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 March 31,September 30, 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 or an emerging growth company.  See the definitions of "large accelerated filer," "accelerated filer"filer," "smaller reporting company" and "smaller reporting"emerging growth 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 April 30,October 31, 2018, there were 11,651,17311,660,491 shares of voting common stock outstanding and 8,044,292 shares of non-voting common 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 Operations2224
Item 3. Quantitative and Qualitative Disclosures About Market Risk3235
Item 4. Controls and Procedures3235
PART II – OTHER INFORMATION 
Item 1. Legal Proceedings3336
Item 1A. Risk Factors3336
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds3336
Item 3. Defaults Upon Senior Securities3336
Item 4. Mine Safety Disclosures3336
Item 5. Other Information3336
Item 6. Exhibits3437
Signatures3538

1
PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

TRINITY CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)

(In thousands, except share and per share data)            
 
March 31, 2018
(Unaudited)
  December 31, 2017  September 30, 2018  December 31, 2017 
ASSETS            
Cash and due from banks $10,003  $12,893  $11,046  $12,893 
Interest-bearing deposits with banks  9,517   22,541   3,645   22,541 
Cash and cash equivalents  19,520   35,434   14,691   35,434 
Investment securities available for sale, at fair value  470,910   468,733   437,975   468,733 
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 
Investment securities held to maturity, at amortized cost (fair value of $7,151 and $7,369 as of September 30, 2018 and December 31, 2017, respectively)  7,769   7,854 
Non-marketable equity securities  4,471   3,617   5,819   3,617 
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  -   - 
Loans held for sale, at lower of cost or market  6,815   - 
Loans (net of allowance for loan losses of $9,528 and $13,803 as of September 30, 2018 and December 31, 2017, respectively)  695,296   686,341 
Bank owned life insurance ("BOLI")  25,874   25,656   26,313   25,656 
Premises and equipment, net  28,336   28,542   28,027   28,542 
Other real estate owned ("OREO"), net  6,449   6,432   5,982   6,432 
Deferred tax assets  12,008   10,143 
Deferred tax assets ("DTAs"), net  11,621   10,143 
Other assets  13,567   14,781   13,283   14,781 
Total assets $1,283,067  $1,287,533  $1,253,591  $1,287,533 
                
LIABILITIES AND SHAREHOLDERS' EQUITY                
Liabilities                
Deposits:                
Noninterest-bearing $163,134  $161,677  $175,655  $161,677 
Interest-bearing  980,960   965,670   921,758   965,670 
Total deposits  1,144,094   1,127,347   1,097,413   1,127,347 
Long-term borrowings  2,300   2,300 
Borrowings  15,400   2,300 
Junior subordinated debt  26,764   36,941   26,766   36,941 
Other liabilities  8,414   15,399   6,243   15,399 
Total liabilities  1,181,572   1,181,987   1,145,822   1,181,987 
                
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 
Stock owned by Employee Stock Ownership Plan ("ESOP") participants; 723,127 shares and 831,645 shares as of September 30, 2018 and December 31, 2017, respectively, at fair value $5,183  $5,961 
                
Commitments and contingencies (Note 13)                
                
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 
Stockholders' equity        
Common stock voting, no par; 20,000,000 shares authorized; 11,660,491 and 11,364,862 shares issued and outstanding as of September 30, 2018 and December 31, 2017, respectively  11,660   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 June 30, 2018 and December 31, 2017, respectively  8,044   8,286 
Additional paid-in capital  35,332   35,071   36,222   35,071 
Retained earnings  56,279   54,587   64,093   54,587 
Common stock related to ESOP  (5,183)  (5,961)
Accumulated other comprehensive loss  (9,791)  (3,763)  (12,250)  (3,763)
Common stock related to ESOP  (5,961)  (5,961)
Total shareholders' equity  95,534   99,585   102,586   99,585 
Total liabilities and shareholders' equity $1,283,067  $1,287,533  $1,253,591  $1,287,533 
 
The accompanying notes are an integral part of these consolidated financial statements.

- 1 -
TRINITY CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

(In thousands, except per share data)  Three Months Ended March 31,  Three Months Ended September 30,  Nine Months Ended September 30, 
 2018  2017  2018  2017  2018  2017 
Interest income:                  
Loans held for sale $125  $-  $167  $0 
Loans, including fees $8,079  $9,307   8,534   9,016   25,272   27,613 
Interest and dividends on investment securities:                        
Taxable  1,582   1,672   1,506   1,665   4,562   5,143 
Nontaxable  1,038   246   1,042   506   3,127   1,085 
Other interest income  113   161   78   275   256   574 
Total interest income  10,812   11,386   11,285   11,462   33,384   34,415 
                        
Interest expense:                        
Deposits  412   459   424   432   1,255   1,333 
Borrowings  53   36   131   37   313   114 
Junior subordinated debt  787   720   363   599   1,501   1,912 
Total interest expense  1,252   1,215   918   1,068   3,069   3,359 
Net interest income  9,560   10,171   10,367   10,394   30,315   31,056 
Provision for loan losses  220   30 
Net interest income after provision for loan losses  9,340   10,141 
(Benefit) provision for loan losses  (1,000)  (250)  (1,480)  (1,220)
Net interest income after benefit for loan losses  11,367   10,644   31,795   32,276 
                        
Noninterest income:                        
Mortgage loan servicing fees  (2)  486   -   446   -   1,394 
Trust and investment services fees  797   651   749   643   2,255   1,953 
Service charges on deposits  254   295   226   202   712   784 
Net gain on sale of OREO  41   328   191   130   764   800 
Net gain on sale of loans  -   -   -   - 
Net loss on sale of securities  -   -   -   (1,248)
BOLI income  218   91   218   88   656   271 
Mortgage referral fee income  245   327   288   431   874   1,175 
Interchange fees  496   630   507   567   1,593   1,823 
Other fees  303   288   301   312   936   984 
Venture capital investment income  -   -   735   (21)
Other noninterest income  6   (21)  18   13   32   85 
Total noninterest income  2,358   3,075   2,498   2,832   8,557   8,000 
                        
Noninterest expenses:                        
Salaries and employee benefits  5,551   6,037   5,410   5,668   16,286   17,913 
Occupancy  590   491   522   553   1,592   1,590 
Data processing  1,029   1,374   952   1,132   2,894   3,557 
Legal, professional, and accounting fees  525   2,212 
Change in value of MSRs  -   238 
Legal, professional and accounting fees  488   712   1,540   3,998 
Change in value of Mortgage servicing rights ("MSRs")  -   677   -   1,406 
Other noninterest expense  2,118   3,564   1,674   2,931   5,955   10,010 
Total noninterest expenses  9,813   13,916   9,046   11,673   28,267   38,474 
Income (loss) before provision (benefit) for income taxes  1,885   (700)
Provision (benefit) for income taxes  193   (214)
Income (loss) before provision for income taxes  4,819   1,803   12,085   1,802 
Provision for income taxes  1,303   1,398   2,579   3,487 
Net income (loss)  1,692   (486)  3,516   405   9,506   (1,685)
Dividends and discount accretion on preferred shares  -   770   -   -   -   770 
Net income (loss) available to common shareholders $1,692  $(1,256)
Net income (loss) attributable to common stockholders $3,516  $405  $9,506  $(2,455)
Basic earnings (loss) per common share $0.09  $(0.10) $0.18  $0.02  $0.48  $(0.16)
Diluted earnings (loss) per common share $0.09  $(0.10) $0.18  $0.02  $0.48  $(0.16)

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

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

  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)
  Three Months Ended September 30,  Nine Months Ended September 30, 
  2018  2017  2018  2017 
  (In thousands) 
Net income (loss) $3,516  $405  $9,506  $(1,685)
Other comprehensive income:                
Unrealized (loss) gains on securities available for sale  (2,418)  229   (11,415)  2,343 
Securities losses reclassified into earnings  -   -   -   1,248 
Related income tax expense (benefit)  620   (106)  2,928   (1,436)
Other comprehensive (loss) income  (1,798)  123   (8,487)  2,155 
Total comprehensive income (loss) $1,718  $528  $1,019  $470 

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

- 3 -
TRINITY CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS'STOCKHOLDERS' EQUITY
(Unaudited)

 Common stock                    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 
 
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
Stockholders'
Equity
 
Balance, December 31, 2016 $9,509  $-  $-  $74,007  $(1,373) $60,651  $(5,495) $(3,192) $134,107  $9,509  $-  $-  $74,007  $(1,373) $60,651  $(5,495) $(3,192) $134,107 
Net income                      (486)          (486)
Net loss                      (1,685)          (1,685)
Other comprehensive income                          381       381                           2,155       2,155 
Redemption of Series A preferred shares              (35,539)                  (35,539)              (35,539)                  (35,539)
Redemption of Series B preferred shares              (1,777)                  (1,777)              (1,777)                  (1,777)
Dividends declared on preferred shares                      (372)          (372)                      (372)          (372)
Series C preferred shares converted to non-voting common stock          8,286   (37,089)  28,803               -           8,286   (37,089)  28,803               - 
Common stock issued for board compensation  34               124               158   40               153               193 
Amortization of preferred stock issuance costs              398       (398)          -               398       (398)          - 
Restricted stock units ("RSUs") vested  17               (17)              - 
RSUs compensation expense                  15               15                   91               91 
Balance, March 31, 2017 $9,543  $-  $8,286  $-  $27,569  $59,395  $(5,114) $(3,192) $96,487 
Balance, September 30, 2017 $9,566  $-  $8,286  $-  $27,657  $58,196  $-3,340  $-3,192  $97,173 


 Common stock                    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 
 
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
Stockholders'
Equity
 
Balance, December 31, 2017 $11,365  $-  $8,286  $-  $35,071  $54,587  $(3,763) $(5,961) $99,585  $11,365  $-  $8,286  $-  $35,071  $54,587  $(3,763) $(5,961) $99,585 
Net income                      1,692           1,692                       9,506           9,506 
Other comprehensive loss                          (6,028)      (6,028)                          (8,487)      (8,487)
Rights offering costs                  (2)              (2)                  (2)              (2)
Common stock issued to board  10               60               70   17               115               132 
Q1 RSU compensation expense                  217               217 
ESOP distributions                              778   778 
RSU compensation expense                  1,105               1,105 
Common stock issued for vested RSUs  14               (14)              -   36               (67)              (31)
Conversion from non-voting to voting common stock  242       (242)                      -   242       (242)                      - 
Balance, March 31, 2018 $11,631  $-  $8,044  $-  $35,332  $56,279  $(9,791) $(5,961) $95,534 
Balance, September 30, 2018 $11,660  $-  $8,044  $-  $36,222  $64,093  $(12,250) $(5,183) $102,586 

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

- 4 -
TRINITY CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 
 
Three Months Ended
March 31,
  Nine Months Ended September 30, 
 2018  2017  2018  2017 
Cash Flows From Operating Activities (Dollars in thousands)  (Dollars in thousands) 
Net income (loss) $1,692   (486) $9,506   (1,685)
Adjustments to reconcile net income to net cash provided by operating activities:                
Depreciation and amortization  2,062   1,904   5,778   5,104 
Provision for loan losses  220   30 
Benefit for loan losses  (1,480)  (1,220)
Net loss on sale of investment securities  -   1,248 
Net gain on sale of loans  -   - 
Gains and write-downs on OREO, net  (21)  (321)  (713)  (166)
Loss on disposal of premises and equipment  2   - 
Loss (gain) on disposal of premises and equipment  5   (37)
Decrease in deferred income tax assets  215   (739)  1,451   1,081 
Change in escrow liabilities  (5,209)  2,158   (5,306)  712 
Change in value of MSRs  -   238   -   1,406 
BOLI Income  (218)  (91)
BOLI income  (656)  (271)
Compensation expense recognized for restricted stock units  217   16   1,105   91 
Decrease in accrued interest payable on sub debt  -   (9,676)  -   (9,676)
Changes in operating assets and liabilities:                
Other Assets  1,185   482 
Other Liabilities  (1,775)  (872)
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)
Other assets  731   4,703 
Other liabilities  (3,849)  (2,158)
Net cash provided by (used in) operating activities before origination and gross sales of loans held for sale  6,572   (868)
Gross sales of loans held for sale  -   - 
Origination of loans held for sale  -   - 
Net cash provided by (used in) operating activities $6,572   (868)
 
