stock, Series C, no par value per share, at $475.00 per share ("Series C Preferred Stock"). The Company used a portion of the net proceeds from the private placement to redeem its outstanding Series A Preferred Stock and Series B Preferred Stock , which it completed on January 25, 2017, and used the remaining net proceeds, plus a $15.0 million dividend from the Bank to pay the deferred interest on its trust preferred securities, and for general corporate purposes. 

In connection with the private placement and in accordance with the terms of a stock purchase agreement, dated September 9, 2016 (the "Stock Purchase Agreement"), the Company entered into a registration rights agreement (the "Registration Rights Agreement") with each of Castle Creek and Patriot. Pursuant to the terms of the Registration Rights Agreement, the Company has agreed to file a resale registration statement for the purpose of registering the resale of the shares of the Common Stock and Series C Preferred Stock issued in the private placement and the underlying shares of Common Stock or non-voting Common Stock into which the shares of Series C Preferred Stock are convertible, as appropriate. The Company is obligated to file the registration statement no later than the third anniversary after the closing of the private placement.

Pursuant to the terms of the Stock Purchase Agreement, Castle Creek and Patriot entered into side letter agreements with us.  Under the terms of the side letter agreements, each of Castle Creek and Patriot is entitled to have one representative appointed to our Board of Directors for so long as such investor, together with its respective affiliates, owns, in the aggregate, 5% or more of all of our outstanding shares of common stock (including shares of common stock issuable upon conversion of the Series C Preferred Stock or non-voting common stock).

Redemption of Series A Preferred Stock and Series B Preferred Stock

On March 27, 2009, Trinity participated in the TARP CPP by issuing 35,539 shares of Trinity's Fixed Rate Cumulative Perpetual Preferred Stock, Series A Preferred Stock to the Treasury for a purchase price of $35.5 million in cash and issued warrants that were immediately exercised by the Treasury for 1,777 shares of Trinity's Fixed Rate Cumulative Perpetual Preferred Stock, Series B Preferred Stock.  Using part of the proceeds from the private placement described above, the Company redeemed all of its outstanding Series A Preferred Stock and Series B Preferred Stock effective January 25, 2017.

Conversion of Series C Preferred Stock to Non-Voting Common Stock

At December 31, 2016, the Company had outstanding 82,862 shares of Series C Preferred Stock that were issued in connection with the private placement.  Following shareholder approval of an amendment to the Company's articles of incorporation to authorize a class of non-voting common stock, and the subsequent filing of such amendment with the New Mexico Secretary of State, all outstanding shares of Series C Preferred Stock were automatically converted into 8,286,200 shares of non-voting common stock at a conversion price of $4.75 per share of non-voting common stock pursuant to the private placement.  This conversion was completed on February 2, 2017.  The non-voting common stock will rank pari passu with the Company's voting common stock with respect to the payment of dividends or distributions.



Note 15. Stock Incentives

At the Company's Annual ShareholderShareholders' Meeting held on January 22, 2015, the Company's shareholders approved the Trinity Capital Corporation 2015 Long-Term Incentive Plan ("2015 Plan"). Under for the 2015 Plan, 500,000benefit of key employees.  As of December 31, 2017, only 30,477 shares of voting common stock fromremained available for issuance.  In accordance with the terms for the 2015 Plan, on February 21, 2018, the Board approved an additional 500,000 shares held in treasury or authorized but unissued votingof common stock areto be reserved for granting stock-based incentive awards.under the 2015 Plan. The Compensation Committee determines the terms and conditions of the awards.  For
There were 239,075 Restricted Stock Unit ("RSU") awards granted under the 2015 Plan during the quarter ended March 31, 2018 and forfeitures of 6,500 RSUs during the quarter ended March 31, 2018, leaving 297,902 shares of common stock available remaining to be issued under the 2015 Plan at March 31, 2018. 
Because share-based compensation awards vesting in the current periods were granted on a variety of dates, the assumptions are presented as weighted averages in those assumptions.  A summary of RSU activity under the 2015 Plan for the three months ended September 30, 2017 there were 356,225 performance-based RSUs granted.  See Exhibit 10.2 of this Form 10Q for more information on the performance-based RSUs.  As of September 30, 2017, there were 96,557 RSUs and 356,225 performance-based RSUs issued under the 2015 Plan.March 31, 2018 is presented below:  
  Shares  Weighted Average Grant Price  Weighted-Average Remaining Contractual Term, in Years  Aggregate Intrinsic Value (in thousands) 
RSUs            
Nonvested as of January 1, 2018  452,782  $4.70   2.01  $2,130 
Granted  239,075   7.58   1.80   1,812 
Vested  (13,925)  4.00   -   (56)
Forfeited or expired  (6,500)  4.75   -   (31)
Outstanding Nonvested as of March 31, 2018  671,432  $5.74   1.66  $3,855 
A summary of changes in the RSUs and performance-based RSUs for the nine months ended September 30, 2017 follows: 
Shares
Nonvested as of January 1, 201750,228
Granted424,930
Vested(16,741)
Forfeited or expired(5,635)
Nonvested as of September 30, 2017452,782

Share-based compensation expense of $41.5$217 thousand and $90.9$16 thousand was recognized for the three and nine months ended September 30,March 31, 2018 and 2017, respectivly.respectively.  As of September 30, 2017,March 31, 2018, there was $2.1$3.4 million in unrecognized compensation costcosts related to unvested share-based compensation awards granted under the 2015 Plan.   The cost will be recognized over the remaining vesting period.periods.

-19-- 17 -


Note 16. Fair Value Measurements

ASC Topic 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.  A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability.  The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs.  An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction.  Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.

The Company uses valuation techniques that are consistent with the sales comparison approach, the income approach and/or the cost approach.  The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities.  The income approach uses valuation techniques to convert expected future amounts, such as cash flows or earnings, to a single present value amount on a discounted basis.  The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost).  Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability.  Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity's own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.  In that regard, ASC Topic 820 establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a reporting entity's own assumptions about the assumptions that market participants would use in pricing an asset or liability.

While management believes the Company's valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.  Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances that caused the transfer, which generally coincides with the Company's monthly and/or quarterly valuation process.

Financial Instruments Recorded at Fair Value on a Recurring Basis

Securities Available for Sale. The fair values of securities available for sale are determined by quoted prices in active markets, when available.  If quoted market prices are not available, the fair value is determined by a matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities' relationship to other benchmark quoted securities.

The following table summarizes the Company's financial assets and off-balance-sheet instruments measured at fair value on a recurring basis as of September 30, 2017March 31, 2018 and December 31, 2016,2017, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

September 30, 2017Total Level 1 Level 2 Level 3 
March 31, 2018Total Level 1 Level 2 Level 3 
(In thousands) (In thousands) 
Financial Assets:                
Investment securities available for sale:                
U.S. Government sponsored agencies $74,229  $-  $74,229  $- 
U.S. government sponsored agency $67,677  $-  $67,677  $- 
States and political subdivision  110,772   -   110,772   -   160,478   -   160,478   - 
Residential mortgage backed securities  129,738   -   129,738   - 
Residential mortgage backed security  118,111   -   118,111   - 
Residential collateralized mortgage obligation  10,304   -   10,304   -   18,164   -   18,164   - 
Commercial mortgage backed securities  108,879   -   108,879   - 
SBA Pools  599   -   599   - 
Commercial mortgage backed security  105,941   -   105,941   - 
SBA pools  539   -   539   - 
Total $434,521  $-  $434,521  $-  $470,910  $-  $470,910  $- 

December 31, 2016        
December 31, 2017Total Level 1 Level 2 Level 3 
        (In thousands) 
Financial Assets:                
Investment securities available for sale:                
U.S. Government sponsored agencies $68,828  $-  $68,828  $- 
U.S. government sponsored agency $68,551  $-  $68,551  $- 
States and political subdivision  37,343   -   37,343   -   158,706   -   158,706   - 
Residential mortgage backed securities  203,819   -   203,819   - 
Residential mortgage backed security  123,083   -   123,083   - 
Residential collateralized mortgage obligation  14,816   -   14,816   -   9,686   -   9,686   - 
Commercial mortgage backed securities  114,172   -   114,172   - 
SBA Pools  672   -   672   - 
Commercial mortgage backed security  108,162   -   108,162   - 
SBA pools  545   -   545   - 
Total $439,650  $-  $439,650  $-  $468,733  $-  $468,733  $- 

There were no financial instrumentsassets or financial liabilities measured at fair value on a recurring basis for which the Company used significant unobservable inputs (Level 3) during the periods presented in these financial statements.  There were no transfers between the levels used on any asset classes during the three and nine months ended September 30, 2017March 31, 2018 or the year ended December 31, 2016.2017.

Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis

The Company may be required, from time to time, to measure certain financial assets and financial liabilities at fair value on a nonrecurring basis in accordance with GAAP.

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

-20-
In accordance with ASC Topic 820, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy.  Collateral values are estimated using Level 3 inputs based on customized discounting criteria.  For collateral dependent impaired loans, the Company obtains a current independent appraisal of loan collateral.  Other valuation techniques are used as well, including internal valuations, comparable property analysis and contractual sales information.

- 18 -
OREO. OREO is adjusted to fair value at the time the loans are transferred to OREO. Subsequently, OREO is carried at the lower of the carrying value or fair value. Fair value is determined based upon independent market prices, appraised values of the collateral or management's estimation of the value of the collateral less anticipated costs to sell.collateral. The fair value of OREO was computed based on third party appraisals, which are level 3 valuation inputs.

As of September 30,March 31, 2018, impaired loans with a carrying value of $29.8 million had a valuation allowance of $2.6 million. As of December 31, 2017, impaired loans with a carrying value of $19.1$39.8 million had a valuation allowance of $2.7 million. As of December 31, 2016, impaired loans with a carrying value of $34.6 million had a valuation allowance of $3.0$5.2 million recorded during 2016.2017.

In the table below, OREO had write-downs during the ninethree months ended September 30, 2017March 31, 2018 of $72$19 thousand.  In the table below, OREO had writedowns during the year ended December 31, 20162017 of $63$43 thousand.  The valuation adjustments on OREO have been recorded through earnings.

Assets measured at fair value on a nonrecurring basis as of September 30, 2017March 31, 2018 and December 31, 20162017 are included in the table below:

` Total  Level 1  Level 2  Level 3  Total  Level 1  Level 2  Level 3 
 (In thousands)  (In thousands) 
September 30, 2017            
March 31, 2018            
Financial Assets                        
Impaired loans $16,427  $-  $-  $16,427  $27,267  $-  $-  $27,267 
MSRs  5,499   -   -   5,499 
Financial Assets                
OREO  93   -   -   93 
                
December 31, 2017                
Financial Assets                
Impaired loans $34,600  $-  $-  $34,600 
Non-Financial Assets                                
OREO  851   -   -   851   405   -   -   405 
                
December 31, 2016                
Financial Assets                
Impaired loans $31,636  $-  $-  $31,636 
MSRs  6,905   -   -   6,905 
Non-Financial Assets                
OREO  582   -   -   582 

See Note 7 for assumptions used to determine the fair value of MSRs.  Assumptions used to determine impaired loans and OREO are presented below by classification, measured at fair value and on a nonrecurring basis as of September 30, 2017March 31, 2018 and December 31, 2016:2017:

 Fair value 
 Valuation
Technique(s)
 Unobservable Input(s)
 Adjustment Range,
Weighted Average
 Fair value 
 Valuation
Technique(s)
 Unobservable Input(s)
 Adjustment Range,
Weighted Average
September 30, 2017 (In thousands)     
March 31, 2018 (In thousands)     
Impaired loans                
Commercial $1,351 Sales comparisonAdjustments for differences of comparable sales(0.00)% to (7.50)%, (6.35)% $13,023 Sales comparisonAdjustments for differences of comparable sales(5.70)% to (150.00)%, (6.07)%
Commercial real estate  5,461 Sales comparisonAdjustments for differences of comparable sales(4.25) to (7.62), (5.98)  5,275 Sales comparisonAdjustments for differences of comparable sales(4.25) to (7.62), (6.07)
Residential real estate  6,297 Sales comparisonAdjustments for differences of comparable sales(3.13) to (7.67), (5.86)  5,784 Sales comparisonAdjustments for differences of comparable sales(3.13) to (7.50), (5.76)
Construction real estate  3,080 Sales comparisonAdjustments for differences of comparable sales(4.00) to (7.25), (6.17)  2,979 Sales comparisonAdjustments for differences of comparable sales(4.00) to (7.25), (6.19)
Installment and other  238 Sales comparisonAdjustments for differences of comparable sales(0.00) to (8.00), (6.41)  206 Sales comparisonAdjustments for differences of comparable sales(4.25) to (8.00), (6.24)
Total impaired loans $16,427      $27,267     
OREO                    
Residential real estate  840 Sales comparisonAdjustments for differences of comparable sales(1.56) to (23.29),(6.10)
Construction real estate  11 Sales comparisonAdjustments for differences of comparable sales(61.05) to (61.05),(61.05)
Total OREO $851     
Commercial real estate $93 Sales comparisonAdjustments for differences of comparable sales(16.67)% to (16.67)%,(16.67)%
  93     

December 31, 2016        
December 31, 2017        
Impaired loans                
Commercial $13,638 Sales comparisonAdjustments for differences of comparable sales(0.00)% to (7.75)%, (5.79)% $13,359 Sales comparisonAdjustments for differences of comparable sales(5.00)% to (100.00)%, (5.97)%
Commercial real estate  5,465 Sales comparisonAdjustments for differences of comparable sales(4.25) to (7.62), (5.96)  10,987 Sales comparisonAdjustments for differences of comparable sales(4.25) to (7.62), (6.63)
Residential real estate  7,174 Sales comparisonAdjustments for differences of comparable sales(3.13) to (37.50), (6.73)  6,774 Sales comparisonAdjustments for differences of comparable sales(3.13) to (7.80), (5.74)
Construction real estate  5,014 Sales comparisonAdjustments for differences of comparable sales(4.00) to (7.50), (5.79)  3,244 Sales comparisonAdjustments for differences of comparable sales(4.00) to (7.25), (6.18)
Installment and other  345 Sales comparisonAdjustments for differences of comparable sales(0.00) to (37.50), (7.70)  236 Sales comparisonAdjustments for differences of comparable sales(4.25) to (8.00), (6.27)
Total impaired loans $31,636      $34,600     
OREO                    
Residential real estate $483 Sales comparisonAdjustments for differences of comparable sales(3.16) to (11.76) (9.29)  315 Sales comparisonAdjustments for differences of comparable sales(9.09) to (9.09), (9.09)
Construction real estate  99 Sales comparisonAdjustments for differences of comparable sales(12.00) to (12.00) (12.00)  90 Sales comparisonAdjustments for differences of comparable sales(9.78) to (9.78), (9.78)
Total OREO $582      $405     

-21-
Fair Value Assumptions

ASC Topic 825 requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis.  The following methods and assumptions were used by the Company in estimating the fair values (representing exit price) of its other financial instruments:instruments.

Cash and due from banks and interest-bearing deposits with banks: - 19 -The carrying amounts reported in the balance sheet approximate fair value and are classified as Level 1.

Securities purchased under resell agreements: The carrying amounts reported in the balance sheet approximate fair value and are classified as Level 1.

Investment Securities: The fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2), using matrix pricing. Matrix pricing is a mathematical technique commonly used to price debt securities that are not actively traded, values debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities' relationship to other benchmark quoted securities (Level 2 inputs). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). See below for additional discussion of Level 3 valuation methodologies and significant inputs.

Non-marketable equity securities:  It is not practical to determine the fair value of FHLB stock due to restrictions placed on its transferability.

Loans held for sale: The fair values disclosed are based upon the values of loans with similar characteristics purchased in secondary mortgage markets and are classified as Level 3.

Loans: For those variable-rate loans that reprice frequently with no significant change in credit risk, fair values are based on carrying values.  The fair values for fixed rate and all other loans are estimated using discounted cash flow analysis, using interest rates currently being offered for loans with similar terms to borrowers with similar credit quality.  The fair value of loans is classified as Level 3 within the fair value hierarchy.

Noninterest-bearing deposits: The fair values disclosed are equal to their balance sheet carrying amounts, which represent the amount payable on demand, and are classified as Level 1.

Interest-bearing deposits: The fair values disclosed for deposits with no defined maturities are equal to their carrying amounts, which represent the amounts payable on demand, and are classified as Level 2.  The carrying amounts for variable rate, fixed term money market accounts and certificates of deposit approximate their fair values at the reporting date.  Fair values for fixed rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on similar certificates to a schedule of aggregated expected monthly maturities on time deposits.

Long-term borrowings: The fair values of the Company's long-term borrowings (other than deposits) are estimated using discounted cash flow analysis, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements, and are classified as Level 2.

Junior subordinated debt: The fair values of the Company's junior subordinated debt are estimated based on the quoted market prices, when available, of the related trust preferred security instruments, or are estimated based on the quoted market prices of comparable trust preferred securities, and are classified as Level 3.

Off-balance-sheet instruments: Fair values for the Company's off-balance-sheet lending commitments in the form of letters of credit are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements.  It is the opinion of management that the fair value of these commitments would approximate their carrying value, if drawn upon, and are classified as Level 2.

Accrued interest: The carrying amounts of accrued interest approximate fair value resulting in a Level 2 or Level 3 classification.

The carrying amount and estimated fair values of other financial instruments as of September 30, 2017March 31, 2018 and December 31, 20162017 are as follows:

 Carrying amount  Level 1  Level 2  Level 3  Total  Carrying amount  Level 1  Level 2  Level 3  Total 
 (In thousands)  (In thousands) 
September 30, 2017               
March 31, 2018               
Financial assets:                              
Cash and due from banks $11,733  $11,733  $-  $-  $11,733  $10,003  $10,003  $-  $-  $10,003 
Interest-bearing deposits with banks  68,234   68,234   -   -   68,234   9,517   9,517   -   -   9,517 
Investments:                                        
Available for sale  434,521   -   434,521   -   434,521   470,910   -   470,910   -   470,910 
Held to maturity  7,882   -   7,512   -   7,512   7,824   -   7,312   -   7,312 
Non-marketable equity securities  3,615   N/A   N/A   N/A   N/A   4,471   N/A   N/A   N/A   N/A 
Loans, net  721,817   -   -   720,008   720,008   694,108   -   -   683,069   683,069 
Accrued interest receivable on securities  2,008   -   2,008   -   2,008   2,726   -   2,726   -   2,726 
Accrued interest receivable on loans  2,285   -   -   2,285   2,285   2,053   -   -   2,053   2,053 
Accrued interest receivable other  8   -   -   8   8   7           7   7 
                                        
Off-balance-sheet instruments:                                        
Loan commitments and standby letters of credit $17  $-  $17  $-  $17  $24  $-  $24  $-  $24 
                                        
Financial liabilities:                                        
Non-interest bearing deposits $183,881  $183,881  $-  $-  $183,881  $163,134  $163,134  $-  $-  $163,134 
Interest bearing deposits  983,438   -   983,534   -   983,534   980,960   -   979,054   -   979,054 
Borrowings  2,300   -   2,644   -   2,644 
Long-term borrowings  2,300   -   2,540   -   2,540 
Junior subordinated debt  36,937   -   -   22,750   22,750   26,764   -   -   17,572   17,572 
Accrued interest payable  360   -   186   174   360   279   -   168   111   279 

-22-
December 31, 2016               
December 31, 2017               
Financial assets:                              
Cash and due from banks $13,537  $13,537  $-  $-  $13,537  $12,893  $12,983  $-  $-  $12,983 
Interest-bearing deposits with banks  105,798   105,798   -   -   105,798   22,541   22,541   -   -   22,541 
Securities purchased under resell agreements  -   -   -   -   -   -   -   -   -   - 
Investments:                      -   -   -   -   - 
Available for sale  439,650   -   439,650   -   439,650   468,733   -   468,733   -   468,733 
Held to maturity  8,824   -   8,613   -   8,613   7,854   -   7,369   -   7,369 
Non-marketable equity securities  3,812   N/A   N/A   N/A   N/A   3,617   N/A   N/A   N/A   N/A 
Loans, net  771,138   -   -   770,254   770,254   686,341   -   -   680,911   680,911 
Accrued interest receivable on securities  1,873   -   1,873   -   1,873   2,795   -   2,795   -   2,795 
Accrued interest receivable on loans  3,874   -   -   3,874   3,874   2,238   -   -   2,238   2,238 
Accrued interest receivable other  296   -   -   296   296   21   -   -   21   21 
                                        
Off-balance-sheet instruments:                                        
Loan commitments and standby letters of credit $26  $-  $26  $-  $26  $23  $-  $23  $-  $23 
                                        
Financial liabilities:                                        
Non-interest bearing deposits $174,305  $174,305  $-  $-  $174,305  $161,677  $161,677  $-  $-  $161,677 
Interest bearing deposits  1,033,115   -   1,040,560   -   1,040,560   965,670   -   964,717   -   964,717 
Long-term borrowings  2,300   -   2,698   -   2,698   2,300   -   2,592   -   2,592 
Junior subordinated debt  36,927   -   -   20,582   20,582   37,116   -   -   27,128   27,128 
Accrued interest payable  10,119   -   270   9,849   10,119   628   -   172   456   628 

Note 17. Regulatory Matters

The payment ofability to pay 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.

The Company is subject to statutory and regulatory restrictions on the payment of dividends and generally cannot pay dividends that exceed its net income or which may weaken its financial health.  The Company's primary source of cash is dividends from the Bank.  Generally, the Bank is subject to certain restrictions on dividends that it may declare without prior regulatory approval.  The Bank cannot pay dividends in any calendar year that, in the aggregate, exceed the Bank's year-to-date net income plus its retained income for the two preceding years.  Additionally, the Bank cannot pay dividends that are in excess of the amount that would result in the Bank falling below the minimum required for capital adequacy purposes.

Trinity was placed under a Written Agreement by the FRB on September 26, 2013. The Written Agreement requires Trinity to serve as a source of strength to the BankBanks and restricts Trinity's ability without written approval of the FRB, to make payments on the Company's junior subordinated debentures, incur or increase any debt, declare and pay dividends or make other capital distributions or to repurchase or redeem Trinity stock. Additionally, the Bank was similarly prohibited from paying dividends to Trinity under the Formal Agreement issued by the Office of Comptroller of the Currency ("OCC") on November 30, 2012 and under the Consent Order, which replaced the Formal Agreement, issued on December 17, 2013. The Consent Order required that the Bank maintain certain capital ratios and receive approval from the OCC prior to declaring dividends.  The Consent Order was terminated by the OCC effective November 3, 2017.  The Company and the Bank continue to take actions to address the provisions of the Written Agreement.

The Company and the Bankbank holding companies are subject to various regulatory capital requirements administered by the federal banking agencies.  Failure to meet minimum capital requirements can initiate certain mandatory—and additional discretionary—actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements.  Under capital adequacy guidelines and the regulatory frameworkaction.  The Basel III Rules became effective for prompt corrective action, the Company's and the Bank's assets, liabilities, and certain off-balance-sheet items are calculated under regulatory accounting practices. The Company's and the Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.  Prompt corrective action provisions are not applicable to bank holding companies.

Quantitative measures established by regulation to ensure capital adequacy require the Company on January 1, 2015 with full compliance with all of the requirements being phased in over a multi-year schedule, and fully phased in by January 1, 2019.  See Item 1 - "Supervision & Regulation" for further discussion regarding the Bank to maintain minimum amounts and ratios (set forth in the table below) of total Common Equity Tier 1 and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined in the regulations), and of Tier 1 capital (as defined in the regulations) to average assets (as defined in the regulations).Basel III Rules.  The Company and the Bank met all capital adequacy requirements to which they were subject as of September 30, 2017March 31, 2018 and December 31, 2016.2017.
Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition.  If adequately capitalized, regulatory approval is required to accept brokered deposits.  If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required.

- 20 -
The statutory requirements and actual amounts and ratios for the Company and the Bank are presented below:

 Actual  
For Capital Adequacy
Purposes
  
To be well capitalized
under prompt
corrective action
provisions
  
Minimum Levels
Under Consent Order
Provisions
  Actual  
For Capital Adequacy
Purposes
  
To be well capitalized
under prompt
corrective action
provisions
 
 Amount  Ratio  Amount  Ratio  Amount  Ratio  Amount  Ratio  Amount  Ratio  Amount  Ratio  Amount  Ratio 
 (Dollars in thousands)                   
September 30, 2017                        
March 31, 2018                  
Total capital (to risk-weighted assets):                                          
Consolidated $144,827   16.9750% $68,254   8.00%  N/A   N/A   N/A   N/A  $144,143   16.8772% $68,326   8.0000%  N/A   N/A 
Bank only  139,379   16.3432%  68,226   8.00% $85,283   10.00% $93,811   11.00%  137,691   16.1420%  68,240   8.0000% $85,300   10.0000%
Tier 1 capital (to risk weighted assets):                                                        
Consolidated  124,036   14.5381%  51,191   6.00%  N/A   N/A   N/A   N/A   133,453   15.6256%  51,244   6.0000%  N/A   N/A 
Bank only  128,674   15.0880%  51,170   6.00%  68,226   8.00%  N/A   N/A   127,014   14.8903%  51,180   6.0000%  68,240   8.0000%
Common Equity Tier 1 Capital (to risk weighted assets):                                                        
Consolidated  99,229   11.6305%  38,393   4.50%  N/A   N/A   N/A   N/A   107,453   12.5813%  38,433   4.5000%  N/A   N/A 
Bank only  128,674   15.0880%  38,377   4.50%  55,434   6.50%  N/A   N/A   127,014   14.8903%  38,385   4.5000%  55,445   6.5000%
Tier 1 leverage (to average assets):                                                        
Consolidated  124,036   9.4951%  52,253   4.00%  N/A   N/A   N/A   N/A   133,453   10.4275%  51,193   4.0000%  N/A   N/A 
Bank only  128,674   9.8963%  52,009   4.00%  65,011   5.00%  104,018   8.00%  127,014   9.9331%  51,148   4.0000%  63,935   5.0000%

N/A—not applicable

-23-
 Actual  
For Capital Adequacy
Purposes
  
To be well capitalized
under prompt
corrective action
provisions
  
Minimum Levels
Under Consent Order
Provisions
  Actual  
For Capital Adequacy
Purposes
  
To be well capitalized
under prompt
corrective action
provisions
 
 Amount  Ratio  Amount  Ratio  Amount  Ratio  Amount  Ratio  Amount  Ratio  Amount  Ratio  Amount  Ratio 
 (Dollars in thousands)                   
December 31, 2016                        
December 31, 2017                  
Total capital (to risk-weighted assets):                                          
Consolidated $178,906   20.0509% $71,381   8.00%  N/A   N/A   N/A   N/A  $152,076   18.1982% $66,853   8.0000%  N/A   N/A 
Bank only  137,873   15.3793%  71,719   8.00% $89,649   10.00% $98,614   11.00%  134,959   16.1823%  66,720   8.0000% $83,399   10.0000%
Tier 1 capital (to risk weighted assets):                                                        
Consolidated  167,290   18.7490%  53,536   6.00%  N/A   N/A   N/A   N/A   132,900   15.9035%  50,140   6.0000%  N/A   N/A 
Bank only  126,598   14.1216%  53,789   6.00%  71,719   8.00%  N/A   N/A   124,481   14.9259%  50,040   6.0000%  66,720   8.0000%
Common Equity Tier 1 Capital (to risk weighted assets):                                                        
Consolidated  60,840   6.8186%  40,152   4.50%  N/A   N/A   N/A   N/A   106,320   12.7228%  37,605   4.5000%  N/A   N/A 
Bank only  126,598   14.1216%  40,342   4.50%  58,272   6.50%  N/A   N/A   124,481   14.9259%  37,530   4.5000%  54,210   6.5000%
Tier 1 leverage (to average assets):                                                        
Consolidated  167,290   12.0120%  35,690   4.00%  N/A   N/A   N/A   N/A   132,900   10.1821%  33,427   4.0000%  N/A   N/A 
Bank only  126,598   9.1596%  35,859   4.00%  44,824   5.00%  71,719   8.00%  124,481   9.6006%  33,360   4.0000%  41,700   5.0000%

N/A - not applicable

 Pursuant to the Consent Order, the Bank was required to maintain (i) a leverage ratio of Tier 1 Capital to total assets of at least 8%; and (ii) a ratio of Total Capital to total risk-weighted assets of at least 11%. As of  September 30, 2017 and December 31, 2016, the Bank was in compliance with these requirements. While theThe Bank's capital ratios as of the periods in the tables above fall into the category of "well-capitalized" under the prompt corrective action rules, the Bank cannot be considered "well-capitalized" due to the requirements in the Consent Order to meetas of  March 31, 2018 and maintain specific capital levels. The Consent Order was terminated by the OCC effective November 3,December 31, 2017.