Continued next page

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

 
Three Months Ended
March 31,
  Nine Months Ended September 30, 
 2018  2017  2018  2017 
Cash Flows From Investing Activities (Dollars in thousands)  (Dollars in thousands) 
Proceeds from maturities and paydowns of investment securities, available for sale $9,905  $14,264  $36,370  $38,647 
Proceeds from sale of investment securities, available for sale  -   56,543 
Purchase of investment securities, available for sale  (21,824)  (26,823)  (21,824)  (92,437)
Purchase of investment securities, other  (1,479)  (2)
Proceeds from maturities and paydowns of investment securities, held to maturity  26   822   72   884 
Proceeds from sale of investment securities, other  -   33 
Purchase bank owned life insurance  -   - 
Proceeds from sale of other real estate owned  509   1,117   2,358   3,251 
Purchase of investment securities, other  (857)  - 
Loans paid down (funded), net  (8,424)  6,615   (15,316)  48,608 
Purchases of premises and equipment  (122)  (390)  (450)  (3,907)
Net cash provided by (used in) investing activities  (20,787)  (4,395)
Proceeds from sale of premises and equipment  1   69 
Net cash (used in) provided by investing activities  (268)  51,689 
Cash Flows From Financing Activities                
Net increase in demand deposits, NOW accounts and savings accounts  26,268   9,614 
Net increase (decrease) in demand deposits, NOW accounts and savings accounts  (3,954)  (2,770)
Net decrease in time deposits  (9,523)  (20,377)  (25,982)  (37,331)
Partial repayment of subordinated debt  (10,310)  -   (10,310)  - 
Proceeds from issuance of short-term borrowings  13,100   - 
Redemption of preferred stock  -   (37,316)  -   (37,316)
Issuance of common stock for stock option plan  68   158 
Decrease in dividends payable on preferred stock  -   (12,965)  -   (12,965)
Net cash provided by (used in) financing activities  6,503   (60,886)
Issuance of common stock  99   193 
Net cash used in (provided by) financing activities  (27,047)  (90,189)
Net decrease in cash and cash equivalents  (15,914)  (72,638)  (20,743)  (39,368)
Cash and cash equivalents:                
Beginning of period  35,434   119,335   35,434   119,335 
End of period $19,520  $46,697  $14,691  $79,967 
Supplemental Disclosures of Cash Flow Information                
Cash payments for:                
Interest $1,601  $10,928  $3,412  $13,118 
Non-cash investing and financing activities:                
Transfers from loans to other real estate owned  473   433   1,467   2,848 
Sales of other real estate owned financed by loans by the Bank  315   - 
Transfer from loans to loans held for sale  6,815   - 
Transfer from venture capital to loans  -   150   -   150 
Conversion of Series C preferred stock to non-voting common stock  -   37,089   -   37,089 
Dividends declared on preferred stock  -   373   -   373 
Conversion of non-voting common stock to voting common stock  242   -   242   - 

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

- 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"), 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.  TCC Advisors Corporation and Trust I were dissolved in 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, 2017 (the "2017 Form 10-K"). Operating results for the three-month periodthree and nine months ended March 31,September 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018 or any other period.

Reclassifications: Some items in the prior year financial statements werehave been 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

The averageAverage number of shares used in calculatingcalculation of basic and diluted earnings (loss) per common share were as follows for the three and nine months ended March 31,September 30, 2018 and 2017:
 
 Three Months Ended March 31,  Three Months Ended September 30,  Nine Months Ended September 30, 
 2018  2017  2018  2017  2018  2017 
 (In thousands, except share and per share data)  (In thousands, except share data) 
Net income (loss) $1,692  $(486) $3,516  $405  $9,506  $(1,685)
Dividends and discount accretion on preferred shares  -   770   -   -   -   770 
Net income (loss) available to common shareholders $1,692  $(1,256)
Net income (loss) attributable to common stockholders $3,516  $405  $9,506  $(2,455)
Weighted average common shares issued  19,665,543   13,017,045   19,702,110   17,539,689   19,685,998   15,647,178 
LESS: Weighted average treasury stock shares  -   -   -   -   -   - 
Weighted average common shares outstanding, net  19,665,543   13,017,045   19,702,110   17,539,689   19,685,998   15,647,178 
Basic income (loss) per common share $0.09  $(0.10)
Basic earnings (loss) per common share $0.18  $0.02  $0.48  $(0.16)
Dilutive effect of stock-based compensation  45,133   -   255,541   13,134   244,759   - 
Weighted average common shares outstanding including dilutive shares  19,710,676   13,017,045   19,957,651   17,552,823   19,930,757   15,647,178 
Diluted income (loss) per common share $0.09  $(0.10)
Diluted earnings (loss) per common share $0.18  $0.02  $0.48  $(0.16)
 
Certain restricted stock units ("RSUs") were not included in the above calculation, as they would have had an anti-dilutive effect. There were no shares excluded from the calculation for the three months ended March 31,September 30, 2018September 30, 2017.  There were no shares excluded from the calculation for the nine months ended September 30, 2018.  The total number of excluded shares excludedrelating to such RSUs was approximately 33,00097,000 shares for threethe nine months ended March 31,September 30, 2017.

Note 3. Recent Accounting Pronouncements

Newly effective standards:  In May 2014, the Financial Accounting Standards Board ("FASB") issued ASUAccounting Standards Update ("ASU") 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. In August 2015, the FASB 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, making it effective for annual reporting periods beginning after December 15, 2017 including interim reporting periods within that reporting period. The Company's revenue is primarily 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 has 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 with no impact on total shareholders' equity or net income.
Revenue Recognition
The Company 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.
- 7 -
·
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 ("DTA") related to available for sale securities in combination with the entity's other deferred tax assets.DTA. 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")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 issuesissued 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 under 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 have a material impact on the Company's Consolidated Financial Statements.

7
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 continues to evaluate the extent of potential impact the new guidance will have on the Company's consolidated financial 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.  The Company is also working with a third party ALLLallowance for loan and lease losses ("ALLL") software provider to help with implementation.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this update modify the disclosure requirements for fair value measurements by removing, modifying, or adding certain disclosures. The update is effective for interim and annual periods in fiscal years beginning after December 15, 2019, with early adoption permitted for the removed disclosures and delayed adoption until fiscal year 2020 permitted for the new disclosures. The removed and modified disclosures will be adopted on a retrospective basis, and the new disclosures will be adopted on a prospective basis. The adoption will not have a material effect on the Company's consolidated financial statements.


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 the levela percentage of certain of its deposits.  This reserve requirement may be met by funds on deposit with the FRB and cash on hand.  As of March 31,September 30, 2018 and December 31, 2017, the reserve requirement on deposit at the FRB was $0.$0 due to the small balance of demand deposits and the balances maintained at the FRB.

Restricted cash included in "cash and due from banks" on the Consolidated Balance Sheets was $100 thousand and $0 at September 30, 2018 and December 31, 2017, respectively.  This restricted cash is maintained at a bank as collateral for our credit card portfolio.

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.equivalents as the Company reviews this risk on a quarterly basis.

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  Amortized Cost  
Gross
Unrealized Gains
  
Gross
Unrealized Losses
  Fair Value 
 (In thousands)  (In thousands) 
March 31, 2018            
September 30, 2018            
U.S. government sponsored agencies $69,310  $-  $(1,633) $67,677  $69,300  $-  $(2,296) $67,004 
State and political subdivisions  163,991   177   (3,690)  160,478   162,628   30   (5,114)  157,544 
Residential mortgage backed securities  120,195   2   (2,086)  118,111   95,703   37   (2,097)  93,643 
Residential collateralized mortgage obligations  18,294   50   (180)  18,164   15,119   48   (188)  14,979 
Commercial mortgage backed securities  110,244   -   (4,303)  105,941   109,725   -   (5,388)  104,337 
SBA pools  554   -   (15)  539   486   -   (18)  468 
Totals $482,588  $229  $(11,907) $470,910  $452,961  $115  $(15,101) $437,975 
                                
December 31, 2017                                
U.S. government sponsored agencies $69,315  $-  $(764) $68,551  $69,315  $-  $(764) $68,551 
State and political subdivisions  157,652   1,306   (252)  158,706   157,652   1,306   (252)  158,706 
Residential mortgage backed securities  124,578   98   (1,593)  123,083   124,578   98   (1,593)  123,083 
Residential collateralized mortgage obligations  9,715   51   (80)  9,686   9,715   51   (80)  9,686 
Commercial mortgage backed securities  110,483   67   (2,388)  108,162   110,483   67   (2,388)  108,162 
SBA pools  560   -   (15)  545   560   -   (15)  545 
Totals $472,303  $1,522  $(5,092) $468,733  $472,303  $1,522  $(5,092) $468,733 

Securities Held to Maturity Amortized Cost  
Gross
Unrealized Gains
  
Gross
Unrealized Losses
  Fair Value 
  (In thousands) 
September 30, 2018            
SBA pools $7,769  $-  $(618) $7,151 
Totals $7,769  $-  $(618) $7,151 
                 
December 31, 2017                
SBA pools $7,854  $-  $(485) $7,369 
Totals $7,854  $-  $(485) $7,369 

- 8 -
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 realizedRealized net gains or losses(losses) on sale and call of securities available for sale.  sale are summarized as follows:

 Three Months Ended September 30,  Nine Months Ended September 30, 
 2018  2017  2018  2017 
 (In thousands) 
Gross realized gains $-  $-  $-  $6 
Gross realized losses  -   -   -   (1,254)
Net gains (losses) $-  $-  $-  $(1,248)

8
There was no tax benefit for the three or provisionnine months ended September 30, 2018 related to net realized gains and losses.  There was no tax benefit for the three months ended September 30, 2017 and a tax benefit of $482 thousand related to these net realized gains and losses for the threenine months ended March 31, 2018 andSeptember 30, 2017.
A summary of unrealized loss information for investment securities, categorized by security type, as of March 31,September 30, 2018 and December 31, 2017 was as follows:

 Less than 12 Months  12 Months or Longer  Total 
 Less than 12 Months  12 Months or Longer  Total  Fair Value  Unrealized Losses  Fair Value  Unrealized Losses  Fair Value  Unrealized Losses 
 
Fair
Value
  
Unrealized
Losses
  
Fair
Value
  
Unrealized
Losses
  
Fair
Value
  
Unrealized
Losses
  (In thousands) 
Securities Available for Sale:
                                    
March 31, 2018                  
September 30, 2018                  
U.S. government sponsored agencies $48,412  $(979) $19,265  $(654) $67,677  $(1,633) $26,449  $(834) $41,023  $(1,462) $67,472  $(2,296)
State and political subdivisions  115,741   (2,913)  24,041   (777)  139,782   (3,690)  111,103   (3,551)  36,527   (1,563)  147,630   (5,114)
Residential mortgage backed securities  37,193   (512)  82,865   (1,574)  120,058   (2,086)  27,367   (653)  59,894   (1,444)  87,261   (2,097)
Residential collateralized mortgage obligations  12,521   (156)  4,271   (24)  16,792   (180)  6,855   (52)  4,234   (136)  11,089   (188)
Commercial mortgage backed securities  24,331   (536)  79,377   (3,767)  103,708   (4,303)  19,370   (614)  84,965   (4,774)  104,335   (5,388)
SBA pools  -   -   539   (15)  539   (15)  -   -   468   (18)  468   (18)
Totals $238,198  $(5,096) $210,358  $(6,811) $448,556  $(11,907) $191,144  $(5,704) $227,111  $(9,397) $418,255  $(15,101)
                                                
December 31, 2017                                                
U.S. government sponsored agencies $49,070  $(331) $19,481  $(433) $68,551  $(764) $49,070  $(331) $19,481  $(433) $68,551  $(764)
State and political subdivisions  23,217   (95)  24,774   (157)  47,991   (252)  23,217   (95)  24,774   (157)  47,991   (252)
Residential mortgage backed securities  18,771   (199)  88,100   (1,394)  106,871   (1,593)  18,771   (199)  88,100   (1,394)  106,871   (1,593)
Residential collateralized mortgage obligations  4,761   (67)  3,502   (13)  8,263   (80)  4,761   (67)  3,502   (13)  8,263   (80)
Commercial mortgage backed securities  6,961   (94)  81,042   (2,294)  88,003   (2,388)  6,961   (94)  81,042   (2,294)  88,003   (2,388)
SBA pools  -   -   545   (15)  545   (15)  -   -   545   (15)  545   (15)
Totals $102,780  $(786) $217,444  $(4,306) $320,224  $(5,092) $102,780  $(786) $217,444  $(4,306) $320,224  $(5,092)
                                                
Securities Held to Maturity:                                                
March 31, 2018                        
September 30, 2018                        
SBA pools $-  $-  $7,312  $(512) $7,312  $(512) $-  $-  $7,151  $(618) $7,151  $(618)
Totals $-  $-  $7,312  $(512) $7,312  $(512) $-  $-  $7,151  $(618) $7,151  $(618)
                                                
December 31, 2017                                                
SBA pools $-  $-  $7,369  $(485) $7,369  $(485) $-  $-  $7,369  $(485) $7,369  $(485)
Totals $-  $-  $7,369  $(485) $7,369  $(485) $-  $-  $7,369  $(485) $7,369  $(485)

As of March 31,September 30, 2018, the Company's security portfolio consisted of 156152 securities, 133131 of which were in an unrealized loss position. As of March 31,September 30, 2018, $468.3$441.1 million in investment securities had unrealized losses with aggregate depreciation of 2.58%3.44% of the Company's amortized cost basis.  Of these securities, $225.0$244.3 million in amortized cost had a continuous unrealized loss position for twelve months or longer with an aggregate depreciation of 3.15%3.94%.  The unrealized losses relate principally to the general change in interest rates and illiquidity, and not credit quality, that has occurred since the securities'securities purchase dates, and such unrecognized losses or gains will continue to vary with general interest rate level fluctuations in the future.  As management does not intend to sell the securities, and it is 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 March 31,September 30, 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 $201  $200  $-  $-  $201  $200  $-  $- 
One to five years  65,540   64,008   -   -   71,007   68,699   -   - 
Five to ten years  6,578   6,487   -   -   3,209   3,189   -   - 
Over ten years  161,536   157,999   7,824   7,312   157,997   152,928   7,769   7,151 
Subtotal  233,855   228,694   7,824   7,312   232,414   225,016   7,769   7,151 
Residential mortgage backed security  120,195   118,111   -   - 
Residential collateralized mortgage obligation  18,294   18,164   -   - 
Commercial mortgage backed security  110,244   105,941         
Residential mortgage backed securities  95,703   93,643   -   - 
Residential collateralized mortgage obligations  15,119   14,979   -   - 
Commercial mortgage backed securities  109,725   104,337         
Total $482,588  $470,910  $7,824  $7,312  $452,961  $437,975  $7,769  $7,151 

Securities with carrying amounts of $83.8$100.3 million and $87.4 million as of March 31,September 30, 2018 and December 31, 2017, respectively, were pledged as collateral on public deposits and for other purposes as required or permitted by law.

- 9 -
Note 6. Loans and Allowance for Loan Losses

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

 March 31, 2018  December 31, 2017  September 30, 2018  December 31, 2017 
 (In thousands)  (In thousands) 
Commercial $67,557  $61,388  $63,539  $61,388 
Commercial real estate  384,247   378,802   404,790   378,802 
Residential real estate  169,559   178,296   155,118   178,296 
Construction real estate  68,002   63,569   72,550   63,569 
Installment and other  16,794   18,952   9,998   18,952 
Total loans  706,159   701,007   705,995   701,007 
Unearned income  (813)  (863)  (1,171)  (863)
Gross loans  705,346   700,144   704,824   700,144 
Allowance for loan losses  (11,238)  (13,803)  (9,528)  (13,803)
Net loans $694,108  $686,341  $695,296  $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 March 31,September 30, 2018, 25.2%24.8% 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 -
The following table presents the contractual aging of the recorded investment in current and past due loans by classcategory of loans as of March 31,September 30, 2018 and December 31, 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 
March 31, 2018 (In thousands) 
September 30, 2018 (In thousands) 
Commercial $67,214  $318  $25  $-  $343  $67,557  $63,512  $27  $-  $-  $27  $63,539 
Commercial real estate  380,993   1,292   -   1,962   3,254   384,247   403,507   920   -   363   1,283   404,790 
Residential real estate  166,462   1,314   387   1,396   3,097   169,559   151,872   1,811   266   1,169   3,246   155,118 
Construction real estate  64,114   338   -   3,550   3,888   68,002   72,178   334   -   38   372   72,550 
Installment and other  16,673   29   -   92   121   16,794   9,860   47   -   91   138   9,998 
Total loans $695,456  $3,291  $412  $7,000  $10,703  $706,159  $700,929  $3,139  $266  $1,661  $5,066  $705,995 
                                                
Nonaccrual loan classification, included above $4,729  $484  $412  $7,000  $7,896  $12,625  $4,888  $1,895  $266  $1,661  $3,822  $8,710 
                                                
December 31, 2017                                                
Commercial $59,703  $173  $1,475  $37  $1,685  $61,388  $59,703  $173  $1,475  $37  $1,685  $61,388 
Commercial real estate  371,640   5,490   -   1,672   7,162   378,802   371,640   5,490   -   1,672   7,162   378,802 
Residential real estate  174,388   1,899   -   2,009   3,908   178,296   174,388   1,899   -   2,009   3,908   178,296 
Construction real estate  59,291   423   74   3,781   4,278   63,569   59,291   423   74   3,781   4,278   63,569 
Installment and other  18,705   80   81   86   247   18,952   18,705   80   81   86   247   18,952 
Total loans $683,727  $8,065  $1,630  $7,585  $17,280  $701,007  $683,727  $8,065  $1,630  $7,585  $17,280  $701,007 
                                                
Nonaccrual loan classification, included above $3,858  $5,859  $38  $7,585  $13,482  $17,340  $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 classcategory of loans as of March 31,September 30, 2018 and December 31, 2017:

 March 31, 2018  December 31, 2017  September 30, 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 $58  $-  $102  $-  $603  $-  $102  $- 
Commercial real estate  5,056   -   8,617   -   3,717   -   8,617   - 
Residential real estate  3,774   -   4,599   -   4,125   -   4,599   - 
Construction real estate  3,645   -   3,911   -   165   -   3,911   - 
Installment and other  92   -   111   -   100   -   111   - 
Total $12,625  $-  $17,340  $-  $8,710  $-  $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" loans include those characterized by the likelihood that the Company will sustain some loss if the deficiencies are not corrected.  Loans classified as "Doubtful" have all the weaknesses inherent in those classified as "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 "SpecialSpecial Mention."  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 have all the weaknesses inherent in those classified as 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.  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 classcategory of loans based on the most recent analysis performed as of March 31,September 30, 2018 and December 31, 2017:

 Pass  Special Mention  Substandard  Doubtful  Total  Pass  Special Mention  Substandard  Doubtful  Total 
March 31, 2018 (In thousands) 
September 30, 2018 (In thousands) 
Commercial $64,757  $225  $2,575  $-  $67,557  $58,035  $3,779  $1,725  $-  $63,539 
Commercial real estate  369,163   4,507   10,577   -   384,247   384,653   3,592   16,545   -   404,790 
Residential real estate  164,280   -   5,279   -   169,559   149,033   663   5,422   -   155,118 
Construction real estate  61,717   898   5,387   -   68,002   71,549   876   125   -   72,550 
Installment and other  16,386   -   408   -   16,794   9,900   -   98   -   9,998 
Total $676,303  $5,630  $24,226  $-  $706,159  $673,170  $8,910  $23,915  $-  $705,995 
                                        
December 31, 2017                                        
Commercial $58,769  $2  $2,617  $-  $61,388  $58,769  $2  $2,617  $-  $61,388 
Commercial real estate  359,768   4,762   14,272   -   378,802   359,768   4,762   14,272   -   378,802 
Residential real estate  172,101   -   6,195   -   178,296   172,101   -   6,195   -   178,296 
Construction real estate  56,661   917   5,991   -   63,569   56,661   917   5,991   -   63,569 
Installment and other  18,523   -   429   -   18,952   18,523   -   429   -   18,952 
Total $665,822  $5,681  $29,504  $-  $701,007  $665,822  $5,681  $29,504  $-  $701,007 

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

Pass  Special Mention  Substandard  Doubtful  Total Pass  Special Mention  Substandard  Doubtful  Total 
March 31, 2018(In thousands) 
September 30, 2018(In thousands) 
Current $673,557  $5,630  $16,269  $-  $695,456  $671,996  $8,910  $20,023  $-  $700,929 
Past due 30-59 days  2,746   -   545   -   3,291   1,174   -   1,965   -   3,139 
Past due 60-89 days  -   -   412   -   412   -   -   266   -   266 
Past due 90 days or more  -   -   7,000   -   7,000   -   -   1,661   -   1,661 
Total $676,303  $5,630  $24,226  $-  $706,159  $673,170  $8,910  $23,915  $-  $705,995 
                                        
December 31, 2017(In thousands)   
Current $662,445  $5,681  $15,601  $-  $683,727  $662,445  $5,681  $15,601  $-  $683,727 
Past due 30-59 days  1,785   -   6,280   -   8,065   1,785   -   6,280   -   8,065 
Past due 60-89 days  1,592   -   38   -   1,630   1,592   -   38   -   1,630 
Past due 90 days or more  -   -   7,585   -   7,585   -   -   7,585   -   7,585 
Total $665,822  $5,681  $29,504  $-  $701,007  $665,822  $5,681  $29,504  $-  $701,007 

As of March 31,September 30, 2018 and December 31, 2017, nonaccrual loans totaling $12.6$7.2 million and $17.3 million were classified as "Substandard,"Substandard, respectively.

The following table presents loans individually evaluated for impairment by classcategory of loans as of March 31,September 30, 2018 and December 31, 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):

 March 31, 2018  December 31, 2017  September 30, 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 $99  $96    $184  $182    $110  $110    $184  $182   
Commercial real estate  8,014   5,056     4,294   4,154     6,494   3,517     4,294   4,154   
Residential real estate  5,809   5,012     6,585   5,808     5,948   5,032     6,585   5,808   
Construction real estate  6,804   5,429     7,471   6,049     1,889   1,863     7,471   6,049   
Installment and other  309   308     349   348     293   292     349   348   
With an allowance recorded:                                        
Commercial  13,267   13,266  $243   13,361   13,359  $211   13,671   13,669  $321   13,361   13,359  $211 
Commercial real estate  6,474   6,474   1,199   10,987   10,987   3,735   5,870   5,870   851   10,987   10,987   3,735 
Residential real estate  6,641   6,641   857   6,774   6,774   943   5,344   5,343   943   6,774   6,774   943 
Construction real estate  3,206   3,206   227   3,244   3,244   231   1,161   1,161   42   3,244   3,244   231 
Installment and other  243   243   37   236   236   32   240   240   34   236   236   32 
Total $50,866  $45,731  $2,563  $53,485  $51,141  $5,152  $41,020  $37,097  $2,191  $53,485  $51,141  $5,152 

The table above includes $39.9$31.6 million of troubled debt restructurings or restructured loans, at March 31,September 30, 2018 and $38.9 million of restructured loanstroubled debt restructurings at December 31, 2017.