Trinity and the Bank are also required to maintain a "capital conservation buffer" of 2.5% above the regulatory minimum risk-based capital requirements. The purpose of the conservation buffer is to ensure that banks maintain a buffer of capital that can be used to absorb losses during periods of financial and economic stress.  The capital conservation buffer began to be phased in beginning in January 2016 at 0.625% of risk-weighted assets and will increase by that amount each year until fully implemented in January 2019.  An institution would be subject to limitations on certain activities, including payment of dividends, share repurchases and discretionary bonuses to executive officers, if its capital level is below the buffered ratio. Factoring in the fully phased-in conservation buffer increases the minimum ratios described above to 7.0% for Common Equity Tier 1, 8.5% for Tier 1 Capital and 10.5% for Total Capital. At September 30,March 31, 2018 the Bank's capital conservation buffer was 8.1420% and the consolidated capital conservation buffer was 8.0813%.  At December 31, 2017 the Bank's capital conservation buffer was 8.3432%8.1823% and the consolidated capital conservation buffer was 7.1305%8.2228%.  At December 31, 2016 the Bank's capital conservation buffer was 7.3793% and the consolidated capital conservation buffer was 2.3186%.

Note 18. Subsequent Events

On November 13, 2017, the Company completed a combined shareholder rights offering, directed share program for certain of its officers, directors and employees and supplemental community offering, at an offering price of $4.75 per share, under its Registration Statement on Form S-1 (No. 333-218952) and related prospectus, dated September 22, 2017. The Company issued 2,105,263 shares of voting common stock and received gross proceeds of approximately $10.0 million.



-24-- 21 -
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Management's Discussion and Analysis of Financial Condition and Results of Operations analyzes the major elements of the Company's balance sheets and statements of income. This section should be read in conjunction with the Company's unaudited consolidated financial statements and accompanying notes included elsewhere in this Quarterly Report on Form 10-Q ("Form 10-Q") and with the unaudited consolidated financial statements and accompanying notes and other detailed information appearing elsewhere in the Company's Annual Report on Form 10-K for the year ended December 31, 20162017 ("20162017 Form 10-K").

Special Note Concerning Forward-Looking Statements

This Form 10-Q 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 are based upon the reasonable 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 Form 10-Q, 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, except as required by law.

The Company's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. The factors, which could cause actual results to differ materially from those expressed in, or implied by, the forward-looking statements and could have a material adverse effect on the operations and future prospects of the Company and its subsidiaries are detailed in the "Risk Factors" section included under Item 1A of Part I of the 20162017 Form 10-K.  These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.

Recent Developments

The Company previously announced the implementation of its strategic plan designed to reduce costs and improve efficiencies throughout the organization, resulting in a reduction in workforce of approximately 10%.  For more information, please refer to the Company's Current Report on Form 8-K filed with the Commission on October 13, 2017 and on October 23, 2017.  The Company has reached a preliminary conclusion that it expects to record costs associated with this staff reduction of $390 thousand.  These costs are expected to be recognized in the Company's consolidated financial statements for the fourth quarter of 2017 and first quarter of 2018.

Overview

Trinity Capital Corporation, a bank holding company organized under the laws of the State of New Mexico, is the sole stockholder of Los Alamos National Bank (the "Bank"), a national banking organization created under the laws of the United States of America.  The Bank is regulated by the OCC. Trinity is also the sole shareholder of Title Guaranty & Insurance Company ("Title Guaranty") and TCC Funds.  The Bank is the sole stockholder of TCC Advisors Corporation ("TCC Advisors"), the sole member of Triscensions ABQ, LLC, a New Mexico limited liability company, and the sole member of FNM 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 startup 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 by the Bank to fund loans and investments in a New Market Tax Credit project.  TCC Funds was dissolved in January 2017.  Title Guaranty was dissolved in September 2017.

The Bank provides a full range of financial services for deposit customers and lends money to creditworthy borrowers at competitive interest rates.  The Bank's products include certificates of deposit, 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 the Bank's three key processes: investment of funds, generation of funds and service-for-fee income.  The profitability of operations depends primarily on the Bank's net interest income, which is the difference between total interest earned on interest-earning assets and total interest paid on interest-bearing liabilities, and its ability to maintain efficient operations.  In addition to the Bank's net interest income, it produces income through mortgage servicing operations and noninterest income processes, such as trust and investment services.

The Company's net income attributable to common stockholders increased $697 thousand from net loss of $292 thousand for the three months ended September 30, 2016 to net income of $405 thousand for the three months ended September 30, 2017. This increase was primarily attributable to a decrease in preferred dividends, a decrease in legal, professional, and accounting fees, a decrease in salaries and benefits, and a decrease in FDIC insurance expense.  These were partially offset by an increase in income tax expense, the restorative contribution to the ESOP, a decrease in fair value of MSRs, a decrease in gain on sale of loans, and a decrease in loan and security interest income.

The Company's net loss attributable to common stockholders increased $1.3 million from net loss of $1.2 million for the nine months ended September 30, 2016 to net loss of $2.5 million for the nine months ended September 30, 2017. This increase was primarily attributable to increases in income tax expense, a restorative contribution to the ESOP, decreases in loan interest income, an increase in losses on sales of securities, a decrease in gain on sale of loans, and an increase in data processing expenses.  Offsetting these factors was a reverse provision in allowance for loan losses, a decrease in dividends on preferred stock, a decrease in fair value of MSRs, an increase in mortgage referral fees, a decrease in FDIC insurance expense, an increase in other fees, and a decrease in interest expenses.


Regulatory Actions against the Company and the Bank

As discussed in the Part I, Item 1, of the 2016 Form 10-K and Note 16 of this Form 10-Q, the FRB entered into the Written Agreement with Trinity.  The Written Agreement requires Trinity to serve as a source of strength to the Bank and restricts Trinity's ability to issue dividends and other capital distributions and to repurchase or redeem any Trinity stock without the prior written approval of the FRB.  The Written Agreement further requires that Trinity implement a capital plan, subject to approval by the FRB, and submit cash flow projections to the FRB.  Finally, the Written Agreement requires Trinity to comply with all applicable laws and regulations and to provide quarterly progress reports to the FRB. Additionally, the Bank entered into a Consent Order with the OCC.  The Consent Order focused on improving the Bank's credit administration, credit underwriting, internal controls, compliance and management supervision.  Additionally, the Consent Order required that the Bank maintain certain capital ratios and receive approval of the OCC prior to declaring dividends.  The Consent Order required the Bank to maintain the following minimum capital ratios: (i) a leverage ratio of Tier 1 Capital to total assets of at least 8%; and (ii) a ratio of Total Capital to total risk-weighted assets of at least 11%.  The OCC terminated the Consent Order effective November 3, 2017.  The Company continues to take action to ensure the satisfaction of the requirements under the Written Agreement.

Critical Accounting Policies

Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. We believe that the most critical accounting policies upon which our financial condition and results of operation depend, and which involve the most complex subjective decisions or assessments, are included in the discussion entitled "Critical Accounting Policies" in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," in the 20162017 Form 10-K, and all amendments thereto, as filed with the Securities and Exchange Commission. There have been no material changes to the critical accounting policies disclosed in the 20162017 Form 10-K.

-25-
Results of Operations

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 noninterest income and noninterest expenses.

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.  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.  Noninterest income and noninterest expenses are impacted by growth of operations and growth in the number of accounts.  Noninterest expenses are impacted by additional employees, branch facilities and promotional marketing expenses.  A number of accounts affect noninterest income, including service fees andas well as noninterest expenses such as computer services, supplies, postage, telecommunications and other miscellaneous expenses.

Net Income (Loss)

. Net income attributableavailable to common stockholdersshareholders for the three months ended September 30, 2017March 31, 2018 was $405 thousand,$1.7 million, or a diluted earnings per common share of $0.02,$0.09, compared to net loss available to common stockholdersshareholders of $292 thousand$1.3 million for the three months ended September 30, 2016,March 31, 2017, or diluted loss per common share of $0.04, representing$0.10, an increase of $697 thousand$2.9 million in net income and an increase of $0.06 in diluted earnings per common share.share of $0.19.  This increase in net income available to common stockholdersshareholders was primarily due to a decrease in dividends on preferred stock of $1.1 million, a decrease in legal, professional, and accounting fees of $998$1.7 million due to finalizing the 2016 financial statement audits in early 2017, a decrease in dividends and discount accretion on preferred shares of $770 thousand due in part to the recoveryredemption of $500shares of Series A and Series B Preferred Stock, an increase in investment interest income of $702 thousand, in legal fees pertaining to one loan relationship that was fully charged-off in 2012, a decrease in salaries and employee benefits of $868$486 thousand, a decrease in FDIC insurance expensedata processing expenses of $598$345 thousand due to the renegotiation of the core system contract in the fourth quarter of 2017, a decrease in collection expenses of $324 thousand, a decrease in supplies expensethe valuation of $410the MSR assets of $238 thousand due to the sale of that asset, and transfer of the mortgage loan servicing portfolio, in December 2017, a decrease in regulatory assessments of $230 thousand due to the termination of the written agreement with the FRB and the Consent Order with the Office of the Comptroller of the Currency (the "OCC"), an increase in trust and investment fees of $146 thousand, an increase in mortgage referral feesBOLI income of $308$127 thousand due to additional BOLI investments in 2017, a decrease in directors' related expenses of $108 thousand, a decrease in interest rate contracts of $305 thousand, a decrease in interest expense of $267 thousand, a reverse provision in allowance for loan losses of $250 thousand, an increase in other non-interest income of $188 thousand, an increase in interest bearing due from accounts interest income of $179 thousand, a decrease in fraud losses of $130 thousand, a decrease in loan closingrecruiting expenses of $92$91 thousand, and a decrease in employee training and travelpostage of $80 thousand.  These were partially offset by an increase in income taxes of $1.4 million primarily due to an additional DTA valuation allowance of $900 thousand, an ESOP restorative contribution accrual of $936 thousand, decrease in the fair value of MSRs of $772 thousand, a decrease in gain on sale of loans of $630 thousand, a decrease in loan interest income of $397 thousand, an increase in data processing expenses of $260 thousand, a decrease in gain on sale of OREO of $186 thousand, a decrease in interest income on securities of $167 thousand, an increase in occupancy expenses of $134 thousand, and a decrease in gains on security sales of $130 thousand.

Net loss attributable to common stockholders for the nine months ended September 30, 2017 was $2.5 million, or a loss per common share of $0.16, compared to net loss available to common stockholders of $1.2 million for the nine months ended September 30, 2016, or loss per common share of $0.18, an increase of $1.3 million in net losses and a decrease in loss per common share of $0.02 due to the increase in number of shares outstanding as a result of the private placement.  This increase in net loss available to common stockholders was primarily due to an increase in income tax expenses of $3.5 million primarily due to an additional DTA valuation allowance of $2.0 million, write off of a duplicate state tax credit of $584 thousand, a write off of state income tax receivables of $312 thousand determined to be uncollectable, a write off of federal income tax receivables of $220 thousand determined to be uncollectable; a decrease in loan interest income of $1.9 million, a decrease in gain on sale of loans of $1.9 million, an increase in losses on sale of securities of $1.4 million, an increase in data processing expenses of $1.3 million, an ESOP restorative contribution accrual of $936 thousand, an increase in customer perks and sponsorships of $418 thousand, an increase in collection expenses of $372 thousand, a decrease in gain on sale of OREO of $359 thousand, an increase in directors' expenses of $166 thousand, and a decrease in mortgage loan servicing fees of $152 thousand.  These were partially offset by a decrease in dividends on preferred stockloan interest income of $2.4$1.2 million, a decrease in FDIC insurance expenses of $1.6 million, a decrease in salaries and benefits of $1.5 million, a reverse provision in allowance formortgage loan loss of $1.2 million, an increase in mortgage referralservicing fees of $1.1 million, a decrease in interest expenses of $700 thousand, an increase in other fees of $492 thousand, a decrease in legal, professional, and accounting fees of $461$488 thousand due to the recovery of $500 thousand in legal fees pertainingBank's strategy to one loan relationship that was fully charged-off in 2012,generate applications for non-affiliated mortgage companies on a fee basis, a decrease in supplies expensegains on sale of $431 thousand, a decrease in marketing expensesOREO of $197$287 thousand, an increase of $190 thousand in BOLI income of $173 thousand, a decrease in employee recruitmentprovision expense, of $138 thousand, an increase in available for sale security interest income of $136 thousand, a decrease in insurance expenses of $104 thousand, and an increase in interest bearing due from account interest incomeoccupancy expenses of $88$99 thousand.

-26-- 22 -
Net Interest Income. The following table presents 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, for the periods indicated:

 Three Months Ended September 30,  Three Months Ended March 31, 
 2017  2016  2018  2017 
 
Average
Balance
  Interest  
Yield
/Rate
  
Average
Balance
  Interest  
Yield
/Rate
  
Average
Balance
  Interest  
Yield
/Rate
  
Average
Balance
  Interest  
Yield
/Rate
 
       (Dollars in thousands)              (Dollars in thousands)       
Interest-earning Assets:                  
Interest-earning assets:                  
Loans(1) $742,994  $9,016   4.83% $802,334  $9,413   4.67% $696,922  $8,079   4.68% $779,447  $9,307   4.84%
Taxable investment securities  340,534   1,665   1.96%  417,801   2,163   2.06%  326,319   1,582   1.94%  416,521   1,672   1.63%
Investment securities exempt from federal income taxes  81,246   506   2.49%  32,131   175   2.17%  162,565   1,038   2.55%  42,122   246   2.37%
Other interest-bearing deposits  71,813   222   1.23%  61,843   43   0.28%  13,356   58   1.77%  51,866   106   0.83%
Non-marketable equity securities  3,975   53   5.31%  4,001   55   5.47%  4,212   55   5.30%  4,004   55   5.57%
Total interest-earning assets  1,240,562   11,462   3.68%  1,318,110   11,849   3.58%  1,203,374   10,812   3.62%  1,293,960   11,386   3.57%
Non-interest-earning assets  68,684           85,930           73,430           57,906         
Total assets $1,309,246          $1,404,040          $1,276,804          $1,351,866         
Interest-bearing Liabilities:                        
Interest-bearing liabilities:                        
Deposits:                                                
NOW deposits $375,275  $62   0.07% $390,389  $61   0.06% $388,817  $65   0.07% $392,990  $62   0.06%
Money market deposits  17,480   4   0.09%  18,283   5   0.11%  19,135   4   0.09%  17,652   4   0.09%
Savings deposits  401,057   81   0.08%  411,440   86   0.08%  387,760   76   0.08%  409,958   82   0.08%
Time deposits over $100,000  99,290   176   0.70%  136,780   251   0.73%  87,331   158   0.73%  131,638   200   0.62%
Time deposits under $100,000  88,469   109   0.49%  112,615   153   0.54%  81,803   109   0.54%  77,591   111   0.58%
Short-term borrowings  -   -   -   -   -   -   3,444   17   1.86%  -   -   0.00%
Long-term borrowings  2,300   37   6.34%  2,300   37   6.40%  2,300   36   6.34%  2,300   36   6.35%
Long-term capital lease obligation  -   -   0.00%  2,211   -   0.00%  -   -   0.00%  2,211   -   0.00%
Junior subordinated debt  36,934   599   6.36%  37,116   742   7.95%  34,228   787   9.19%  37,116   720   7.87%
Total interest-bearing liabilities  1,020,805   1,068   0.41%  1,111,134   1,335   0.48%  1,004,818   1,252   0.50%  1,071,456   1,215   0.46%
Demand deposits, noninterest-bearing  171,882           169,326           159,899           160,790         
Other noninterest-bearing liabilities  13,073           38,563           8,218           14,163         
                                                
Stockholders' equity, including stock owned by ESOP  103,486           85,017         
Total liabilities and stockholders equity $1,309,246          $1,404,040         
Shareholders' equity, including stock owned by ESOP  103,869           105,457         
Total liabilities and shareholders' equity $1,276,804          $1,351,866         
Net interest income/interest rate spread (2)     $10,394   3.27%     $10,514   3.10%     $9,560   3.12%     $10,171   3.11%
Net interest margin (3)          3.34%          3.17%          3.20%          3.19%

(1)Average loans include nonaccrual loans of $13.8$14.7 million and $26.6$16.1 million for the three months ended September 30,March 31, 2018 and 2017, and 2016, respectively.  Interest income includes loan origination fees of $195$49 thousand and $175$275 thousand for the three months ended September 30,March 31, 2018 and 2017, and 2016, respectively.

(2)Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.
(3)Net interest margin represents net interest income as a percentage of average interest-earning assets.
-27-
  Nine Months Ended September 30, 
  2017  2016 
  
Average
Balance
  Interest  
Yield
/Rate
  
Average
Balance
  Interest  
Yield
/Rate
 
        (Dollars in thousands)       
Interest-earning Assets:                  
Loans(1) $763,657  $27,613   4.83% $816,713  $29,532   4.83%
Taxable investment securities  387,713   5,143   1.77%  402,553   5,769   1.91%
Investment securities exempt from federal income taxes  59,398   1,085   2.44%  21,444   323   2.01%
Securities purchased under resell agreements  -   -   0.00%  4,159   43   1.39%
Other interest-bearing deposits  47,984   406   1.13%  95,897   318   0.44%
Non-marketable equity securities  3,997   161   5.39%  4,000   163   5.44%
Total interest-earning assets  1,262,749   34,408   3.64%  1,344,766   36,148   3.59%
Non-interest-earning assets  66,868           69,243         
Total assets $1,329,617          $1,414,009         
Interest-bearing Liabilities:                        
Deposits:                        
NOW deposits $387,986  $189   0.07% $403,498  $181   0.06%
Money market deposits  17,333   12   0.09%  26,720   22   0.11%
Savings deposits  405,933   245   0.08%  397,495   254   0.09%
Time deposits over $100,000  102,709   559   0.73%  144,905   813   0.75%
Time deposits under $100,000  94,589   328   0.46%  120,829   500   0.55%
Short-term borrowings  495   4   1.10%  -   -   0.00%
Long-term borrowings  2,300   109   6.34%  2,300   110   6.39%
Long-term capital lease obligation  1,401   -   0.00%  2,211   -   0.00%
Junior subordinated debt  37,054   1,913   6.81%  37,116   2,179   7.84%
Total interest-bearing liabilities  1,049,800   3,359   0.42%  1,135,074   4,059   0.48%
Demand deposits, noninterest-bearing  158,850           160,721         
Other noninterest-bearing liabilities  17,132           35,250         
                         
Stockholders' equity, including stock owned by ESOP  103,835           82,964         
Total liabilities and stockholders equity $1,329,617          $1,414,009         
Net interest income/interest rate spread (2)     $31,049   3.22%     $32,089   3.11%
Net interest margin (3)          3.29%          3.19%

(1)Average loans include nonaccrual loans of $14.5 million and $24.2 million for the nine months ended September 30, 2017 and 2016, respectively.  Interest income includes loan origination fees of $827 thousand and $915 thousand for the nine months ended September 30, 2017 and 2016, respectively.
(2)Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.
(3)Net interest margin represents net interest income as a percentage of average interest-earning assets.

Net interest income decreased $120$611 thousand to $10.4$9.6 million for the three months ended September 30,as of March 31, 2018 from $10.2 million as of March 31, 2017 from $10.5 million for the three months ended September 30, 2016 due to a decrease inlower interest income of $387$574 thousand and a decreasean increase in interest expense of $267 thousand.$37 thousand from 2017.  Net interest income decreased primarily due to a decreaselower average volume in average taxable investment securities of $77.3$90.2 million, a lower average volume in loans of $82.5 million, and a decrease inlower average volume in other interest-bearing deposits of loans of $59.3$38.5 million, partially offset by an increase in average tax-exempt investment securities of $49.1 million and an increase in average other interest bearing deposits of $10.0$120.4 million.  The net reductionchange in volume and shift in mix of interest earning assets from taxable investment securities and loans to tax-exempt investment securities resulted in the average yield on earning assets increasing tenfive basis points to 3.68%3.62% for the three months ended September 30, 2017March 31, 2018 from 3.58%3.57% for the three months ended September 30, 2016.March 31, 2017.  The decreaseincrease in interest expense was primarily due to subordinated debt interest expense increasing by $67 thousand due to the early payoff, in March 2018, of certain Junior Subordinated Deferrable Interest Debentures due 2030 that were issued by Trinity Capital Trust I.  These securities were callable at a decrease in theredemption rate of 101.088% but were carried at an interest rate of 10.875%.  Total deposits average volume ofdecreased $65.0 million, with the largest decline in volume in total time deposits of $61.6 million, a decrease$40.1 million.  The increase in average volume of $15.1 million in NOW deposits, and a decrease in the average volume of $10.4 million in savings deposits.  The reduction in volumesubordinated debt expense and shift in deposit mix caused the cost of interest-bearing liabilities to decline sevenincrease four basis points to 0.41%0.50% for the three months ended September 30, 2017March 31, 2018 from 0.48%0.46% for the three months ended September 30, 2016.March 31, 2017.  Net interest margin increased 17one basis pointspoint to 3.34%3.20% for the three months ended September 30, 2017March 31, 2018 from 3.17%3.19% for the three months ended September 30, 2016.

Net interest income decreased $1.0 million to $31.0 million for the nine months ended September 30, 2017 from $32.1 million for the nine months ended September 30, 2016 due to a decrease in interest income of $1.7 million and a decrease in interest expense of $700 thousand.  Net interest income decreased primarily due to a decrease in average volume of loans of $53.1 million, a decrease in average volume of other interest bearing deposits of $47.9 million, and a decrease in average volume of taxable investment securities of $14.8 million, partially offset by an increase in average volume of tax-exempt securities of $38.0 million.  The reduction in volume and shift in the mix of interest earning assets from loans, other interest bearing deposits, and taxable investment securities to tax exempt investment securities resulted in the average yield on earning assets to increase five basis points to 3.64% for the nine months ended September 30, 2017 from 3.59% for the nine months ended September 30, 2016.  The decrease in interest expense was primarily due to a decrease in the average volume of time deposits of $68.4 million, a decrease in average volume of $15.5 million in NOW deposits, and a decrease in average volume of $9.4 million in money market deposits, partially offset by an increase in average volume of $8.4 million in savings deposits.  The reduction in volume and shift in deposit mix caused the cost of interest-bearing liabilities to decline six basis points to 0.42% for the nine months ended September 30, 2017 from 0.48% for the nine months ended September 30, 2016.  Net interest margin increased ten basis points to 3.29% for the nine months ended September 30, 2017 from 3.19% for the nine months ended September 30, 2016.March 31, 2017.

-28-- 23 -
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 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.

  Three Months Ended September 30, 
  2017 Compared to 2016 
  
Change Due to
Volume
  
Change Due to
Rate
  Total Change 
  (In thousands) 
Interest-earning Assets:         
Loans $(696) $299  $(397)
Taxable investment securities  (400)  (98)  (498)
Investment securities exempt from federal income taxes  268   63   331 
Other interest bearing deposits  7   172   179 
Non-marketable equity securities  -   (2)  (2)
Total (decrease) increase in interest income $(821) $434  $(387)
Interest-bearing Liabilities:            
Now deposits $(2) $3  $1 
Money market deposits  -   (1)  (1)
Savings deposits  (2)  (3)  (5)
Time deposits over $100,000  (69)  (6)  (75)
Time deposits under $100,000  (33)  (11)  (44)
Short-term borrowings  -   -   - 
Long-term borrowings  -   -   - 
Capital long-term lease obligation  -   -   - 
Junior subordinated debt  (4)  (139)  (143)
Total increase (decrease) in interest expense $(110) $(157) $(267)
Increase (decrease) in net interest income $(711) $591  $(120)

 Nine Months Ended September 30,  Three Months Ended March 31, 
 2017 Compared to 2016  2018 Compared to 2017 
 
Change Due to
Volume
  
Change Due to
Rate
  Total Change  
Change Due to
Volume
  
Change Due to
Rate
  Total Change 
 (In thousands)  (In thousands) 
Interest-earning Assets:                  
Loans $(1,918) $(1) $(1,919) $(985) $(243) $(1,228)
Taxable investment securities  (213)  (413)  (626)  (362)  272   (90)
Investment securities exempt from federal income taxes  572   190   762   703   89   792 
Securities purchased under resell agreements  (43)  -   (43)
Other interest bearing deposits  (159)  247   88   (79)  31   (48)
Non-marketable equity securities  -   (2)  (2)  3   (3)  - 
Total (decrease) increase in interest income $(1,761) $21  $(1,740) $(720) $146  $(574)
Interest-bearing Liabilities:                        
Now deposits $(7) $15  $8 
NOW deposits $(1) $4  $3 
Money market deposits  (8)  (2)  (10)  -   -   - 
Savings deposits  5   (14)  (9)  (4)  (2)  (6)
Time deposits over $100,000  (237)  (17)  (254)  (67)  25   (42)
Time deposits under $100,000  (109)  (63)  (172)  6   (8)  (2)
Short-term borrowings  4   -   4   -   16   16 
Long-term borrowings  -   (1)  (1)  -   -   - 
Capital long-term lease obligation  -   -   - 
Junior subordinated debt  (4)  (262)  (266)  (56)  123   67 
Total increase (decrease) in interest expense $(356) $(344) $(700) $(122) $158  $36 
Increase (decrease) in net interest income $(1,405) $365  $(1,040) $(598) $(12) $(610)

-29-Provision for Loan Losses.
Our allowance is established through charges to income in the form of the provision in order to bring our allowance to a level deemed appropriate by management. The allowance at March 31, 2018 and March 31, 2017 was $11.2 million and $14.2 million, respectively, representing 1.6% and 1.8% of total loans, respectively, as of such dates. We recorded a $220 thousand provision for loan losses for the three months ended March 31, 2018 compared with a provision for loan losses of $30 thousand for the three months ended March 31, 2017. The increase in the provision was primarily due to an increase in loan balances.  See the "Financial Condition" section below for further information on provision for loan losses.
Noninterest Income. Changes in noninterest income were as follows for the periods indicated:

 Three Months Ended September 30,     Nine Months Ended September 30,     
Three Months Ended
March 31, 2018,
    
 2017  2016  Net difference  2017  2016  Net difference  2018  2017  Net difference 
 (In thousands)  (In thousands) 
Noninterest income:                           
Mortgage loan servicing fees $446  $456  $(10) $1,394  $1,546  $(152) $(2) $486  $(488)
Trust and investment services fees  643   654   (11)  1,953   1,900   53   797   651   146 
Service charges on deposits  202   153   49   784   719   65   254   295   (41)
Net gain on sale of OREO  130   316   (186)  800   1,159   (359)
Net gain (loss) on sale of OREO  41   328   (287)
Net gain on sale of loans  -   630   (630)  -   1,853   (1,853)  -   -   - 
Net (loss) gain on sale of securities  -   130   (130)  (1,248)  184   (1,432)
Net gain (loss) on sale of securities  -   -   - 
BOLI income  88   98   (10)  271   98   173   218   91   127 
Mortgage referral fees  431   123   308   1,175   123   1,052   245   327   (82)
Interchange fees  496   630   (134)
Other fees  598   684   (86)  1,732   1,240   492   303   288   15 
Other noninterest income (loss)  12   (176)  188   71   25   46 
Other noninterest income  6   (21)  27 
Total noninterest income $2,550  $3,068  $(518) $6,932  $8,847  $(1,915) $2,358  $3,075  $(717)

Noninterest income decreased $518$717 thousand to $2.6$2.4 million for the three months ended September 30, 2017March 31, 2018 from $3.1 million for the three months ended September 30, 2016,March 31, 2017, primarily attributable to a decrease of $488 thousand in mortgage loan servicing fees due to the sale of the MSR asset and servicing portfolio at the end of 2017, a decrease of $287 thousand in gains on sale of loans of $630 thousand due to the change in strategy in 2016 to generate applications for non-affiliated mortgage companies on a fee basis,OREO, a decrease in gain on sale of OREO of $186$82 thousand a decrease in gain on sale of securities of $130 thousand, partially offset by increases in mortgage referral fees, a decrease of $308$134 thousand in interchange fees primarily due to the changeone-time true up of interchange fees in lending strategy whereby the Bank generates residential mortgage applications for non-affiliated residential mortgage companies2017, and a decrease of $41 thousand in service charges on a fee basis, anddeposits.  Those decreases were partially offset by an increase of $146 thousand in othertrust and investment fees, an increase of $188 thousand.

Noninterest$127 thousand in BOLI income decreased $1.9 million to $6.9 million for the nine months ended September 30, 2017 from $8.8 million for the nine months ended September 30, 2016, primarily attributable to the decrease in gain on sale of loans of $1.9 million due to the changeadditional BOLI investments in strategy in 2016 to generate applications for non-affiliated mortgage companies on a fee basis, an increase in loss on sale of securities of $1.4 million due to management's decision to sell underperforming securities and partially replace with securities currently earning market rates, a decrease in gain on sale of OREO of $359 thousand,2017, and a decrease in mortgage loan servicing feesventure capital expenses of $152 thousand.  These were partially offset by increases in mortgage referral fees of $1.1 million due to the change in lending strategy whereby the Bank generates residential mortgage applications for non-affiliated residential mortgage companies on a fee basis, and an increase in other fees of $492 thousand primarily composed of one-time interchange fees from MasterCard of $360 thousand, a one-time MasterCard incentive of $36 thousand, and an ICBA rebate of $68 thousand; and an increase in BOLI income of $173$43 thousand.