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

 Three Months Ended  Three Months Ended  Nine Months Ended 
 March 31, 2018  March 31, 2017  September 30, 2018  September 30, 2017  September 30, 2018  September 30, 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 $139  $1  $1,989  $14  $112  $2  $6,834  $184  $167  $4  $4,411  $543 
Commercial real estate  4,605   -   5,035   10   3,241   27   5,133   99   5,231   80   5,084   295 
Residential real estate  5,410   15   4,459   22   5,033   32   4,712   54   6,962   94   4,586   162 
Construction real estate  5,739   22   6,982   88   3,330   22   7,397   104   6,046   66   7,189   308 
Installment and other  328   3   308   3   296   3   399   5   416   10   353   14 
With an allowance recorded:                                                
Commercial  13,313   187   13,935   186   13,487   210   7,547   22   17,866   622   10,741   66 
Commercial real estate  8,730   70   6,353   67   6,144   64   6,350   69   9,916   189   6,352   205 
Residential real estate  6,708   75   8,343   81   5,434   58   7,695   81   8,094   173   8,019   240 
Construction real estate  3,225   42   4,209   40   1,255   13   3,302   43   2,987   40   3,755   129 
Installment and other  239   2   405   3   239   2   289   2   319   6   347   7 
Total $48,436  $417  $52,018  $514  $38,571  $433  $49,658  $663  $58,004  $1,284  $50,837  $1,969 

If nonaccrual loans outstanding had been current in accordance with their original terms, approximately $188.3$118 thousand and $211.4$197 thousand would have been recorded as loan interest income during the three months ended March 31,September 30, 2018 and 2017, respectively, and $222 thousand and $585 thousand during the nine months ended September 30, 2018 and 2017, respectively. Interest income recognized in the above table was primarily recognized on a cash basis.basis was not material.

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

- 12 -
Allowance for Loan Losses:

For the three and nine months ended March 31,September 30, 2018 and 2017, 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 March 31, 2018:                     
Three Months Ended September 30, 2018:                     
Beginning balance $536  $8,573  $2,843  $1,030  $315  $506  $13,803  $543  $6,583  $2,151  $732  $131  $304  $10,444 
Provision (benefit) for loan losses  46   1,046   (323)  (53)  (95)  (401)  220   6   (768)  (86)  15   (30)  (137)  (1,000)
                            
Charge-offs  (9)  (2,736)  (105)  (112)  (28)  -   (2,990)  (1)  -   (65)  -   (21)  -   (87)
Recoveries  24   22   47   49   63   -   205   25   12   102   4   28   -   171 
Net charge-offs  15   (2,714)  (58)  (63)  35   -   (2,785)
Net recoveries (charge-offs)  24   12   37   4   7   -   84 
Ending balance $597  $6,905  $2,462  $914  $255  $105  $11,238  $573  $5,827  $2,102  $751  $108  $167  $9,528 
                                                        
Three Months Ended March 31, 2017:                            
Three Months Ended September 30, 2017:                            
Beginning balance $1,449  $6,472  $4,524  $1,119  $715  $73  $14,352  $1,377  $6,205  $3,805  $1,117  $635  $28  $13,167 
Provision (benefit) for loan losses  320   13   (209)  (27)  4   (71)  30   (297)  461   (117)  1,731   (2,073)  45   (250)
                            
Charge-offs  (186)  -   (244)  (16)  (137)  -   (583)  (7)  (612)  -   (1,385)  (19)  -   (2,023)
Recoveries  173   88   55   10   62   -   388   56   88   125   37   2,000   -   2,306 
Net charge-offs  (13)  88   (189)  (6)  (75)  -   (195)
Net recoveries (charge-offs)  49   (524)  125   (1,348)  1,981   -   283 
Ending balance $1,756  $6,573  $4,126  $1,086  $644  $2  $14,187  $1,129  $6,142  $3,813  $1,500  $543  $73  $13,200 
                                                        
Nine Months Ended September 30, 2018:                            
Beginning balance $536  $8,573  $2,843  $1,030  $315  $506  $13,803 
Provision (benefit) for loan losses  98   (62)  (799)  (120)  (258)  (339)  (1,480)
                            
Charge-offs  (134)  (2,736)  (184)  (212)  (76)  -   (3,342)
Recoveries  73   52   242   53   127   -   547 
Net recoveries (charge-offs)  (61)  (2,684)  58   (159)  51   -   (2,795)
Ending balance $573  $5,827  $2,102  $751  $108  $167  $9,528 
                            
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 
                            

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 
March 31, 2018 (In thousands) 
September 30, 2018 (In thousands) 
Allowance for loan losses allocated to:                                          
Loans individually evaluated for impairment $243  $1,199  $857  $227  $37  $-  $2,563  $321  $851  $943  $42  $34  $-  $2,191 
Loans collectively evaluated for impairment  354   5,706   1,605   687   218   105   8,675   252   4,976   1,159   709   74   167   7,337 
Ending balance $597  $6,905  $2,462  $914  $255  $105  $11,238  $573  $5,827  $2,102  $751  $108  $167  $9,528 
Loans:                                                        
Individually evaluated for impairment $13,362  $11,530  $11,653  $8,635  $551  $-  $45,731  $13,779  $9,387  $10,375  $3,024  $532  $-  $37,097 
Collectively evaluated for impairment  54,195   372,717   157,906   59,367   16,243   -   660,428   49,760   395,403   144,743   69,526   9,466   -   668,898 
Total ending loans balance $67,557  $384,247  $169,559  $68,002  $16,794  $-  $706,159  $63,539  $404,790  $155,118  $72,550  $9,998  $-  $705,995 
                                                        
December 31, 2017                                                        
Allowance for loan losses allocated to:                                                        
Loans individually evaluated for impairment $211  $3,735  $943  $231  $32  $-  $5,152  $211  $3,735  $943  $231  $32  $-  $5,152 
Loans collectively evaluated for impairment  325   4,838   1,900   799   283   506   8,651   325   4,838   1,900   799   283   506   8,651 
Ending balance $536  $8,573  $2,843  $1,030  $315  $506  $13,803  $536  $8,573  $2,843  $1,030  $315  $506  $13,803 
Loans:                                                        
Individually evaluated for impairment $13,541  $15,141  $12,582  $9,293  $584  $-  $51,141  $13,541  $15,141  $12,582  $9,293  $584  $-  $51,141 
Collectively evaluated for impairment  47,847   363,661   165,714   54,276   18,368   -   649,866   47,847   363,661   165,714   54,276   18,368   -   649,866 
Total ending loans balance $61,388  $378,802  $178,296  $63,569  $18,952  $-  $701,007  $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:

TDRsTroubled 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 table presentstables present the loans restructured as TDRs during the nine months ended September 30, 2018 and the three and nine months ended September 30, 2018 and 2017.  There were no new TDRs for the three months ended March 31, 2018 and 2017, respectively.September 30, 2018.

Three Months Ended March 31, 2018  Nine Months Ended September 30, 2018 
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  1  $171  $171  $1   3  $335  $335  $26 
Commercial real estate  2   2,356   2,356   -   2   2,356   2,356   - 
Residential real estate  2   237   237   - 
Total  3  $2,527  $2,527  $1   7  $2,928  $2,928  $26 

Three Months ended March 31, 2017 Three Months Ended September 30, 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) 
Construction real estate  1  $10  $10  $- 
Commercial  2  $105  $105  $29 
Total  1  $10  $10  $-   2  $105  $105  $29 


  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 

14
The following table presentstables present loans by classcategory modified as TDRs for which there was a payment default within twelve12 months following the modification during the three and nine months ended March 31,September 30, 2018 and 2017:2017.  There were no TDRs with a payment default within 12 months following modification for the three months ended September 30, 2018.

 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 Nine Months Ended September 30, 2018 
Number of
Contracts
 
Pre-
Modification
Outstanding
Recorded
Investment
 
Specific
reserves
allocated
 
Number of
Contracts
 
Pre-Modification
Outstanding
Recorded Investment
 
Specific
Reserves Allocated
 
(Dollars in thousands)    (Dollars in thousands) 
Construction real estate  1  $61  $- 
Residential real estate  1  $145  $- 
Total  1  $61  $-   1  $145  $- 

 Three Months Ended September 30, 2017 
 
Number of
Contracts
 
Pre-Modification
Outstanding
Recorded Investment
 
Specific
Reserves Allocated
 
    (Dollars in thousands) 
Construction real estate  1  $61  $- 
Total  1  $61  $- 

 Nine Months Ended September 30, 2017 
 
Number of
Contracts
 
Pre-Modification
Outstanding
Recorded Investment
 
Specific
Reserves Allocated
 
    (Dollars in thousands) 
Construction real estate  2  $807  $10 
Total  2  $807  $10 

Impairment analyses are prepared on TDRs in conjunction with the normal allowance for loan loss process. TDRs restructured during the three months ended March 31,September 30, 2018 and 2017 required $1a specific reserve of $0 and $29 thousand, respectively.  TDRs restructured during the nine months ended September 30, 2018 and 2017 required a specific reserve of $26 thousand and $0 in specific reserves,$30 thousand, respectively. TDRs resulted in charge-offs of $147$0 and $403 thousand and $20 thousand during the three months ended March 31,September 30, 2018 and 2017, respectively.  For the nine months ended September 30, 2018 and 2017, TDRs resulted in charge-offs of $2.8 million and $458 thousand, respectively. The TDRs that subsequently defaulted required a$0 and $10 thousand provision of $25 thousand and $0 to the allowance for loan losses for the three and nine months ended March 31,September 30, 2018 and 2017, respectively.

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

March 31, 2018  December 31, 2017 September 30, 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 $104  $32,934  $108  $33,801   98  $28,387  $108  $33,801 
Nonaccrual  17   6,844   19   5,146   16   3,250   19   5,146 
Total $121  $39,778  $127  $38,947   114  $31,637  $127  $38,947 

Specific reserves on TDRs at March 31,September 30, 2018 and December 31, 2017 were $2.6$1.9 million and $2.4 million, respectively.

As of March 31,September 30, 2018, the Bank had a total of $2.1$185 thousand in commitments to lend additional funds on one residentialcommercial loan classified as a TDR.  As of December 31, 2017, the Bank had a total of $23 thousand in commitments to lend additional funds on two loans classified as TDRs.

Loans to Executive Officers and Directors:Directors

Loan principal balances to executive officers and directors of the Company were $174.6$142.4 thousand and $198.4 thousand as of March 31,September 30, 2018 and December 31, 2017, respectively.  Total extensions of credit, available, including companies in which these individuals have management control or beneficial ownership, was $300.6were $258.4 thousand and $324.4 thousand as of March 31,September 30, 2018 and December 31, 2017, respectively.  An analysis of the activity related to these loans as of March 31,September 30, 2018 and December 31, 2017 is as follows:

 March 31, 2018  December 31, 2017  September 30, 2018  December 31, 2017 
 (In thousands)  (In thousands) 
Balance, beginning $198  $348  $198  $348 
Additions  -   13   -   13 
Changes in Board composition  -   (76)
Changes in composition  -   (76)
Principal payments and other reductions  (24)  (87)  (56)  (87)
Balance, ending $174  $198  $142  $198 

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

Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets.  The Company's mortgage loans serviced for others portfolio was transferred to another Fannie Mae-approved servicer on December 31, 2017.

During the three months ended March 31, 2017, 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 $18 thousand during the three months ended 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 $0 and $4.2 million as of March 31, 2018 and December 31, 2017, respectively.  There were no custodial balances on deposit with other financial institutions as of March 31, 2018 and December 31, 2017.


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

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

 March 31, 2018  December 31, 2017  September 30, 2018  December 31, 2017 
 (In thousands)  (In thousands) 
Commercial real estate $1,649  $1,667  $2,308  $1,667 
Residential real estate  1,051   886   468   886 
Construction real estate  3,749   3,879   3,206   3,879 
Total $6,449  $6,432  $5,982  $6,432 

Loans secured by residential real estate properties for which formal foreclosure proceedings were in process at September 30, 2018 and December 31, 2017 were $547 thousand and $1.4 million, respectively.

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

 Three Months Ended March 31,  Three Months Ended September 30,  Nine Months Ended September 30, 
 2018  2017  2018  2017  2018  2017 
 (In thousands)  (In thousands) 
Balance at beginning of period $6,432  $8,436  $5,870  $7,085  $6,432  $8,436 
Transfers in at fair value  473   433   746   2,154   1,467   2,848 
Capitalized improvements  32   -   -   -   43   - 
Write-down of value  (18)  (82)  -   (29)  (46)  (615)
Gain on disposal  39   321   189   124   759   781 
Cash received upon disposition  (509)  (1,117)  (823)  (1,135)  (2,358)  (3,251)
Sales financed by loans  -   - 
Sales financed by loans by the Bank  -   -   (315)  - 
Balance at end of period $6,449  $7,991  $5,982  $8,199  $5,982  $8,199 

Note 9. Deposits

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

 March 31, 2018  December 31, 2017  September 30, 2018  December 31, 2017 
 (In thousands )  (In thousands ) 
Demand deposits, noninterest bearing $163,134  $161,677  $175,655  $161,677 
NOW and money market accounts  428,436   404,225 
NOW  376,405   385,881 
Money market accounts  18,976   18,344 
Savings deposits  388,901   388,300   379,213   388,300 
Time certificates, $250,000 or more  21,339   21,639   19,831   21,639 
Other time certificates  142,284   151,506   127,333   151,506 
Total $1,144,094  $1,127,347  $1,097,413  $1,127,347 

Deposits from executive officers, directors and their affiliates as of March 31,September 30, 2018 and December 31, 2017 were $1.8$1.5 million and $2.2 million respectively.as of December 31, 2017.

Note 10. Borrowings

Notes payable to the Federal Home Loan Bank of Dallas ("FHLB") as of March 31,September 30, 2018 and December 31, 2017 were secured by a blanket assignment of mortgage loans or other collateral acceptable to FHLB, and generally had a fixed rate of interest intereston long-term borrowings is payable monthly and principal due at end of term, unless otherwise noted. Interest on short-term borrowings is due on maturity.  As of March 31,September 30, 2018, there were $328.6was $337.4 million in collateral value from loans pledged under the blanket assignment and $76.1$59.8 million from investment securities held in safekeeping at the FHLB. At March 31,September 30, 2018, there were $2.3$15.4 million in advances outstanding at the FHLB. An additional $402.4$381.8 million in advances is available based on the March 31,September 30, 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.

The following table details borrowings as of March 31,September 30, 2018 and December 31, 2017.2017:

Maturity DateRate  Type Principal dueMarch 31, 2018  December 31, 2017  Rate  Type Principal DueSeptember 30, 2018  December 31, 2017 
       (In thousands)         (In thousands) 
October 1, 2018  2.450%VariableAt maturity $13,100  $- 
April 27, 2021  6.343% Fixed At maturity  2,300   2,300   6.343%FixedAt maturity  2,300   2,300 
         Total $2,300  $2,300          Total $15,400  $2,300 

- 15 -16
Note 11. Junior Subordinated Debt

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

 Trust I  Trust III  Trust IV  Trust V  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  May 11, 2004  June 29, 2005  September 21, 2006 
Amount of trust preferred securities issued $10,000  $6,000  $10,000  $10,000  $6,000  $10,000  $10,000 
Rate on trust preferred securities  10.875% 4.70625% (variable)   6.88% 3.7745% (variable)  5.02125% (variable)   6.88000% 3.98413% (variable) 
Maturity March 8, 2030  September 8, 2034  November 23, 2035  December 15, 2036  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  September 8, 2009  August 23, 2010  September 15, 2011 
Common equity securities issued $310  $186  $310  $310  $186  $310  $310 
Junior subordinated deferrable interest debentures owed $-  $6,186  $10,310  $10,310  $6,186  $10,310  $10,310 
Rate on junior subordinated deferrable interest debentures  10.875% 4.70625% (variable)   6.88% 3.7745% (variable)  5.02125% (variable)   6.88000% 3.98413% (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 amountamounts and at the raterates 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.  After the early redemption was consumated, Trust I was dissolved.

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.

As of March 31,September 30, 2018, and December 31, 2017, there was $110.7$109 thousand and $456.0 thousand, respectively, in interest accrued and unpaid to trust preferred security holders.

As of March 31,September 30, 2018 and December 31, 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 March 31,September 30, 2018 and 2017, the Company recorded a tax expense of $193 thousand compared to$1.3 million and $1.4 million, respectively.  For the nine months ended September 30, 2018 and 2017, the Company recorded a tax benefitexpense of $214 thousand$2.6 million and $3.5 million, respectively. The expense recorded for the three and nine months ended March 31, 2017.September 30, 2018 includes an increase to the DTA valuation allowance of $347 thousand.  The expense recorded for the nine months ended September 30, 2017 includes an increase to the DTA valuation allowance of $2.0 million.

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  Three Months Ended September 30,  Nine Months Ended September 30, 
 Amount  Rate  Amount  Rate  2018  2018 
 (Dollars in thousands)  (In thousands) 
Federal statutory tax rate $396   21.00% $(238)  34.00% $1,013   21% $2,538   21%
State income tax, net of federal benefit  61   3.23%  155   (22.22)%  196   4%  476   4%
Net tax exempt interest income  (211)  (11.18)%  (91)  13.08%  (210)  (4)%  (631)  (5)%
Other, net  (53)  (2.81)%  (40)  5.68%  (43)  (1)%  (151)  (1)%
Tax provision (benefit) before change in valuation allowance  193   10.24%  (214)  30.54%
Tax provision before change in valuation allowance  956   20%  2,232   18%
Change in valuation allowance  -   -   -   -   347   7%  347   3%
Provision (benefit) for income taxes $193   10.24% $(214)  30.54%
Provision for income taxes $1,303   27% $2,579   21%

17
  Three Months Ended September 30,  Nine Months Ended September 30, 
  2017  2017 
  (In thousands) 
Federal statutory tax rate $613   34% $613   34%
State income tax, net of federal benefit  66   4%  235   13%
Net tax exempt interest income  (108)  (6)%  (372)  (21)%
Other, net  (73)  (4)%  998   56%
Tax provision before change in valuation allowance  498   28%  1,474   82%
Change in valuation allowance  900   50%  2,013   112%
Provision for income taxes $1,398   78% $3,487   194%

A DTA or deferred tax asset ("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.  The Company had a valuation allowance at December 31, 2017 and March 31,In evaluating its DTA as of September 30, 2018, of $2.5 million on part of the net DTAs.  This valuation allowance was initially recorded in 2017 when it was determined that $1.7 million and $645 thousandit was more likely than not that a portion of the Company's federal and state tax credit carryforwards are expectedwould expire unrealized and that $347 thousand should be added to expire unused as a result of loss usage limitations resulting from the Company experiencingvaluation allowance due to an "ownership change" under Section 382analysis of the Internal Revenue Code on December 19, 2016 which limits its ability to use pre-ownership changeventure capital investments DTA balance.  Accordingly the DTA valuation increased by $347 thousand during the three and nine months ended September 30, 2018.  The valuation balance as of control net operating losses and certain other pre-ownership change tax attributes against the Company's post-ownership change income. September 30, 2018 was $2.7 million.

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

Contract Amount Contract Amount 
March 31, 2018  December 31, 2017 September 30, 2018  December 31, 2017 
(In thousands) (In thousands) 
Unfunded commitments under lines of credit $133,162  $122,910  $132,886  $122,910 
Commercial and standby letters of credit  5,277   5,377   3,798   5,377 
Commitments to make loans  15,444   1,909   18,750   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 portionsportion of loans in process and equity lines of credit, of approximately $138.4$136.7 million as of March 31,September 30, 2018 and $128.3 million as of December 31, 2017, respectively.2017.  Of these commitments outstanding, the breakdown between fixed rate and adjustable rate loans is as follows:

March 31, 2018  December 31, 2017 September 30, 2018  December 31, 2017 
(In thousands) (In thousands) 
Fixed rate $16,878  $17,933  $30,092  $17,933 
Adjustable rate  121,561   110,354   106,592   110,354 
Total $138,439  $128,287  $136,684  $128,287 

The fixed loan commitments as of March 31,September 30, 2018 have interest rates ranging from 0.0% to 6.5%6.0% and maturities ranging from on demand to 811 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 valueamount of collateral with the FHLB at March 31,September 30, 2018 was $404.7$397.2 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 March 31,September 30, 2018 and December 31, 2017, respectively, $151 thousand and $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 $24$27 thousand and $23 thousand as of March 31,September 30, 2018 and December 31, 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 March 31,September 30, 2018 or December 31, 2017.


Note 15. Stock Incentives

At the Shareholders' Meeting held on January 22, 2015, the Company's shareholders approved the Trinity Capital Corporation 2015 Long-Term Incentive Plan ("2015 Plan") for the benefit of key employees.  As of December 31, 2017, only 30,477 shares of voting common stock remained available for issuance.  In accordance with the terms for the 2015 Plan, on February 21, 2018, the Board approved an additional 500,000 shares of common stock to be reserved under the 2015 Plan. The Compensation Committee determines the terms and conditions of the awards.

18
There were 239,075 Restricted Stock Unit ("RSU")12,500 RSU awards granted under the 2015 Plan and 3,750 forfeitures during the quarterthree months ended March 31, 2018September 30, 2018.  There were 312,775 RSUs awards granted under the 2015 Plan and 10,250 in forfeitures of 6,500 RSUs during the quarternine months ended March 31,September 30, 2018, leaving 297,902252,952 shares of voting common stock available remaining to be issued under the 2015 Plan at March 31,September 30, 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 threenine months ended March 31,September 30, 2018 is presented below: 
 Shares  Weighted Average Grant Price  Weighted-Average Remaining Contractual Term, in Years  Aggregate Intrinsic Value (in thousands)  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   452,782  $4.70   2.01  $2,128 
Granted  239,075   7.58   1.80   1,812   312,775   7.66   1.25   2,396 
Vested  (13,925)  4.00   -   (56)  (40,575)  4.61   -   (187)
Forfeited or expired  (6,500)  4.75   -   (31)  (10,250)  5.21   -   (53)
Outstanding Nonvested as of March 31, 2018  671,432  $5.74   1.66  $3,855 
Outstanding Nonvested as of June 30, 2018  714,732  $6.00   1.22  $4,284 

Share-based compensation expense of $217$493 thousand and $16$42 thousand was recognized for the three months ended March 31,September 30, 2018 and 2017, respectively, and $1.1 million and $91 thousand was recognized for the nine months ended September 30, 2018 and 2017, respectively.  As of March 31,September 30, 2018, there was $3.4$3.1 million in unrecognized compensation costs related to unvested share-based compensation awards granted under the 2015 Plan.   The cost will be recognized over the remaining vesting periods.

- 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 March 31,September 30, 2018 and December 31, 2017, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

March 31, 2018Total Level 1 Level 2 Level 3 
(In thousands) Total Level 1 Level 2 Level 3 
September 30, 2018(In thousands) 
Financial Assets:                
Investment securities available for sale:                
U.S. government sponsored agency $67,677  $-  $67,677  $- 
U.S. government sponsored agencies $67,004  $-  $67,004  $- 
States and political subdivision  160,478   -   160,478   -   157,544   -   157,544   - 
Residential mortgage backed security  118,111   -   118,111   - 
Residential mortgage backed securities  93,643   -   93,643   - 
Residential collateralized mortgage obligation  18,164   -   18,164   -   14,979   -   14,979   - 
Commercial mortgage backed security  105,941   -   105,941   - 
Commercial mortgage backed securities  104,337   -   104,337   - 
SBA pools  539   -   539   -   468   -   468   - 
Total $470,910  $-  $470,910  $-  $437,975  $-  $437,975  $- 

December 31, 2017Total Level 1 Level 2 Level 3 
 (In thousands) 
Financial Assets:        
Investment securities available for sale:        
U.S. government sponsored agency $68,551  $-  $68,551  $- 
States and political subdivision  158,706   -   158,706   - 
Residential mortgage backed security  123,083   -   123,083   - 
Residential collateralized mortgage obligation  9,686   -   9,686   - 
Commercial mortgage backed security  108,162   -   108,162   - 
SBA pools  545   -   545   - 
Total $468,733  $-  $468,733  $- 
19
 Total Level 1 Level 2 Level 3 
December 31, 2017(In thousands) 
Financial Assets:        
Investment securities available for sale:        
U.S. government sponsored agencies $68,551  $-  $68,551  $- 
States and political subdivision  158,706   -   158,706   - 
Residential mortgage backed securities  123,083   -   123,083   - 
Residential collateralized mortgage obligation  9,686   -   9,686   - 
Commercial mortgage backed securities  108,162   -   108,162   - 
SBA pools  545   -   545   - 
Total $468,733  $-  $468,733  $- 

There were no financial assets or financial liabilitiesinstruments 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 March 31,September 30, 2018 or the year ended December 31, 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.