- 24 -
Noninterest Expenses. Changes in noninterest expenses were as follows for the periods indicated:

 Three Months Ended September 30,     Nine Months Ended September 30,     Three Months Ended March 31,    
 2017  2016  Net difference  2017  2016  Net difference  2018  2017  Net difference 
 (In thousands)  (In thousands) 
Noninterest expenses:                           
Salaries and employee benefits $5,668  $6,536  $(868) $17,913  $19,460  $(1,547) $5,551  $6,037  $(486)
Occupancy  805   671   134   2,360   2,414   (54)  590   491   99 
Data processing  1,132   872   260   3,557   2,232   1,325   1,029   1,374   (345)
Legal, professional, and accounting fees  541   1,539   (998)  4,488   4,949   (461)  525   2,212   (1,687)
Change in value of MSRs  677   (95)  772   1,406   1,830   (424)
Amortization and valuation of MSRs  -   238   (238)
Other noninterest expenses:                                    
Marketing  183   172   11   667   864   (197)  106   160   (54)
Supplies  44   454   (410)  233   664   (431)  56   77   (21)
Postage  119   71   48   429   416   13   54   134   (80)
FDIC insurance premiums  182   780   (598)  705   2,259   (1,554)  127   311   (184)
Collection expenses  112   151   (39)  951   579   372   186   510   (324)
Other  1,928   1,640   288   4,690   3,262   1,428   1,589   2,372   (783)
Total other noninterest expenses  2,568   3,268   (700)  7,675   8,044   (369)  2,118   3,564   (1,446)
Total noninterest expenses $11,391  $12,791  $(1,400) $37,399  $38,929  $(1,530) $9,813  $13,916  $(4,103)

Noninterest expenses decreased $1.4$4.1 million to $11.4$9.8 million for the three months ended September 30, 2017March 31, 2018 from $12.8$13.9 million for the three months ended September 30, 2016. This decrease was primarily attributableMarch 31, 2017. Noninterest expenses decreased in almost all categories due to a decreasethe strategic business review initiative in 2017.  Decreases were realized in legal, professional, and accounting fees of $998 thousand$1.7 million due to finalizing the 2016 financial statement audit in part to the recovery of $500 thousand in legal fees pertaining to one loan relationship that was fully charged-off in 2012, a decrease2017, in salaries and benefits of $868$486 thousand decreaseswhich is reflective of the reduction in FDIC insurance premiums of $598 thousand, a decreaseforce completed in supplies expense of $410 thousand, and a decrease of $305 thousand in interest rate contracts mark-to-market that were included in 2016 and decreases in fraud and other losses of $130 thousand, both of which are included in other.  These were partially offset by the ESOP restorative contribution accrual of $936 thousand included in Other, a decrease in MSR fair value of $772 thousand, an increase2017, in data processing of $345 thousand which reflects the cost savings from the contract renegotiation completed at the end of 2017, in collection expenses of $260$324 thousand, in the value of the MSR asset of $238 thousand which reflects the sale of the MSR asset and transfer of the servicing portfolio at the end of 2017, in regulatory assessments of $230 thousand which reflects decreased costs from the termination of the OCC's Consent Order and the FRB's Written Agreement, director related expenses of $108 thousand, in recruiting expenses of $91 thousand, in postage expense of $80 thousand, in customer perks and sponsorships of $78 thousand, in employee education and travel expenses of $57 thousand, and an increase in occupancy expensesfraud losses of $134 thousand.

Noninterest expenses decreased $1.5 million to $37.4 million for the nine months ended September 30, 2017 from $38.9 million for the nine months ended September 30, 2016. This decrease was primarily attributable to a decrease in FDIC insurance expense of $1.6 million, a decrease in salaries and benefits of $1.5 million, a decrease in legal, professional, and accounting fees of $461 thousand due to the recovery of $500 thousand in legal fees pertaining to one loan relationship that was fully charged-off in 2012, a decrease in supplies expense of $431 thousand, an increase in MSR fair value of $424 thousand, and a decrease in marketing expenses of $197$54 thousand.  These decreases were partially offset by an increase of $99 thousand in data processing expenses of $1.3 million due to the implementation of new core systems in July 2016; an ESOP restorative contribution accrual of $936 thousand, an increase of customer perks and sponsorships of $418 thousand, and an increase in directors' expenses of $166 thousand, all of which are included in other; and an increase in collection expenses of $372 thousand.occupancy expenses.

Impact of Inflation and Changing Prices. The primary impact of inflation on our operations is increased operating costs. Unlike industrial companies, nearly all of our assets and liabilities are monetary in nature.  As a result, interest rates have a greater impact on our performance than do the effects of general levels of inflation.  Over short periods of time, interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services.

Income Taxes. Provision for income taxes increased $407 thousand for the three months ended March 31, 2018 from the three months ended March 31, 2017.There was a $1.4 million provision for income taxes for the three months ended September 30, 2017 and a $3.5 million provision for income taxes for the nine months ended September 30, 2017 due to an additional $2.0 million in DTA valuation allowance, a write offMarch 31, 2018 of duplicate tax credits of $584 thousand, a write off of $312 thousand in state income tax receivables deemed to be uncollectable, and a write off of $220 thousand in federal income tax receivables deemed to be uncollectable.$193 thousand.  There was no provision (benefit)a benefit for income taxes for the three and nine months ended September 30, 2016.March 31, 2017 of $214 thousand.

-30-
Financial Condition

Balance Sheet-General. Total assets as of September 30, 2017March 31, 2018 were $1.3$1.28 billion, decreasing $103.0$4.5 million from $1.4$1.29 billion as of December 31, 2016.2017.  During 2017, interest-bearingthe first quarter of 2018, interest bearing deposits with banks decreased $37.6$13.0 million from December 31, 2017 while net loans decreased $49.3increased $7.8 million and investment securities available for sale decreased $5.1increased $2.1 million but were partially offset by an increase in premises and equipment of $2.8 million.  The increase in premises and equipment was primarily due to the purchase of the land on which the Cerrillos branch is located, but was offset by the decrease in the capitalized lease the Bank held on this property.from December 31, 2017.  During the same period total liabilities decreased to $1.2$1.18 billion, a decrease of $66.0 million, primarily due to decreases in deposits.  Stockholders'$415 thousand.  Shareholders' equity (excluding stock owned by the ESOP) decreased $36.9$4.1 million to $97.2$95.5 million as of September 30, 2017March 31, 2018 compared to $134.1$99.6 million as of December 31, 20162017 primarily as a result of the change in other comprehensive income due to the redemptiondecrease in market value of the Series A Preferred Stock and Series B Preferred Stock.investment portfolio.

Investment Securities. We primarily utilize our investment portfolio to provide a source of earnings, to manage liquidity, to provide collateral to pledge against public deposits, and to manage interest rate risk. In managing the portfolio, the Company seeks to obtain the objectives of safety of principal, liquidity, diversification and maximized return on funds.  For an additional discussion with respect to these matters, see "Sources of Funds" included in Item 7 and "Asset Liability Management" included under Item 7A of the 20162017 Form 10-K.

The following table sets forth the amortized cost and fair value of our securities portfolio as of the dates indicated:

 At September 30, 2017  At December 31, 2016  At March 31, 2018  At December 31, 2017 
 
Amortized
Cost
  Fair Value  
Amortized
Cost
  Fair Value  
Amortized
Cost
  Fair Value  
Amortized
Cost
  Fair Value 
 (In thousands)  (In thousands)          
Securities Available for Sale:                        
U.S. Government sponsored agencies $74,321  $74,229  $69,306  $68,828 
U.S. government sponsored agency $69,310  $67,677  $69,315  $68,551 
State and political subdivision  111,127   110,772   38,718   37,343   163,991   160,478   157,652   158,706 
Residential mortgage-backed securities  131,099   129,738   206,101   203,819 
Residential mortgage-backed security  120,195   118,111   124,578   123,083 
Residential collateralized mortgage obligation  10,313   10,304   14,828   14,816   18,294   18,164   9,715   9,686 
Commercial mortgage backed securities  110,720   108,879   117,272   114,172 
Commercial mortgage backed security  110,244   105,941   110,483   108,162 
SBA pools  606   599   681   672   554   539   560   545 
Totals $438,186  $434,521  $446,906  $439,650  $482,588  $470,910  $472,303  $468,733 
                                
Securities Held to Maturity:                                
SBA pools $7,882  $7,512  $8,824  $8,613  $7,824  $7,312  $7,854  $7,369 
Totals $7,882  $7,512  $8,824  $8,613  $7,824  $7,312  $7,854  $7,369 

U.S. government sponsored agency securities generally consist of fixed rate securities with maturities from two months to sixfive years.  StatesState and political subdivision investment securities consist of a local issue rated from "Aaa"Aaa to "Aa2"Aa2 by Moody's Investment Services with maturities of tenfour months to nineteeneighteen years.

The Company had a total of $10.3$18.2 million in residential collateralized mortgage obligations as of September 30, 2017.March 31, 2018.  The residential collateralized mortgage obligations were private label issued or issued by U.S. government sponsored agencies.  At the time of purchase, the ratings of these securities ranged from AAA to Aaa.  As of September 30, 2017,March 31, 2018, the ratings of these securities were Aaa to BBB by Standard & Poors and Aaa to Ba1 by Moody's Investor Service, which are considered "Investment Grade"Investment Grade (rating of "BBB"BBB or higher).  At the time of purchase and on a monthly basis, the Company reviews these securities for impairment on an other than temporary basis.  The Company utilizes several external sources to evaluate prepayments, delinquencies, loss severity, and other factors in determining if there is impairment.  As of September 30, 2017,March 31, 2018, none of these securities were deemed to have other than temporary impairment.  The Company continues to closely monitor the performance and ratings of these securities.

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As of September 30,March 31, 2018 and December 31, 2017, securities of no single issuer exceeded 10% of stockholders'shareholders' equity, except for U.S. government sponsored agency securities.

The following table sets forth certain information regarding contractual maturities and the weighted average yields of our securities portfolio as of the date indicated:

 Due in One Year or Less  
Due after One Year
through Five Years
  
Due after Five Years
through Ten Years
  
Due after Ten Years or no
stated Maturity
  Due in One Year or Less  
Due after One Year
through Five Years
  
Due after Five Years
through Ten Years
  
Due after Ten Years or no
stated Maturity
 
 Balance  
Weighted
Average
Yield
  Balance  
Weighted
Average
Yield
  Balance  
Weighted
Average
Yield
  Balance  
Weighted
Average
Yield
  Balance  
Weighted
Average
Yield
  Balance  
Weighted
Average
Yield
  Balance  
Weighted
Average
Yield
  Balance  
Weighted
Average
Yield
 
As of September 30, 2017 (Dollars in thousands) 
As of March 31, 2018 (Dollars in thousands) 
Securities Available for Sale:                                                
U.S. Government sponsored agencies $4,998   0.89% $53,725   1.82% $15,506   2.20% $-   0.00%
U.S. government sponsored agency $-   0.00% $62,500   1.87% $5,177   2.27% $-   0.00%
States and political subdivision (1)  202   1.20%  1,545   1.91%  1,357   2.54%  107,669   2.53%  200   1.20%  1,508   1.91%  1,310   2.54%  157,460   2.56%
Mortgage backed  -   0.00%  31,743   1.71%  75,537   2.34%  141,640   2.04%  4   1.22%  39,118   1.88%  65,132   2.32%  137,962   2.40%
SBA pools  -   0.00%  -   0.00%  -   0.00%  599   2.04%  -   0.00%  -   0.00%  -   0.00%  539   2.12%
Asset-backed security  -   0.00%  -   0.00%  -   0.00%  -   0.00%
Totals $5,200   0.90% $87,013   1.78% $92,400   2.32% $249,908   2.25% $204   1.20% $103,126   1.87% $71,619   2.32% $295,961   2.49%
Securities Held to Maturity:                                                                
SBA pools $-   0.00% $-   0.00% $-   0.00% $7,882   3.57% $-   0.00% $-   0.00% $-   0.00% $7,824   3.89%
Totals $-   0.00% $-   0.00% $-   0.00% $7,882   3.57% $-   0.00% $-   0.00% $-   0.00% $7,824   3.89%

(1)Yield is reflected adjusting for federal and state exemption of interest income and certain other permanent income tax differences.

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Loan Portfolio.  With management's focus on reducingAs the amount of non-performing loans,Company addressed other pressing issues in prior years, levels of total loans decreased steadily from 2012 tothrough 2017.  While loan demand remains weak in our markets, management is working to increase its portfolio of performing loans.  The total amounts in the residential real estate and commercial real estate loan portfolios haveportfolio has steadily decreased primarily due to the Bank's refined lending strategy to diversify itsgenerate applications for residential mortgage loans for non-affiliated mortgage companies on a fee basis versus underwriting to carry in the portfolio.

The following table sets forth the composition of the loan portfolio:

 September 30, 2017  December 31, 2016  March 31, 2018  December 31, 2017 
 Amount  Percent  Amount  Percent  Amount  Percent  Amount  Percent 
 (Dollars in thousands)  (Dollars in thousands) 
Commercial $65,157   8.85% $69,161   8.79% $67,557   9.57% $61,388   8.76%
Commercial real estate  389,831   52.97%  405,900   51.58%  384,247   54.41%  378,802   54.04%
Residential real estate  186,934   25.40%  214,726   27.29%  169,559   24.01%  178,296   25.43%
Construction real estate  76,399   10.38%  75,972   9.66%  68,002   9.63%  63,569   9.07%
Installment and other  17,676   2.40%  21,053   2.68%  16,794   2.38%  18,952   2.70%
Total loans  735,997   100.00%  786,812   100.00%  706,159   100.00%  701,007   100.00%
Unearned income  (980)      (1,322)      (813)      (863)    
Gross loans  735,017       785,490       705,346       700,144     
Allowance for loan losses  (13,200)      (14,352)      (11,238)      (13,803)    
Net loans $721,817      $771,138      $694,108      $686,341     

Net loans decreased $49.3increased $7.8 million from $771.1$686.3 million as of December 31, 20162017 to $721.8$694.1 million as of September 30, 2017.March 31, 2018.  Gross loans increased $5.2 million while the allowance for loan losses decreased $2.6 million due to net charge-offs.  The largest increases were in gross commercial loans of $6.2 million, commercial real estate of $5.4 million, and construction real estate loans of $4.4 million, partially offset by decreases were in gross residential real estate loans of $27.8$8.7 million and gross commercial real estate loans of $16.1 million, gross commercial loans of $4.0 million, and installment and other loans of $3.4$2.2 million.  These were partially offset by increases in construction real estate of $427 thousand.