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 -As of September 30, 2018, impaired loans with a carrying value of $26.3 million had a valuation allowance of $2.2 million. As of December 31, 2017, impaired loans with a carrying value of $39.8 million had a valuation allowance of $5.2 million recorded during 2017.

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.collateral less anticipated costs to sell. The fair value of OREO was computed based on third party appraisals, which are level 3 valuation inputs.

As of 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 $39.8 million had a valuation allowance of $5.2 million recorded during 2017.

In the table below, OREO had write-downs during the threenine months ended March 31,September 30, 2018 of $19$42 thousand.  In the table below, OREO had writedowns during the year ended December 31, 2017 of $43 thousand.  The valuation adjustments on OREO have been recorded through earnings.

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

` Total  Level 1  Level 2  Level 3  Total  Level 1  Level 2  Level 3 
 (In thousands)  (In thousands) 
March 31, 2018            
September 30, 2018            
Financial Assets                        
Impaired loans $27,267  $-  $-  $27,267  $24,092  $-  $-  $24,092 
Financial Assets                
Non-Financial Assets                
OREO  93   -   -   93   222   -   -   222 
                                
December 31, 2017                                
Financial Assets                                
Impaired loans $34,600  $-  $-  $34,600  $34,600  $-  $-  $34,600 
Non-Financial Assets                                
OREO  405   -   -   405   405   -   -   405 

Assumptions used to determine impaired loans and OREO are presented below by classification, measured at fair value and on a nonrecurring basis as of March 31,September 30, 2018 and December 31, 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
March 31, 2018 (In thousands)     
September 30, 2018 (In thousands)     
Impaired loans                
Commercial $13,023 Sales comparisonAdjustments for differences of comparable sales(5.70)% to (150.00)%, (6.07)% $13,348 Sales comparisonAdjustments for differences of comparable sales(5.00)% to (150.00)%, (7.32)%
Commercial real estate  5,275 Sales comparisonAdjustments for differences of comparable sales(4.25) to (7.62), (6.07)  5,019 Sales comparisonAdjustments for differences of comparable sales(5.50) to (37.50), (7.16)
Residential real estate  5,784 Sales comparisonAdjustments for differences of comparable sales(3.13) to (7.50), (5.76)  4,400 Sales comparisonAdjustments for differences of comparable sales(3.13) to (37.50), (7.29)
Construction real estate  2,979 Sales comparisonAdjustments for differences of comparable sales(4.00) to (7.25), (6.19)  1,119 Sales comparisonAdjustments for differences of comparable sales(4.00) to (40.00), (5.97)
Installment and other  206 Sales comparisonAdjustments for differences of comparable sales(4.25) to (8.00), (6.24)  206 Sales comparisonAdjustments for differences of comparable sales(4.13) to (37.50), (7.34)
Total impaired loans $27,267      $24,092     
OREO                    
Commercial real estate $93 Sales comparisonAdjustments for differences of comparable sales(16.67)% to (16.67)%,(16.67)%  74 Sales comparisonAdjustments for differences of comparable sales(33.33)% to (33.33)%, (33.33)%
  93     
Residential real estate  148 Sales comparisonAdjustments for differences of comparable sales(3.16)% to (3.16)%, (3.16)%
Total OREO $222     

December 31, 2017         
Impaired loans         
Commercial $13,359 Sales comparisonAdjustments for differences of comparable sales(5.00)% to (100.00)%, (5.97)%
Commercial real estate  10,987 Sales comparisonAdjustments for differences of comparable sales(4.25) to (7.62), (6.63)
Residential real estate  6,774 Sales comparisonAdjustments for differences of comparable sales(3.13) to (7.80), (5.74)
Construction real estate  3,244 Sales comparisonAdjustments for differences of comparable sales(4.00) to (7.25), (6.18)
Installment and other  236 Sales comparisonAdjustments for differences of comparable sales(4.25) to (8.00), (6.27)
Total impaired loans $34,600      
OREO           
Residential real estate  315 Sales comparisonAdjustments for differences of comparable sales(9.09) to (9.09), (9.09)
Construction real estate  90 Sales comparisonAdjustments for differences of comparable sales(9.78) to (9.78), (9.78)
Total OREO $405      

20
December 31, 2017         
Impaired loans         
Commercial $13,359 Sales comparisonAdjustments for differences of comparable sales(5.00)% to (100.00)%, (5.97)%
Commercial real estate  10,987 Sales comparisonAdjustments for differences of comparable sales(4.25) to (7.62), (6.63)
Residential real estate  6,774 Sales comparisonAdjustments for differences of comparable sales(3.13) to (7.80), (5.74)
Construction real estate  3,244 Sales comparisonAdjustments for differences of comparable sales(4.00) to (7.25), (6.18)
Installment and other  236 Sales comparisonAdjustments for differences of comparable sales(4.25) to (8.00), (6.27)
Total impaired loans $34,600      
OREO           
Residential real estate $315 Sales comparisonAdjustments for differences of comparable sales(9.09) to (9.09), (9.09)
Construction real estate  90 Sales comparisonAdjustments for differences of comparable sales(9.78) to (9.78), (9.78)
Total OREO $405      
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.

- 19 -
The carrying amount and estimated fair values (representing exit price) of other financial instruments as of March 31,September 30, 2018 and December 31, 2017 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) 
March 31, 2018               
September 30, 2018               
Financial assets:                              
Cash and due from banks $10,003  $10,003  $-  $-  $10,003  $11,046  $11,046  $-  $-  $11,046 
Interest-bearing deposits with banks  9,517   9,517   -   -   9,517   3,645   3,645   -   -   3,645 
Investments:                                        
Available for sale  470,910   -   470,910   -   470,910   437,975   -   437,976   -   437,976 
Held to maturity  7,824   -   7,312   -   7,312   7,769   -   7,151   -   7,151 
Non-marketable equity securities  4,471   N/A   N/A   N/A   N/A   5,819   N/A   N/A   N/A   N/A 
Loans held for sale  6,815   -   6,815   -   6,815 
Loans, net  694,108   -   -   683,069   683,069   695,296   -   -   690,610   690,610 
Accrued interest receivable on securities  2,726   -   2,726   -   2,726   2,632   -   2,632   -   2,632 
Accrued interest receivable on loans  2,053   -   -   2,053   2,053   2,246   -   -   2,246   2,246 
Accrued interest receivable other  7           7   7   5   -   -   5   5 
                                        
Off-balance-sheet instruments:                                        
Loan commitments and standby letters of credit $24  $-  $24  $-  $24  $27  $-  $27  $-  $27 
                                        
Financial liabilities:                                        
Non-interest bearing deposits $163,134  $163,134  $-  $-  $163,134  $175,655  $175,655  $-  $-  $175,655 
Interest bearing deposits  980,960   -   979,054   -   979,054   921,758   -   919,644   -   919,644 
Long-term borrowings  2,300   -   2,540   -   2,540 
Borrowings  15,400   -   15,591   -   15,591 
Junior subordinated debt  26,764   -   -   17,572   17,572   26,766   -   -   17,750   17,750 
Accrued interest payable  279   -   168   111   279   284   -   175   109   284 

December 31, 2017                              
Financial assets:                              
Cash and due from banks $12,893  $12,983  $-  $-  $12,983  $12,893  $12,983  $-  $-  $12,983 
Interest-bearing deposits with banks  22,541   22,541   -   -   22,541   22,541   22,541   -   -   22,541 
Securities purchased under resell agreements  -   -   -   -   -   -   -   -   -   - 
Investments:  -   -   -   -   -                     
Available for sale  468,733   -   468,733   -   468,733   468,733   -   468,733   -   468,733 
Held to maturity  7,854   -   7,369   -   7,369   7,854   -   7,369   -   7,369 
Non-marketable equity securities  3,617   N/A   N/A   N/A   N/A   3,617   N/A   N/A   N/A   N/A 
Loans, net  686,341   -   -   680,911   680,911   686,341   -   -   680,911   680,911 
Accrued interest receivable on securities  2,795   -   2,795   -   2,795   2,795   -   2,795   -   2,795 
Accrued interest receivable on loans  2,238   -   -   2,238   2,238   2,238   -   -   2,238   2,238 
Accrued interest receivable other  21   -   -   21   21   21   -   -   21   21 
                                        
Off-balance-sheet instruments:                                        
Loan commitments and standby letters of credit $23  $-  $23  $-  $23  $23  $-  $23  $-  $23 
                                        
Financial liabilities:                                        
Non-interest bearing deposits $161,677  $161,677  $-  $-  $161,677  $161,677  $161,677  $-  $-  $161,677 
Interest bearing deposits  965,670   -   964,717   -   964,717   965,670   -   964,717   -   964,717 
Long-term borrowings  2,300   -   2,592   -   2,592   2,300   -   2,592   -   2,592 
Junior subordinated debt  37,116   -   -   27,128   27,128   37,116   -   -   27,128   27,128 
Accrued interest payable  628   -   172   456   628   628   -   172   456   628 

21
Note 17. Regulatory Matters

The ability to paypayment of dividends by any financial institution is affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations, and a financial institution generally is prohibited from paying any dividends if, following payment thereof, the institution would be undercapitalized.

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.

Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies.  Failure to meet capital requirements can initiate regulatory action.  The Basel III Rules became effective for 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" of the 2017 Form 10-K, for further discussion regarding the Basel III Rules.  The Company and the Bank met all capital adequacy requirements to which they were subject as of March 31,September 30, 2018 and December 31, 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
  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 
                   (Dollars in thousands) 
March 31, 2018                  
September 30, 2018                  
Total capital (to risk-weighted assets):                                    
Consolidated $144,143   16.8772% $68,326   8.0000%  N/A   N/A  $151,865   17.5493% $69,229   8.00%  N/A   N/A 
Bank only  137,691   16.1420%  68,240   8.0000% $85,300   10.0000%  146,106   16.9333%  69,027   8.00% $86,283   10.00%
Tier 1 capital (to risk weighted assets):                                                
Consolidated  133,453   15.6256%  51,244   6.0000%  N/A   N/A   142,186   16.4308%  51,922   6.00%  N/A   N/A 
Bank only  127,014   14.8903%  51,180   6.0000%  68,240   8.0000%  136,427   15.8115%  51,770   6.00%  69,027   8.00%
Common Equity Tier 1 Capital (to risk weighted assets):                                                
Consolidated  107,453   12.5813%  38,433   4.5000%  N/A   N/A   116,952   13.5148%  38,941   4.50%  N/A   N/A 
Bank only  127,014   14.8903%  38,385   4.5000%  55,445   6.5000%  136,427   15.8115%  38,827   4.50%  56,084   6.50%
Tier 1 leverage (to average assets):                                                
Consolidated  133,453   10.4275%  51,193   4.0000%  N/A   N/A   142,186   11.2026%  50,769   4.00%  N/A   N/A 
Bank only  127,014   9.9331%  51,148   4.0000%  63,935   5.0000%  136,427   10.7753%  50,644   4.00%  63,306   5.00%

N/A—not applicable

 Actual  
For Capital Adequacy
Purposes
  
To be well capitalized
under prompt
corrective action
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 
                   (Dollars in thousands) 
December 31, 2017                                    
Total capital (to risk-weighted assets):                                    
Consolidated $152,076   18.1982% $66,853   8.0000%  N/A   N/A  $152,076   18.1982% $66,853   8.00%  N/A   N/A 
Bank only  134,959   16.1823%  66,720   8.0000% $83,399   10.0000%  134,959   16.1823%  66,720   8.00% $83,399   10.00%
Tier 1 capital (to risk weighted assets):                                                
Consolidated  132,900   15.9035%  50,140   6.0000%  N/A   N/A   132,900   15.9035%  50,140   6.00%  N/A   N/A 
Bank only  124,481   14.9259%  50,040   6.0000%  66,720   8.0000%  124,481   14.9259%  50,040   6.00%  66,720   8.00%
Common Equity Tier 1 Capital (to risk weighted assets):                                                
Consolidated  106,320   12.7228%  37,605   4.5000%  N/A   N/A   106,320   12.7228%  37,605   4.50%  N/A   N/A 
Bank only  124,481   14.9259%  37,530   4.5000%  54,210   6.5000%  124,481   14.9259%  37,530   4.50%  54,210   6.50%
Tier 1 leverage (to average assets):                                                
Consolidated  132,900   10.1821%  33,427   4.0000%  N/A   N/A   132,900   10.1821%  33,427   4.00%  N/A   N/A 
Bank only  124,481   9.6006%  33,360   4.0000%  41,700   5.0000%  124,481   9.6006%  33,360   4.00%  41,700   5.00%

N/A - not applicable

The Bank's capital ratios fall into the category of "well-capitalized" as of  March 31,September 30, 2018 and 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 March 31,September 30, 2018 the Bank's capital conservation buffer was 8.1420%8.9333% and the consolidated capital conservation buffer was 8.0813%9.0148%.  At December 31, 2017 the Bank's capital conservation buffer was 8.1823% and the consolidated capital conservation buffer was 8.2228%.