Loan Maturities. The following table sets forth the maturity or repricing information for loans outstanding as of September 30, 2017:March 31, 2018:

 Due in One Year or Less  Due after one Year through Five Years  Due after Five Years  Total  Due in One Year or Less  Due after one Year through Five Years  Due after Five Years  Total 
 Fixed Rate  
Variable
Rate
  Fixed Rate  
Variable
Rate
  Fixed Rate  
Variable
Rate
  Fixed Rate  
Variable
Rate
  Fixed Rate  
Variable
Rate
  Fixed Rate  
Variable
Rate
  Fixed Rate  
Variable
Rate
  Fixed Rate  
Variable
Rate
 
 (Dollars in thousands)  (Dollars in thousands)       
Commercial $2,465  $29,351  $23,474  $374  $9,493  $-  $35,432  $29,725  $1,523  $32,978  $22,814  $480  $9,762  $-  $34,099  $33,458 
Commercial real estate  18,649   101,268   82,518   71,816   107,663   7,917   208,830   181,001   12,477   99,492   97,768   69,884   103,372   1,254   213,617   170,630 
Residential real estate  361   96,139   3,727   14,855   70,561   1,291   74,649   112,285   268   86,314   3,772   15,590   63,217   398   67,257   102,302 
Construction real estate  14,846   42,969   2,734   305   9,836   5,709   27,416   48,983   10,519   31,905   5,235   5,707   14,636   -   30,390   37,612 
Installment and other  852   9,090   3,461   -   4,273   -   8,586   9,090   760   9,131   2,792   -   4,111   -   7,663   9,131 
Total loans $37,173  $278,817  $115,914  $87,350  $201,826  $14,917  $354,913  $381,084  $25,547  $259,820  $132,381  $91,661  $195,098  $1,652  $353,026  $353,133 

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Asset Quality. Over the past several years, the Bank experienced improvements in asset quality and has made strides to reduce the number of non-performing loans.quality.

The following table sets forth the amounts of non-performing loans and non-performing assets as of the dates indicated:

 March 31,  December 31, 
 September 30, 2017  December 31, 2016  2018  2017 
 (Dollars in thousands)  (Dollars in thousands) 
Non-accruing loans $15,731  $21,478  $12,625  $17,340 
Loans 90 days or more past due, still accruing interest  394   -   -   - 
Total non-performing loans  16,125   21,478   12,625   17,340 
OREO  8,199   8,436   6,449   6,432 
Total non-performing assets $24,324  $29,914  $19,074  $23,772 
TDRs, still accruing interest $34,886  $35,158  $32,934  $33,801 
Total non-performing loans to total loans  2.19%  2.73%  1.79%  2.47%
Allowance for loan losses to non- performing loans  81.86%  66.82%  89.01%  79.60%
Total non-performing assets to total assets  1.84%  2.10%  1.49%  1.85%

As of September 30, 2017,March 31, 2018, total non-performing assets decreased $5.6$4.7 million to $24.3$19.1 million from $29.9$23.8 million as of December 31, 20162017 primarily due to a decrease in non-accruing loans of $5.7$4.7 million.  ConstructionThe decrease in non-accruing loans was primarily due to a decrease in commercial real estate non-accruing loans decreased $5.2of $3.6 million, and commercial loans decreased $1.1 million.  These were partially offset by increasesa decrease in commercial real estate loans of $379 thousand, residential real estate loans of $117$825 thousand, and installment and othera decrease in construction real estate loans of $79$266 thousand.

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The following table presents data related to non-performing loans by dollar amount and category as of the dates indicated:

 Commercial  Commercial real estate  Residential real estate  Commercial  Commercial real estate  Residential real estate 
Dollar Range 
Number of
Borrowers
  Amount  
Number of
Borrowers
  Amount  
Number of
Borrowers
  Amount  
Number of
Borrowers
  Amount  
Number of
Borrowers
  Amount  
Number of
Borrowers
  Amount 
 (Dollars in thousands)  (Dollars in thousands) 
September 30, 2017                  
March 31, 2018                  
$5.0 million or more  -  $-   -  $-   -  $-   -  $-   -  $-   -  $- 
$3.0 million to $4.9 million  -   -   -   -   -   -   -   -   -   -   -   - 
$1.5 million to $2.9 million  -   -   1   2,233   -   -   -   -   1   1,870   -   - 
Under $1.5 million  3   108   9   3,969   50   4,364   2   58   9   3,186   44   3,774 
Total  3  $108   10  $6,202   50  $4,364   2  $58   10  $5,056   44  $3,774 
                                                
Percentage of individual loan category      0.17%      1.59%      2.33%      0.09%      1.32%      2.23%
                                                
December 31, 2016                        
December 31, 2017                        
$5.0 million or more  -  $-   -  $-   -  $-   -  $-   -  $-   -  $- 
$3.0 million to $4.9 million  -   -   -   -   -   -   -   -   1   4,709   -   - 
$1.5 million to $2.9 million  -   -   1   2,212   -   -   -   -   -   -   -   - 
Under $1.5 million  14   1,192   11   3,611   50   4,247   3   102   10   3,908   52   4,599 
Total  14  $1,192   12  $5,823   50  $4,247   3  $102   11  $8,617   52  $4,599 
                                                
Percentage of individual loan category      1.72%      1.43%      1.98%      0.17%      2.27%      2.58%

Continued:

 Construction real estate  Installment & other loans  Total  Construction real estate  Installment & other loans  Total 
Dollar Range 
Number of
Borrowers
  Amount  
Number of
Borrowers
  Amount  
Number of
Borrowers
  Amount  
Number of
Borrowers
  Amount  
Number of
Borrowers
  Amount  
Number of
Borrowers
  Amount 
 
(Dollars in thousands)
                   
September 30, 2017                  
March 31, 2018                  
$5.0 million or more  -  $-   -  $-   -  $-   -  $-   -  $-   -  $- 
$3.0 million to $4.9 million  -   -   -   -   -   -   -   -   -   -   -   - 
$1.5 million to $2.9 million  1   2,002   -   -   2   4,235   1   2,001   -   -   2   3,871 
Under $1.5 million  15   2,919   6   136   83   11,496   8   1,644   2   92   65   8,754 
Total  16  $4,921   6  $136   85  $15,731   9  $3,645   2  $92   67  $12,625 
                                                
Percentage of individual loan category      6.44%      0.77%      2.14%      5.36%      0.55%      1.79%
                                                
December 31, 2016                        
December 31, 2017                        
$5.0 million or more  -  $-   -  $-   -  $-   -  $-   -  $-   -  $- 
$3.0 million to $4.9 million  -   -   -   -   -   -   -   -   -   -   1   4,709 
$1.5 million to $2.9 million  3   6,596   -   -   4   8,808   1   2,001   -   -   1   2,001 
Under $1.5 million  17   3,563   4   57   96   12,670   11   1,910   4   111   80   10,630 
Total  20  $10,159   4  $57   100  $21,478   12  $3,911   4  $111   82  $17,340 
                                                
Percentage of individual loan category      13.37%      0.27%      2.73%      6.15%      0.59%      2.47%

Non-performing loans include (i) loans accounted for on a nonaccrual basis, and (ii) accruing loans contractually past due 90 days or more as to interest and principal.  Management reviews the loan portfolio for problem loans on a regular basis with additional resources dedicated to resolving the non-performing loans. Additional internal controls were implemented to ensure the timely identification of signs of weaknesses in credits, facilitating efforts to rehabilitate or exit the relationship in a timely manner. External loan reviews, which have been conducted on a regular basis, were also revised to provide a broad scope and reviewers now have access to all elements of a relationship.  In 2017, a significant portion of the loan portfolio was also examined by independent third party consultants.  

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During the ordinary course of business, management may become aware of borrowers who may not be able to meet the contractual requirements of loan agreements.  Such loans are placed under close supervision with consideration given to placing the loan on nonaccrual status, increasing the allowance, and (if appropriate) partial or full charge-off.  After a loan is placed on nonaccrual status, any interest previously accrued, but not yet collected, is reversed against current income.  When payments are received on nonaccrual loans, such payments will be applied to principal and any interest portion included in the payments are not included in income, but rather are applied to the principal balance of the loan.  Loans will not be placed back on accrual status unless all unpaid interest and principal payments are received.  If interest on nonaccrual loans had been accrued, such income would have amounted to $188 thousand and $211 thousand for the three months ended March 31, 2018 and 2017, respectively.  Our policy is to place loans 90 days or more past due on nonaccrual status. 
Non-performing assets also consist of other repossessed assets and OREO.  OREO represents properties acquired through foreclosure or other proceedings and are initially recorded at the fair value less estimated costs of disposal.  OREO is evaluated regularly to ensure that the recorded amount is supported by its recorded value.  Valuation allowances to reduce the carrying amount to fair value less estimated costs of disposal are recorded as necessary.  Revenues and expenses from the operations of OREO and changes in the valuation are included in noninterest expenses on the consolidated statements of operations with the exception of costs expended to improve the long term value of the property.  These costs increase the recorded value of the OREO asset, not to exceed the fair value less estimated costs of disposal.
The following table presents an analysis of the allowance for loan losses for the periods indicated:

 Three Months Ended September 30,  Nine Months Ended September 30,  
Three Months Ended
March 31,
 
 2017  2016  2017  2016  2018  2017 
 (Dollars in thousands)  (In thousands) 
Balance at beginning of period $13,167  $17,592  $14,352  $17,392 
(Benefit) provision for loan losses  (250)  -   (1,220)  - 
Balance at beginning of year $13,803   14,352 
Provision for loan losses  220   30 
Charge-offs:                        
Commercial  7   206   270   481   9   186 
Commercial real estate  612   46   639   46   2,736   - 
Residential real estate  -   174   309   576   105   244 
Construction real estate  1,385   -   1,409   22   112   16 
Installment and other  19   98   253   333   28   137 
Total charge-offs  2,023   524   2,880   1,458   2,990   583 
Recoveries :                        
Commercial  56   260   306   749   24   173 
Commercial real estate  88   377   186   507   22   88 
Residential real estate  125   56   224   315   47   55 
Construction real estate  37   5   51   122   49   10 
Installment and other  2,000   35   2,181   174   63   62 
Total recoveries  2,306   733   2,948   1,867   205   388 
Net (recoveries) charge-offs  (283)  (209)  (68)  (409)
Net charge-offs  2,785   195 
Balance at end of period $13,200  $17,801  $13,200  $17,801  $11,238   14,187 

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Net recoveriescharge-offs for the three months ended September 30, 2017March 31, 2018 totaled $283 thousand,$2.8 million, an increase in net recoveries of $74 thousand$2.6 million from the three months ended September 30, 2016March 31, 2017 primarily due to net recoveries for installment and other loans of $2.0 million due to a large recovery on a loan relationship that was previously fully charged-off in 2012, and increases in net recoveries in residential real estate loans of $243 thousand, partially offset by increases in net charge-offs in construction real estate loans of $1.4 million and increases in net charge-offs in commercial real estate loans of $855 thousand.

 Net recoveries for the nine months ended September 30, 2017 totaled $68 thousand, a decrease in net recoveries of $341 thousand from nine months ended September 30, 2016 primarily due to increases$2.8 million.  The change in net charge-offs for construction real estate loans of $1.5 million, increases in net charge-offs forthe commercial real estate loans of $914 thousand, and increases in net charge-offs for commercial loans of $232 thousand; partially offset by increases in net recoveries in installment and other loans of $2.1 millionwas primarily due in part to a large recovery on aone loan relationship that was previously charged-off in 2012, and increases in net recoveries in residential real estate loans of $176 thousand.relationship.

As the trend of decreasing problem loan balances, decreasing delinquencies, and decreasing loan balances continues, we anticipate continuing to take reverse provisions in the allowance for loan and lease losses until the balance is, in management's judgment, appropriate for probable incurred losses in the loan portfolio given its risk and size.  For further discussion on the allowance for loan and leases losses calculation, see "Critical Accounting Policies" in Part I, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of the 2016 Form 10-K.
The following table sets forth the allocation of the allowance for loan lossesthe periods presented and the percentage of allowance in each classification to total allowance for the periods indicated:allowance:

 September 30, 2017  December 31, 2016  March 31, 2018  December 31, 2017 
 Amount  Percent  Amount  Percent  Amount  Percent  Amount  Percent 
 (Dollars in thousands)  (Dollars in thousands) 
Commercial $1,129   8.55% $1,449   10.10% $597   5.31% $536   3.88%
Commercial real estate  6,142   46.54%  6,472   45.09%  6,905   61.45%  8,573   62.11%
Residential real estate  3,813   28.89%  4,524   31.52%  2,462   21.91%  2,843   20.60%
Construction real estate  1,500   11.36%  1,119   7.80%  914   8.13%  1,030   7.46%
Installment and other  543   4.11%  715   4.98%  255   2.27%  315   2.28%
Unallocated  73   0.55%  73   0.51%  105   0.93%  506   3.67%
Total $13,200   100.00% $14,352   100.00% $11,238   100.00% $13,803   100.00%

The allowance for loan losses decreased $1.2$2.6 million from $14.4$13.8 million as of December 31, 20162017 to $13.2$11.2 million as of September 30, 2017.March 31, 2018. This decreasereduction was largely due to improving credit quality, anet charge-offs.  A $220 thousand provision for loan loss was required for the three months ended March 31, 2018.  A $1.2 million reversal provision for loan loss was required for the year ended December 31, 2017.  The decrease in allowance was primarily driven by the commercial real estate loan balances, and decreasing delinquencies.charge-offs.  The additional provision was primarily due to the $7.8 million dollar increase in the loan portfolio.

AWe consider a loan is consideredto be impaired when, based on current information and events, we determine that it is probable that the Bankwe will not be unableable to collect all amounts due according to the original contractual terms of the note, including interest payments.  When management identifies a loan agreement, including both principalas impaired, impairment is measured based on the present value of expected future cash flows and interest.  

discounted at the loan's effective interest rates, except when the sole remaining source of repayment for the loan is the liquidation of the collateral.  In these cases management uses the current fair value of the collateral, less estimated selling costs when foreclosure is probable, rather than discounted cash flows.  If management determines that the value of the impaired loan is less than the recorded investment in the loan, an impairment is recognized through a charge-off to the allowance.
The allocation of the allowance for impaired credits is based onequal to the recorded investment in the loan using one of three methods to measure impairment: the fair value of the collateral less disposition costs, the present value of expected future cash flows method, or the observable market price of the loan.  Impairment reserves are generallyAn impairment reserve that exceeds collateral value is charged to the allowance for loan losses in the period it is identified.  Total loans which were deemed to have been impaired, including both performing and non-performing loans, as of September 30, 2017March 31, 2018 and December 31, 20162017 were $50.6$45.7 million and $53.8$51.1 million, respectively.  Impaired loans that are deemed collateral dependent have been charged down to the value of the collateral (based upon the most recent valuations), less estimated disposition costs.  Impaired loans with specifically identified allocations of allowance for loan losses had a total of $2.7$2.6 million and $3.0$5.2 million allocated in the allowance for loan losses as of September 30, 2017March 31, 2018 and December 31, 2016,2017, respectively.