- 21 -22
Note 18. Subsequent Event

On November 1, 2018, the Company and the Bank entered into an agreement and plan of merger (the "merger agreement") with Enterprise Financial Services Corp ("EFSC") and its wholly-owned subsidiary, Enterprise Bank & Trust ("EB&T"), pursuant to which the Company will merge with and into EFSC, with EFSC surviving (the "merger").  Immediately following the merger, the Bank will merge with and into EB&T, with EB&T surviving.

The board of directors of each party to the merger agreement has approved the merger.  The completion of the merger is subject to customary closing conditions, including the approval of the Company's shareholders and bank regulatory approvals, and is expected to close in early 2019.  Directors and certain shareholders and executive officers of the Company have entered into agreements with EFSC pursuant to which they have committed to vote their shares of Company common stock in favor of the merger.

Under the terms of the merger agreement and upon completion of the merger, holders of Company common stock will have the right to receive 0.1972 shares of EFSC common stock and $1.84 in cash for each share of TCC common stock they hold, subject to certain adjustments. Based on EFSC's closing price of $43.45 per share on October 31, 2018, the merger consideration mix would result in a total of approximately $38 million in cash and $175 million in EFSC shares.



23
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 audited 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, 2017 ("2017 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 including difficulties and delays in integrating the Company and EFSC and achieving anticipated synergies, cost savings and other benefits from the merger; higher than anticipated merger costs; deposit attrition, operating costs, customer loss and business disruption following the merger, including difficulties in maintaining relationships with employees, may be greater than expected; required governmental approvals of the merger may not be obtained on the merger's proposed terms and schedule, or without regulatory constraints that may limit growth, and those additional risks are detailed in the "Risk Factors" section included under Item 1A of Part I of the 2017 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.

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 2017 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 2017 Form 10-K.

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 as well asand noninterest expenses such as computer services, supplies, postage, telecommunications and other miscellaneous expenses.

Net Income (Loss).

Net income availableattributable to common shareholdersstockholders for the three months ended March 31,September 30, 2018 was $1.7$3.5 million, or a diluted earnings per common share of $0.09,$0.18, compared to net loss availableincome attributable to common shareholdersstockholders of $1.3 million$405 thousand for the three months ended March 31,September 30, 2017, or dilutedearnings per common share of $0.02, representing an increase of $3.1 million in net income and an increase of $0.16 in earnings per common share.  This increase in net income attributable to common stockholders was primarily due to a decrease in other noninterest expenses of $936 thousand due to an ESOP restorative contribution accrual in 2017 and $287 thousand due to a true-up of the unfunded commitment reserve,  an increase in the reverse provision for loan loss of $750 thousand, a decrease in the change in value of MSRs of $677 thousand due to the sale of the loan servicing portfolio in 2017, an increase in tax exempt investment securities interest income of $536 thousand, a decrease in salaries and benefits of $258 thousand, a decrease in legal, professional, and accounting expense of $224 thousand, a decrease in data processing expense of $180 thousand, a decrease in regulatory premium expense of $149 thousand, and increase in BOLI income of $130 thousand, an increase in loans held for sale interest income of $125 thousand, and an increase in trust and investment fees of $106 thousand.  These were partially offset by a decrease in loan interest income of $482 thousand, a decrease in mortgage loan servicing income of $446 thousand due to the sale of the loan servicing portfolio in 2017, a decrease in income taxes of $442 thousand partially offset by an increase in deferred tax asset valuation allowance of $347 thousand, an increase in collection expenses of $303 thousand due to a recovery of collection legal expenses in 2017, a decrease in junior subordinated debt of $236 thousand due to the early redemption of the Trust I trust preferred securities, a decrease in interest income on due from accounts of $174 thousand due to lower balances, a decrease in taxable investment securities of $159 thousand, and a decrease in mortgage referral fees of $143 thousand due to lower volume.

Net income attributable to common stockholders for the nine months ended September 30, 2018 was $9.5 million, or earnings per common share of $0.48, compared to net loss attributable to common stockholders of $2.5 million for the nine months ended September 30, 2017, or loss per common share of $0.10,$0.16, an increase of $2.9$12.0 million in net income and an increase in diluted earnings per common share of $0.19.$0.64.  This increase in net income availableattributable to common shareholdersstockholders was primarily due to a decrease in legal, professional, and accounting fees of $1.7$2.5 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 to the redemption of shares of Series A and Series B Preferred Stock, an increase in tax-exempt investment interestsecurities income of $702 thousand,$2.0 million, a decrease in salaries and employee benefits of $486$1.6 million, a decrease in the change in value of MSRs of $1.4 million due to the sale of the loan servicing portfolio in 2017, a decrease in loss on sale of investment securities of $1.2 million, a decrease in other noninterest expenses if $936 thousand due to the ESOP restorative contribution accrual in 2017 and $287 thousand due to the true-up of the unfunded commitment reserve, a decrease in income taxes of $1.3 million partially offset by an increase in deferred tax asset valuation allowance of $347 thousand, a decrease in preferred stock dividends and discount accretion of $770 thousand, an increase on venture capital investment income of $756 thousand primarily due to a recovery on an investment that was previously written down, a decrease in data processing expenses of $345$663 thousand, a decrease in collections expenses of $647 thousand, a decrease in regulatory premium expense of $547 thousand, a decrease in junior subordinated debt of $411 thousand due to the renegotiationearly redemption of the core system contractTrust I trust preferred securities, an increase in the fourth quarterBOLI income of 2017, a decrease in collection expenses of $324 thousand, a decrease in the valuation of the MSR assets of $238$385 thousand due to the salepurchase of that asset, and transfer of the mortgage loan servicing portfolio,additional BOLI investments 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 feesincome of $146$302 thousand, an increase in BOLI incomereverse provision for loan losses of $127 thousand due to additional BOLI investments in 2017, a decrease in directors' related expenses of $108$260 thousand, a decrease in recruitingfurniture and equipment expense of $193 thousand, a decrease in employee recruitment expense of $185 thousand, a decrease in check card expenses of $91$127 thousand, a decrease in customer relations and sponsorships of $126 thousand, and a decrease in postageemployee travel and training expenses of $80$110 thousand.  These were partially offset by a decreasedecreases in loan interest income of $1.2$2.3 million, a decrease in mortgage loan servicing income of $1.4 million due to the sale of the loan servicing portfolio in 2017, a decrease in taxable investment securities income of $581 thousand, a decrease in mortgage referral fees of $488$301 thousand due to the Bank's strategy to generate applications for non-affiliated mortgage companies on a fee basis,decrease volume, and a decrease in gains on saleinterchange fees of OREO of $287 thousand, an increase of $190 thousand in provision expense, and an increase in occupancy expenses of $99$230 thousand.

- 22 -24
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 March 31,  Three Months Ended September 30, 
 2018  2017  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:                  
Loans(1) $696,922  $8,079   4.68% $779,447  $9,307   4.84%
Interest-earning Assets:                  
Loans held for sale $6,804  $125   7.30% $-  $-   - 
Loans (1)  704,210   8,534   4.82%  742,994   9,016   4.83%
Taxable investment securities  326,319   1,582   1.94%  416,521   1,672   1.63%  305,431   1,506   1.97%  340,534   1,665   1.96%
Investment securities exempt from federal income taxes  162,565   1,038   2.55%  42,122   246   2.37%  163,077   1,042   2.56%  81,246   506   2.49%
Other interest-bearing deposits  13,356   58   1.77%  51,866   106   0.83%  3,668   19   2.00%  71,813   222   1.23%
Non-marketable equity securities  4,212   55   5.30%  4,004   55   5.57%  5,121   59   4.55%  3,975   53   5.31%
Total interest-earning assets  1,203,374   10,812   3.62%  1,293,960   11,386   3.57%  1,188,311   11,285   3.78%  1,240,562   11,462   3.68%
Non-interest-earning assets  73,430           57,906           74,407           68,684         
Total assets $1,276,804          $1,351,866          $1,262,718          $1,309,246         
Interest-bearing liabilities:                        
Interest-bearing Liabilities:                        
Deposits:                                                
NOW deposits $388,817  $65   0.07% $392,990  $62   0.06% $376,374  $64   0.07% $375,275  $62   0.07%
Money market deposits  19,135   4   0.09%  17,652   4   0.09%  19,466   4   0.09%  17,480   4   0.09%
Savings deposits  387,760   76   0.08%  409,958   82   0.08%  379,479   75   0.08%  401,057   81   0.08%
Time deposits over $100,000  87,331   158   0.73%  131,638   200   0.62%  77,915   161   0.82%  99,290   176   0.70%
Time deposits under $100,000  81,803   109   0.54%  77,591   111   0.58%  73,683   120   0.65%  88,469   109   0.49%
Short-term borrowings  3,444   17   1.86%  -   -   0.00%  15,895   94   2.37%  -   -   - 
Long-term borrowings  2,300   36   6.34%  2,300   36   6.35%  2,300   37   6.34%  2,300   37   6.34%
Long-term capital lease obligation  -   -   0.00%  2,211   -   0.00%  -   -   0.00%  -   -   0.00%
Junior subordinated debt  34,228   787   9.19%  37,116   720   7.87%  26,765   363   5.30%  36,934   599   6.36%
Total interest-bearing liabilities  1,004,818   1,252   0.50%  1,071,456   1,215   0.46%  971,877   918   0.37%  1,020,805   1,068   0.41%
Demand deposits, noninterest-bearing  159,899           160,790           176,270           171,882         
Other noninterest-bearing liabilities  8,218           14,163           6,185           13,073         
                                                
Shareholders' equity, including stock owned by ESOP  103,869           105,457         
Total liabilities and shareholders' equity $1,276,804          $1,351,866         
Stockholders' equity, including stock owned by ESOP  108,386           103,486         
Total liabilities and stockholders' equity $1,262,718          $1,309,246         
Net interest income/interest rate spread (2)     $9,560   3.12%     $10,171   3.11%     $10,367   3.41%     $10,394   3.27%
Net interest margin (3)          3.20%          3.19%          3.44%          3.34%

(1)Average loans include nonaccrual loans of $14.7$7.3 million and $16.1$13.8 million for the three months ended March 31,September 30, 2018 and 2017, respectively.  Interest income includes loan origination fees of $49$93 thousand and $275$195 thousand for the three months ended March 31,September 30, 2018 and 2017, 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.