TDRs are defined as those loans whose terms have been modified due to deterioration in the financial condition of the borrower in which the Company grants concessions to the borrower in the restructuring that it would not otherwise consider.  Total loans which were considered TDRs as of September 30, 2017March 31, 2018 and December 31, 20162017 were $39.8 million and $43.1$38.9 million, respectively.  Of these, $34.9$32.9 million and $35.2$33.8 million were still performing in accordance with modified terms as of September 30, 2017March 31, 2018 and December 31, 2016,2017, respectively.

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Although the Company believes the allowance for loan losses is sufficient at March 31, 2018 to cover probable incurred losses inherent in the loan portfolio, there can be no assurance that the allowance will prove sufficient to cover actual loan losses.

Potential Problem Loans. We utilize an internal asset classification system as a means of reporting problem and potential problem assets.  At the scheduled meetings of the Board of Directors of the Bank, a watch list is presented, listing significant loan relationships as "Special Mention," "Substandard," "Doubtful" and "Loss."  Substandard"Substandard" assets include those characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected.  Assets classified as Doubtful"Doubtful" have all the weaknesses inherent in those classified as Substandard"Substandard" with the added characteristic that the weaknesses present make collection or liquidation in full highly questionable and improbable, on the basis of currently existing facts, conditions and values.  Assets classified as "Loss" are those considered uncollectible and viewed as valueless assets and have been charged-off.  Assets that do not currently expose us to sufficient risk to warrant classification in one of the aforementioned categories, but possess weaknesses that deserve management's close attention are deemed to be Special"Special Mention."

Our determination as to the classification of our assets and the amount of our valuation allowances is subject to review by the OCC, which can order the establishment of additional general or specific loss allowances.  There can be no assurance that regulators, in reviewing our loan portfolio, will not request us to materially adjust our allowance for loan losses.  The OCC, in conjunction with the other federal banking agencies, has adopted an interagency policy statement on the allowance for loan losses.  The policy statement provides guidance for financial institutions on both the responsibilities of management for the assessment and establishment of adequate allowances for loan losses and guidance for banking agency examiners to use in determining the adequacy of general valuation guidelines.  Generally, the policy statement recommends that: (i) institutions establish effective systems and controls to identify, monitor and address asset quality problems; (ii) management has analyzed all significant factors that affect the collectability of the portfolio in a reasonable manner; and (iii) management established acceptable allowance evaluation processes that meet the objectives set forth in the policy statement.  Management believes it has established an adequate allowance for probable loan losses.  We analyze our process regularly, with modifications made if needed, and report those results four times per year at meetings of our Board LoanAudit Committee.

Although management believes that adequate specific and general allowance for loan losses have been established, actual losses are dependent upon future events and, as such, further additions to the level of specific and general allowance for loan losses may become necessary.

We define potential problem loans as performing loans rated Substandard that do not meet the definition of a non-performing loan.

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The following table shows the amounts of performing but adversely classified assets and Special Mentionspecial mention loans as of the periods indicated:

March 31, December 31, 
September 30, 2017 December 31, 2016 2018 2017 
(In thousands) (In thousands) 
Performing loans classified as:        
Substandard $12,787  $22,573  $11,600  $12,164 
Total performing adversely classified loans $12,787  $22,573  $11,600  $12,164 
Special mention loans $6,717  $18,589  $5,630  $5,681 

The table above does not include nonaccrual loans that are less than 30 days past due.  Total performing adversely classified assets as of September 30, 2017March 31, 2018 were $12.8$11.6 million, a decrease of $9.8 million$564 thousand from $22.6$12.2 million as of December 31, 2016.2017.  The declines were primarily in the commercial commercial real estate loans,loan, residential real estate loan, and construction real estate loan categories.  In addition, Special Mentionspecial mention loans decreased $11.9 million.  These declines were primarily in commercial real estate loans, construction real estate loans, commercial real estate loans, and residential real estate loans.$51 thousand.  For further discussion of loans, see Note 6 "Loans and Allowance for Loan Losses" in Part I, Item 1, "Financial Statements and Supplementary Data" of the 20162017 Form 10-K.

Sources of Funds

General. Deposits, short-term and long-term borrowings, loan and investment security repayments and prepayments, proceeds from the sale of securities, and cash flows generated from operations are the primary sources of our funds for lending, investing and other general purposes.  Loan repayments are a relatively predictable source of funds except during periods of significant interest rate declines, while deposit flows tend to fluctuate with prevailing interests rates, money market conditions, general economic conditions and competition.

Deposits. We offer a variety of deposit accounts with a range of interest rates and terms.  Our core deposits consist of checking accounts, NOW accounts, MMDA,money market deposit accounts, savings accounts and non-public certificates of deposit.  These deposits, along with public fund deposits and short-term and long-term borrowings are used to support our asset base.  Our deposits are obtained predominantly from our market areas.  We rely primarily on competitive rates along with customer service and long-standing relationships with customers to attract and retain deposits; however, market interest rates and rates offered by competing financial institutions significantly affect our ability to attract and retain deposits.

The following table sets forth the maturities of time deposits of $250 thousand or more for the period indicated:

 
September 30, 2017
(In thousands)
  
March 31, 2018
(In thousands)
 
Maturing within three months $6,198  $4,561 
After three but within six months  2,514   2,533 
After six but within twelve months  6,287   5,599 
After twelve but within three years  1,846   2,321 
After three years  6,222   6,325 
Total time deposits $250,000 and over $23,067  $21,339 

Borrowings. We have access to a variety of borrowing sources and use short-term and long-term borrowings to support our asset base.  Short-term borrowings arewere advances from the FHLB with remaining maturities under one year.  Long-term borrowings are advances from the FHLB with remaining maturities over one year.

There wasThe Company had $2.3 million outstanding in FHLB borrowings at September 30, 2017March 31, 2018 and 2016.2017.

Liquidity

Bank Liquidity. Liquidity management is monitored by the Asset/Liability Management Committee and Board of Directors of the Bank, which review historical funding requirements, current liquidity position, sources and stability of funding, marketability of assets, options for attracting additional funds, and anticipated future funding needs, including the level of unfunded commitments.

Our primary sources of funds are retail and commercial deposits, borrowings, public funds and funds generated from operations.  Funds from operations include principal and interest payments received on loans and securities.  While maturities and scheduled amortization of loans and securities provide an indication of the timing of the receipt of funds, changes in interest rates, economic conditions and competition strongly influence mortgage prepayment rates and deposit flows, reducing the predictability of the timing on sources of funds.

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We adhere to a liquidity policy, which was updated and approved by the Board of Directors in December 2017, which requires that we maintain the following liquidity ratios:

● The Liquidity Coverage Ratio is defined as the Anticipated Sources of Liquidity divided by the Anticipated Liquidity Needs 1.15 Times.
●Fed Funds Purchased are limited to 60% of the total Available Fed Fund Lines, leaving 40% available for emergency needs and potential funding needs.
● Cumulative Liquidity Gap (% of cumulative net cash outflow over a six month period under a worst case scenario) of 100%.
●FHLB Advances are limited to 75% of the Total Collateral Advance Capacity leaving 25%● Fed Funds Purchased are limited to 60% of the total Available Lines, leaving 40% available for emergency liquidity needs and potential funding needs.
●Wholesale Repurchase Agreements are limited, in aggregate, to no more than 10% of Total Funding (which is defined as equal to total assets).
● FHLB Advances are limited to 75% of the Total Collateral Advance Capacity leaving 25% available for emergency liquidity needs and potential funding needs. 
●Total Borrowings are limited to no more than 25% of Total Funding. 
● Total Borrowings are limited to no more than 25% of Total Funding (which is defined as equal to Total Assets).
●Wholesale Funds, as that term is defined above, is limited to no more than 25% of the Bank's Total Funding (total assets)
● Wholesale (CDs) Funds is limited to no more than 25% of the Bank's Total Funding.
●Brokered funds are not to exceed 20% of Total Funding● Brokered funds are not to exceed 20% of total funding without the prior approval of the Board of Directors.
●● The total aggregate balance of Wholesale Funds, Brokered Funds and Borrowings as defined above is limited to no more than 35% of Total Funding.
●The Liquidity Coverage Ratio is defined as the Anticipated Sources of Liquidity divided by the Anticipated Liquidity Needs must be greater than 1.15.
●Cumulative Liquidity Gap (percent of cumulative net cash outflow over a six month period under a worst case scenario) at least 100%.

As of September 30, 2017March 31, 2018 and December 31, 2016,2017, we were in compliance with the foregoing policy.

As of September 30, 2017,March 31, 2018, we had outstanding loan origination commitments and unused commercial and retail lines of credit of $112.1$133.2 million and standby letters of credit of $5.2$5.3 million.  We anticipate we will have sufficient funds available to meet current origination and other lending commitments.  Certificates of deposit scheduled to mature within one year totaled $141.9$127.8 million as of September 30, 2017.March 31, 2018. As of September 30, 2017,March 31, 2018, total certificates of depositsdeposit declined $37.3$9.5 million or 17.0%5.50% from the prior year end.

In the event that additional short-term liquidity is needed, we have established relationshipsa relationship with severala large regional banksbank to provide short-term borrowings in the form of federal funds purchases.  We have the ability to borrow up to $20.0 million for a short period (15 to 60 days) from these banks on a collective basis.this bank. Management believes that we will be able to continue to borrow federal funds from our correspondent banksbank in the future. Additionally, we are a member of the FHLB and, as of September 30, 2017,March 31, 2018, we had the ability to borrow from the FHLB up to $75.8$402.4 million in additional funds.  As a contingency plan for significant funding needs, the Asset/Liability Management Committee may also consider the sale of investment securities, selling securities under agreement to repurchase, sale of certain loans and/or the temporary curtailment of lending activities.

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Company Liquidity. Trinity's main sources of liquidity at the holding company level are dividends from the Bank.

The Bank is subject to various regulatory capital requirements administered by federal and state banking agencies,  and has been subject to the restrictions imposed by the Consent Order, which affect its ability to pay dividends to Trinity.  See "Business—Supervision and Regulation—Trinity—Dividends Payments" and "Business—Supervision and Regulation—The Bank—Dividend Payments" in Part I, Item 1 of the Company's 20162017 Form 10-K.  Failure to meet minimum capital requirements can initiate certain mandatory and discretionary actions by regulators that, if undertaken, could have a direct material effect on our financial statements.  The Consent Order also required that the Bank maintain (i) a leverage ratio of Tier 1 Capital to total assets of at least 8%; and (ii) a ratio of Total Capital to total risk-weighted assets of at least 11%. As of September 30, 2017,March 31, 2018, the Bank was in compliance with these requirements.  The OCC terminated the Consent Order effective as of November 3, 2017.
 
The Bank has an internal Capital Plan which identifies potential sources for additional capital should it be deemed necessary.  For more information, see "Capital Resources" included in Item 7 and Note 20 "Regulatory Matters" in Item 8, "Financial Statements and Supplementary Data" of the 20162017 Form 10-K.

Contractual Obligations, Commitments, and Off-Balance-Sheet Arrangements

We have various financial obligations, including contractual obligations and commitments, which may require future cash payments

Contractual Obligations. There have been no material changes to contractual obligations as of September 30, 2017.March 31, 2018.  For information on the nature of each obligation, see Note 16 "Commitments and Off-Balance-Sheet Activities" in Item 8, "Financial Statements and Supplementary Data" of the 20162017 Form 10-K.

Commitments. There have been no material changes to the commitments as of September 30, 2017.March 31, 2018.  Further discussion of these commitments is included in Note 15 "Commitments and Off-Balance-Sheet Activities" in Item 8, "Financial Statements and Supplementary Data" of the 20162017 Form 10-K.

Capital Resources

Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies.  Capital adequacy guidelines and, additionally for bank,banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices.  Capital amounts and classifications are also subject to qualitative judgments by regulators.  Failure to meet capital requirements can initiate regulatory action.  Under the prompt corrective action regulations, to be adequately capitalized a bank must maintain minimum ratios of total capital to risk-weighted assets of 8%, Tier 1 capital to risk-weighted assets of 6%, common equity Tier 1 capital to risk-weighted assets of 4.5%, and Tier 1 capital to total assets of 4%.  A "well–capitalized" institution must maintain minimum ratios of total capital to risk-weighted assets of at least 10%, Tier 1 capital to risk-weighted assets of at least 8%, common equity Tier 1 capital to risk-weighted assets of at least 6.5%, and Tier 1 capital to total assets of at least 5% and must not be subject to any written order, agreement or directive requiring it to meet or maintain a specific capital level.

The Basel III rulesRules also established a "capital conservation buffer" of 2.5% above the regulatory minimum risk-based capital requirements.  The capital conservation buffer requirement phased in beginning January 1, 2016 at 0.625% of risk-weighted assets and will increase by that amount ear year until fully implemented in January 2019.  An institution would be subject to limitations on certain activities including payment of dividends, share repurchases and discretionary bonuses to executive officers if its capital level is below the buffered ratio.

A certain amount of Trinity's Tier 1 Capital is in the form of trust preferred securities. See Note 10, "Junior Subordinated Debt" in Item 8, "Financial Statements and Supplementary Data" of the 20152017 Form 10-K for details on the effect these have on risk based capital. See "Risk Factors" in Part I, Item 1A of the 20162017 Form 10-K for further information regarding changes in the regulatory environment affecting capital.

As previously discussed, on December 17, 2013, the Bank entered into the Consent Order with the OCC, which replaced the Formal Agreement.  
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The focus of the Consent Order was on improving the Bank's credit administration, credit underwriting, internal controls, compliance and management supervision.  Additionally, the Consent Order required that the Bank maintain certain capital ratios and receive approval of the OCC prior to declaring dividends.  The Consent Order required the Bank to maintain the following minimum capital ratios: (i) a leverage ratio of Tier 1 Capital to total assets of at least 8%; and (ii) a ratio of Total Capital to total risk-weighted assets of at least 11%.  While the Bank's capital ratios as of the periods in the table belowMarch 31, 2018 fall into the category of "well-capitalized" under the prompt corrective action rules, the Bank cannot be considered "well-capitalized" due to the requirements to meet and maintain specific capital levels in the Consent Order. As of September 30, 2017, the Bank was in compliance with these requirements. The OCC terminated the Consent Order effective as of November 3, 2017."well-capitalized."  The required and actual amounts and ratios for Trinity and the Bank as of September 30, 2017March 31, 2018 are presented below:

 Actual  
For Capital Adequacy
Purposes
  
To be well capitalized
under prompt
corrective action
provisions
  
Minimum Levels
Under Consent Order
Provisions
  Actual  
For Capital Adequacy
Purposes
  
To be well capitalized
under prompt
corrective action
provisions
 
 Amount  Ratio  Amount  Ratio  Amount  Ratio  Amount  Ratio  Amount  Ratio  Amount  Ratio  Amount  Ratio 
 (Dollars in thousands )                   
September 30, 2017                        
March 31, 2018                  
Total capital (to risk-weighted assets):                                          
Consolidated $144,827   16.9750% $68,254   8.00%  N/A   N/A   N/A   N/A  $144,143   16.8772% $68,326   8.0000%  N/A   N/A 
Bank only  139,379   16.3432%  68,226   8.00% $85,283   10.00% $93,811   11.00%  137,691   16.1420%  68,240   8.0000% $85,300   10.0000%
Tier 1 capital (to risk weighted assets):                                                        
Consolidated  124,036   14.5381%  51,191   6.00%  N/A   N/A   N/A   N/A   133,453   15.6256%  51,244   6.0000%  N/A   N/A 
Bank only  128,674   15.0880%  51,170   6.00%  68,226   8.00%  N/A   N/A   127,014   14.8903%  51,180   6.0000%  68,240   8.0000%
Common Equity Tier 1 Capital (to risk weighted assets):                                                        
Consolidated  99,229   11.6305%  38,393   4.50%  N/A   N/A   N/A   N/A   107,453   12.5813%  38,433   4.5000%  N/A   N/A 
Bank only  128,674   15.0880%  38,377   4.50%  55,434   6.50%  N/A   N/A   127,014   14.8903%  38,385   4.5000%  55,445   6.5000%
Tier 1 leverage (to average assets):                                                        
Consolidated  124,036   9.4951%  52,253   4.00%  N/A   N/A   N/A   N/A   133,453   10.4275%  51,193   4.0000%  N/A   N/A 
Bank only  128,674   9.8963%  52,009   4.00%  65,011   5.00%  104,018   8.00%  127,014   9.9331%  51,148   4.0000%  63,935   5.0000%

N/A—not applicable

At September 30, 2017March 31, 2018 the Bank's capital conservation buffer was 8.3432%8.1420 % and the Company's consolidated Company's capital conservation buffer was 7.1305%.8.0813 %.


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Item 3. Quantitative and Qualitative Disclosures about Market Risk

This item has been omitted based on the Company's status as a smaller reporting company.

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Item 4. Controls and Procedures

As discussed inAn evaluation was carried out under the 2016 Form 10-K, filed on April 14, 2017, subsequent tosupervision and with the issuanceparticipation of the Company's consolidated financial statementsmanagement, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company's disclosure controls and procedures, as that term is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended ("Exchange Act")), as of and for the quarterly period ended June 30, 2012, the Company's management determined that the Bank had not properly recognized certain losses and risks inherit in its loan portfolio on a timely basis as disclosed in the Company's Current Reports on Form 8-K filed on November 13, 2012, April 26, 2013 and October 27, 2014 with the Securities and Exchange Commission ("SEC").  This failure was caused by the override of controls by certain former members of management and material weaknesses in internal control over financial reporting.

Management anticipates that its remedial actions, and further actions that are being developed, will strengthen the Company's internal control over financial reporting and will, over time, address the material weaknesses that were identified.  Certainend of the remedial measures, primarily those associated with information technology systems, infrastructure and controls, may require ongoing effort and investment. Management has made technological improvements with the implementation of the new core systems in July 2016.  These new enhanced core systems have allowed management to redesign processes and enhance controls.  Because some of these remedial actions take place on a quarterly basis, their successful implementation must be further evaluated before management is able to conclude that a material weakness has been remediated.  The Company cannot provide any assurance that these remediation efforts will be successful or that the Company's internal control over financial reporting will be effective as a result of these efforts. Our management, with the oversight of the Audit Committee, will continue to identify and take steps to remedy known material weaknesses as expeditiously as possible and enhance the overall design and capability of our control environment.

To address the material weaknesses described below, the Company performed extensive procedures to ensure the reliability of its financial reporting.  These procedures included independent review of loan grading, TDR recognition, accrual status, collateral valuations, impairment and required loan loss reserves. Additional procedures were conducted relating to accounts payable, journal entries and reconciliations, and access controls. The additional procedures were conducted at a detailed level and included the dedication of a significant amount of internal resources and external consultants. As a result, management believes that the consolidated financial statements and other financial information included inperiod covered by this Form 10-Q fairly present, in all material respects, the Company's financial condition, results of operations, and cash flows for the periods presented in accordance with GAAP.

Controls and Proceduresreport.

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company's Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to the Company's management to allow timely decisions regarding required disclosure based on the definition of "disclosure controls and procedures" in Rules 13a-15 (e) and 15d-15(e) under the Securities and Exchange Act of 1934 as amended (the "Exchange Act").

The Company does not expect that its disclosure controls and procedures and internal control over financial reporting will prevent all errors or fraud.  A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control procedure are met and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.  Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.  These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns in controlsfiles or procedures can occur because of simple error or mistake.  Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control.  The design of any control procedure is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.  Because of the inherent limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and not be detected.

As of the end of the period covered by this Form 10-Q, we conducted an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer ("CEO") and our Chief Financial Officer ("CFO"), of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, to ensure that information required to be disclosed by us in the reports filed or submitted by ussubmits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms includingof the Securities and Exchange Commission. Based upon this evaluation of those disclosure controls and procedures, the Chief Executive Officer and Chief Financial Officer of the Company concluded, as of the end of the period covered by this report, that the Company's disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports filed or submitted by usthe Company files and submits under the Exchange Act is accumulatedrecorded, processed, summarized and communicated to management to allow timely decisions regarding required disclosure. Our disclosure controls include some, but not all, components of our internal control over financial reporting.reported as and when required.

Based on that evaluation, our CEOIn designing and CFO concluded that ourevaluating the disclosure controls and procedures, were not effective as of September 30, 2017, as a result of the material weakness in internal control over financial reporting as discussed below.

Internal Control over Financial Reporting

Management of the Company is responsible for establishingmanagement recognized that any controls and maintaining adequate internal control designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Internal control over financial reporting is defined in Rule 13a-15(f) under the Exchange Act as a process designed by, or under the supervision of, the Company's principal executive and principal financial officers and effected by the Company's Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Internal control over financial reporting includes those policies and procedures, that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements. Management's assessment of the effectiveness of internal control over financial reporting is based on the criteria established in the 1992 Internal Control —Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

All internal control systems, no matter how well designed have inherent limitations. Internaland operated, can provide only reasonable assurance of achieving the desired control over financial reporting isobjectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Further, no evaluation of a processcost-effective system of controls can provide absolute assurance that involves human diligenceall control issues and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also caninstances of fraud, if any, will be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements will not be prevented or detected on a timely basis by internal control over financial reporting. Further, because of changes in conditions, the effectiveness of internal control may vary over time. A material weakness is a deficiency or a combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis.detected.

Material weaknesses in the Company's internal control over financial reporting were disclosed in Item 9A, Controls and Procedures, of the 2016 Form 10-K.  In connection with the preparation of our financial statements for inclusion in this Form 10-Q, the Company's management evaluated the effectiveness of the Company's internal control over financial reporting as of September 30, 2017. Based on this evaluation, management has concluded that many of the control deficiencies identified in the Company's internal control over financial reporting report in the 2016 Form 10-K as being present at December 31, 2016, were still present, which individually or in combination were considered material weaknesses as of September 30, 2017. Management has identified the following material weaknesses in the Company's internal control over financial reporting as of December 31, 2016. Many of these weaknesses continue to be present.

(1)    Internal Control Environment.  Weaknesses in the control environment resulted in an environment in which management was able to override controls in the past, including:
·An internal control matrix has notThere have been established to define the internal controls "key" to ensuring financial statements are free of material misstatement.  As a result the work performed to test key internal controls was not sufficient to comply with all of the Company's obligations under Section 112 of the Federal Deposit Insurance Corporation Improvement Act (FDICIA).
·Management has not yet adopted COSO's 2013 Integrated Framework, and is still reporting under the 1992 Integrated Framework.
·Management has not yet implemented input and file maintenance controls over financially significant systems to detect errors in initial input and unauthorized changes.

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(2)
Information Systems and Reports.  Weaknesses in the control environment over implementation, change management and monitoring of in-house systems were present, including:
·In many cases management has relied on outputs from financially significant systems (such as accrued interest receivable / payable calculations, trust fees, days past due, average balances) without completing a periodic review / testing of these outputs to corroborate system accuracy.  These calculations are critical to ensuring accurate revenue and expense recognition.
·A review of user access to all financial significant applications was not performed in calendar year 2016.  In addition, security events were not being tracked through available application logs for several applications.
·During the year many financially significant applications were converted to another application.  Management indicated work had been performed to validate the accurate transfer of the data, however for a few financially significant applications much of the documentation supporting this review was not retained.

(3)
Financial Reporting.  Management reviews of control procedures designed to validate and detect errors at period end were informal in some cases and in most cases lacked the precision necessary to identify material errors:
·Segregation of duties were not in place in several financially significant areas.
·Review controls over financial significant, manually prepared reports and calculations, as well as reports from third parties, were not sufficiently documented to evidence a precise review occurred which would detect a material misstatement.
·The preparation of memorandums supporting conclusions are imprecise and lack detailed documentation.  Additionally, evidence reviewed suggested that these memos were not being reviewed in a precise enough manner to detect misstatements.
·Management has not yet developed a formal and sufficiently precise review control over the preparation of financial and regulatory reports, which includes a thorough review for material misstatements, clerical errors, formatting errors, transpositions, or noncompliance with GAAP / SEC / regulatory reporting requirements.
·Although management implemented a reconciliation checklist in the current year, the reconciliations tracked within the checklist were not completed in a timely manner, and included stale reconciling items.

(4)
Allowance for Loan Losses. Processes and controls designed to monitor loan quality and determine the allowance for loan loss reserve were inadequate as follows:
·Reserve calculations and reports utilized to estimate required reserves were subject to informal control procedures, leading to weaknesses in the quality of documentation utilized by management to support loan impairments, specific reserve requirements, and qualitative adjustments.
·Reports utilized by the Loan Risk Rating Committee were not subject to formal reviews to ensure that decisions are being made based on accurate and complete information.
·Review of the allowance for loan loss calculation was informal and insufficiently precise.

Management is working diligently to remediate such material weaknesses but that work is still in progress.  As a result, management has not concluded those material weaknesses to be remediated as of September 30, 2017.

Except for such remedial measures, no changes in the Company's internal control over financial reporting occurredas that term is defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act, during the fiscal quarterthree months ended September 30, 2017March 31, 2018 that have materially affected or are reasonably likely to materially affect, the Company's internal control over financial reporting.

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings

The Company and its subsidiaries are subject, to various legal actions as described in the 20162017 Form 10-K.  There are no material developments in the legal actions described in the 20162017 Form 10-K.

The Company may also become a party to legal proceedings.proceedings in the ordinary course of business.  Except as described above,in the first paragraph of this Item, we are not presently involved in any litigation, nor to our knowledge is any litigation threatened against us, that in management's opinion would result in any material adverse effect on our financial position or results of operations or that is not expected to be covered by insurance.


Item 1A. Risk Factors

Not applicable.

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

 During the thirdfirst quarter of 2017,2018, we made no repurchases or unregistered sales of any class of our equity securities.

Item 3.   Defaults Upon Senior Securities

 None

Item 4.   Mine Safety Disclosures

Not Applicable

Item 5.   Other Information

 None

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Item 6.    Exhibits

1.1
Form of Agency Agreement between the Company and Boenning & Scattergood, Inc., as financial advisor (incorporated herein by reference to Exhibit 1.1 of Amendment No. 2 to the Company's Registration Statement on Form S-1 filed on September 19, 2017 (No. 333-218952))
3.1
Amended and Restated Articles of Incorporation of Trinity Capital Corporation Corporation (incorporated herein by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed on July 7, 2017 (File No. 000-50266))
3.2
Second Amended and Restated Bylaws of Trinity Capital Corporation (incorporated herein by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed January 30, 2018 (File No. 000-50266))
  
10.1
Form of Amended and Restated Standby PurchaseChange in Control Agreement, dated April 20, 2018, by and among the Companybetween Trinity Capital Corporation and Strategic ValueLos Alamos National Bank Partners LLCand Yin Y. Ho (incorporated herein by reference to Exhibit 10.20 of Amendment No. 13.1 to the Company's Registration StatementCurrent Report on Form S-18-K filed on August 28, 2017 (No. 333-218952)April 26, 2018 (File No. 000-50266))
  
10.2
Change in Control Agreement, dated April 20, 2018, by and between Trinity Capital Corporation and Los Alamos National Bank and John S. Gulas (incorporated herein by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed April 26, 2018 (File No. 000-50266))
10.3
Change in Control Agreement, dated April 20, 2018, by and between Trinity Capital Corporation and Los Alamos National Bank and Thomas G. Dolan (incorporated herein by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed April 26, 2018 (File No. 000-50266))
10.4
Form of 2018 Restricted Stock Unit Award Agreement under the Company'sTrinity Capital Corporation 2015 Long-Term Incentive Plan (incorporated herein by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed April 26, 2018 (File No. 000-50266))
  
31.1
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a)
  
31.2
Certification on Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a)
  
32.1
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  
32.2
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  
101Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets as of September 30, 2017March 31, 2018 and December 31, 2016;2017; (ii) Consolidated Statements of Operations for the three and nine months ended September 30, 2017March 31, 2018 and 2016;2017; (iii) Consolidated Statements of Changes in Stockholders'Shareholders' Equity for the ninethree months ended September 30, 2017March 31, 2018 and 2016;2017; (iv) Consolidated Statements of Cash Flows for the ninethree months ended September 30, 2017March 31, 2018 and 2016;2017; and (v) Notes to Consolidated Financial Statements, tagged as blocks of text



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SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized.

 TRINITY CAPITAL CORPORATION
Date: November 14, 2017May 11, 2018  
 By:/s/ John S. Gulas 
  
John S. Gulas
Chief Executive Officer and President
   
 By:/s/ Thomas G. Dolan
  Thomas G. Dolan
  Chief Financial Officer

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