25
  Nine Months Ended September 30, 
  2018  2017 
  Average Balance  Interest  Yield/Rate  Average Balance  Interest  Yield/Rate 
        (Dollars in thousands)       
Interest-earning Assets:                  
Loans held for sale $3,082  $167   7.26% $-  $-   - 
Loans (1)  702,589   25,272   4.80%  763,657   27,613   4.83%
Taxable investment securities  317,152   4,562   1.92%  387,713   5,143   1.77%
Investment securities exempt from federal income taxes  163,145   3,127   2.56%  59,398   1,085   2.44%
Other interest-bearing deposits  6,782   92   1.79%  47,984   406   1.13%
Non-marketable equity securities  4,709   164   4.66%  3,997   161   5.39%
Total interest-earning assets  1,197,459   33,384   3.72%  1,262,749   34,408   3.64%
Non-interest-earning assets  74,397           66,868         
Total assets $1,271,856          $1,329,617         
Interest-bearing Liabilities:                        
Deposits:                        
NOW deposits $385,956  $197   0.07% $387,986  $189   0.07%
Money market deposits  19,492   13   0.09%  17,333   12   0.09%
Savings deposits  382,977   226   0.08%  405,933   245   0.08%
Time deposits over $100,000  82,399   476   0.77%  102,709   559   0.73%
Time deposits under $100,000  77,619   343   0.59%  94,589   328   0.46%
Short-term borrowings  12,459   204   2.17%  495   4   1.10%
Long-term borrowings  2,300   109   6.34%  2,300   109   6.34%
Long-term capital lease obligation  -   -   0.00%  1,401   -   0.00%
Junior subordinated debt  29,225   1,501   6.77%  37,054   1,913   6.81%
Total interest-bearing liabilities  992,427   3,069   0.41%  1,049,800   3,359   0.42%
Demand deposits, noninterest-bearing  167,477           158,850         
Other noninterest-bearing liabilities  6,539           17,132         
                         
Stockholders' equity, including stock owned by ESOP  105,413           103,835         
Total liabilities and stockholders' equity $1,271,856          $1,329,617         
Net interest income/interest rate spread (2)     $30,315   3.31%     $31,049   3.22%
Net interest margin (3)          3.36%          3.29%

(1)Average loans include nonaccrual loans of $11.3 million and $14.5 million for the nine months ended September 30, 2018 and 2017, respectively.  Interest income includes loan origination fees of $208 thousand and $827 thousand for the nine months ended September 30, 2018 and 2017, 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 $611$27 thousand to $9.6$10.4 million as of March 31,for the three months ended September 30, 2018 from $10.2$10.4 million as of March 31,for the three months ended September 30, 2017 due to lowera decrease in interest income of $574$177 thousand and an increasea decrease in interest expense of $37 thousand from 2017.$150 thousand.  Net interest income decreased primarily due to a lowerdecrease in average volume of other interest-bearing deposits of $68.1 million, a decrease in average volume of loans of $38.8 million, and a decrease in average volume of taxable investment securities of $90.2 million, a lower average volume in loans of $82.5 million, and a lower average volume in other interest-bearing deposits of $38.5$35.1 million, partially offset by an increase in average tax-exempt investment securities of $120.4$81.8 million and an increase in average volume of loans held for sale of $6.8 million.  The changenet reduction 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 five10 basis points to 3.62%3.78% for the three months ended March 31,September 30, 2018 from 3.57%3.68% for the three months ended March 31,September 30, 2017.  The increasedecrease in interest expense was primarily due to a decrease in the average volume of time deposits of $36.2 million, a decrease in average volume in savings deposits of $21.6 million, and a decrease in average junior subordinated debt interest expense increasing by $67 thousandof $10.2 million due to the early payoff,redemption of the Trust I trust preferred securities.  This was partially offset by an increase 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 redemption rate of 101.088% but were carried at an interest rate of 10.875%.  Total deposits average volume decreased $65.0in short-term borrowings of $15.9 million, with the largest declinean increase in average volume in money market deposits of $2.0 million, and an increase in average volume in NOW deposits of $1.1 million.  The reduction in volume in total time deposits of $40.1 million.  The increase in subordinated debt expense and shift in deposit mix caused the cost of interest-bearing liabilities to increasedecline four basis points to 0.50%0.37% for the three months ended March 31,September 30, 2018 from 0.46%0.41% for the three months ended March 31,September 30, 2017.  Net interest margin increased oneten basis pointpoints to 3.20%3.44% for the three months ended March 31,September 30, 2018 from 3.19%3.34% for the three months ended March 31,September 30, 2017.

Net interest income decreased $734 thousand to $30.3 million for the nine months ended September 30, 2018 from $31.0 million for the nine months ended September 30, 2017 due to a decrease in interest income of $1.0 million and a decrease in interest expense of $290 thousand.  Net interest income decreased primarily due to a decrease in average volume of taxable investment securities of $70.6 million, a decrease in average volume of loans of $61.1 million, and a decrease in average volume of other interest bearing deposits of $41.2 million, partially offset by an increase in average volume of tax-exempt securities of $103.7 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 eight basis points to 3.72% for the nine months ended September 30, 2018 from 3.64% for the nine months ended September 30, 2017.  The decrease in interest expense was primarily due to a decrease in the average volume of time deposits of $37.3 million, a decrease in average volume of savings deposits of $23.0 million, a decrease in average volume in junior subordinated debt of $7.8 million due to the early redemption of the Trust I trust preferred securities, and a decrease in average volume of NOW deposits of $2.0 million, partially offset by an increase in average volume of short-term borrowings of $12.0 million, and an increase in average volume of money market deposits of $2.2 million.  The reduction in volume and shift in mix caused the cost of interest-bearing liabilities to decrease one basis point to 0.41% for the nine months ended September 30, 2018 from 0.42% at September 30, 2017.  Net interest margin increased seven basis points to 3.36% for the nine months ended September 30, 2018 from 3.29% for the nine months ended September 30, 2017.

- 23 -26
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 March 31,  Three Months Ended September 30, 
 2018 Compared to 2017  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 held for sale $125  $-  $125 
Loans $(985) $(243) $(1,228)  (471)  (11)  (482)
Taxable investment securities  (362)  272   (90)  (172)  13   (159)
Investment securities exempt from federal income taxes  703   89   792   510   26   536 
Other interest bearing deposits  (79)  31   (48)  (211)  8   (203)
Non-marketable equity securities  3   (3)  -   15   (9)  6 
Total (decrease) increase in interest income $(720) $146  $(574) $(204) $27  $(177)
Interest-bearing Liabilities:                        
NOW deposits $(1) $4  $3 
Now deposits $-  $2  $2 
Money market deposits  -   -   -   -   -   - 
Savings deposits  (4)  (2)  (6)  (4)  (2)  (6)
Time deposits over $100,000  (67)  25   (42)  (38)  23   (15)
Time deposits under $100,000  6   (8)  (2)  (18)  29   11 
Short-term borrowings  -   16   16   94   -   94 
Long-term borrowings  -   -   -   -   -   - 
Capital long-term lease obligation  -   -   - 
Junior subordinated debt  (56)  123   67   (165)  (71)  (236)
Total increase (decrease) in interest expense $(122) $158  $36  $(131) $(19) $(150)
Increase (decrease) in net interest income $(598) $(12) $(610) $(73) $46  $(27)

  Nine Months Ended September 30, 
  2018 Compared to 2017 
  
Change Due
to Volume
  
Change Due
to Rate
  
Total
Change
 
  (In thousands) 
Interest-earning Assets:         
Loans held for sale $167  $-  $167 
Loans  (2,208)  (133)  (2,341)
Taxable investment securities  (936)  355   (581)
Investment securities exempt from federal income taxes  1,895   147   2,042 
Other interest bearing deposits  (349)  35   (314)
Non-marketable equity securities  29   (26)  3 
Total (decrease) increase in interest income $(1,402) $378  $(1,024)
Interest-bearing Liabilities:            
Now deposits $(1) $9  $8 
Money market deposits  1   -   1 
Savings deposits  (14)  (5)  (19)
Time deposits over $100,000  (111)  28   (83)
Time deposits under $100,000  (59)  74   15 
Short-term borrowings  200   -   200 
Long-term borrowings  -   -   - 
Capital long-term lease obligation  -   -   - 
Junior subordinated debt  (404)  (8)  (412)
Total increase (decrease) in interest expense $(388) $98  $(290)
Increase (decrease) in net interest income $(1,014) $280  $(734)

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,September 30, 2018 and March 31,September 30, 2017 was $11.2$9.5 million and $14.2$13.2 million, respectively, representing 1.6%1.4% and 1.8% of total loans, respectively, as of such dates. We recorded a $220 thousand$1.0 million reverse provision for loan losses for the three months ended March 31,September 30, 2018 compared with a reverse provision for loan losses of $30$250 thousand for the three months ended March 31,September 30, 2017. For the nine months ended September 30, 2018 and September 30, 2017 we recorded a reverse provision for the loan losses of $1.5 million and $1.2 million, respectively.  The increase in thereverse provision was primarily due to an increaseimproving credit quality, a decrease in impaired loan balances.balances, and decreasing delinquencies.  See the "Financial Condition" section below for further information on provision for loan losses.

27
Noninterest Income. Changes in noninterest income were as follows for the periods indicated:

 
Three Months Ended
March 31, 2018,
     Three Months Ended September 30,     Nine Months Ended September 30,    
 2018  2017  Net difference  2018  2017  Net Difference  2018  2017  Net Difference 
 (In thousands)  (In thousands) 
Noninterest income:                           
Mortgage loan servicing fees $(2) $486  $(488) $-  $446  $(446) $-  $1,394  $(1,394)
Trust and investment services fees  797   651   146   749   643   106   2,255   1,953   302 
Service charges on deposits  254   295   (41)  226   202   24   712   784   (72)
Net gain (loss) on sale of OREO  41   328   (287)
Net gain on sale of loans  -   -   - 
Net gain (loss) on sale of securities  -   -   - 
Net gain on sale of OREO  191   130   61   764   800   (36)
Net (loss) gain on sale of securities  -   -   -   -   (1,248)  1,248 
BOLI income  218   91   127   218   88   130   656   271   385 
Mortgage referral fees  245   327   (82)  288   431   (143)  874   1,175   (301)
Interchange fees  496   630   (134)  507   567   (60)  1,593   1,823   (230)
Other fees  303   288   15   301   312   (11)  936   984   (48)
Venture capital investment income  -   -   -   735   (21)  756 
Other noninterest income  6   (21)  27   18   13   5   32   85   (53)
Total noninterest income $2,358  $3,075  $(717) $2,498  $2,832  $(334) $8,557  $8,000  $557 

Noninterest income decreased $717$334 thousand to $2.4$2.5 million for the three months ended March 31,September 30, 2018 from $3.1$2.8 million for the three months ended March 31,September 30, 2017, primarily attributable to athe decrease of $488 thousand in mortgage loan servicing fees of $446 thousand, a decrease in mortgage referral fees of $143 thousand, and a decrease in interchange fees of $60 thousand.  This was partially offset by an increase in BOLI income of $130 thousand, an increase in trust and investment fees of $106 thousand, an increase in gain on sale of OREO of $61 thousand, and an increase in service charges on deposit accounts of $24 thousand.

Noninterest income increased $557 thousand to $8.6 million for the nine months ended September 30, 2018 from $8.0 million for the nine months ended September 30, 2017, primarily attributable to the decrease in loss on sale of securities of $1.2 million, an increase in venture capital investment income of $756 thousand resulting from a recovery on an investment that was previously written down, an increase in BOLI income of $385 thousand due to additional investments in 2017, and an increase in trust and investment fees of $302 thousand.  This was partially offset by a decrease in mortgage loan servicing fees of $1.4 million due to the sale of the MSR asset and servicing portfolio at the end ofin 2017, a decrease of $287 thousand in gains on sale of OREO, a decrease of $82 thousand in mortgage referral fees of $301 thousand, a decrease of $134 thousand in interchange fees primarily due to one-time true up of interchange fees in 2017,$230 thousand, and a decrease of $41 thousand in service charges on deposits.  Those decreases were partially offset by an increasedeposit accounts of $146 thousand in trust and investment fees, an increase of $127 thousand in BOLI income due to additional BOLI investments in 2017, and a decrease in venture capital expenses of $43$72 thousand.

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

 Three Months Ended March 31,     Three Months Ended September 30,     Nine Months Ended September 30,    
 2018  2017  Net difference  2018  2017  Net Difference  2018  2017  Net Difference 
 (In thousands)  (In thousands) 
Noninterest expenses:                           
Salaries and employee benefits $5,551  $6,037  $(486) $5,410  $5,668  $(258) $16,286  $17,913  $(1,627)
Occupancy  590   491   99   522   553   (31)  1,592   1,590   2 
Data processing  1,029   1,374   (345)  952   1,132   (180)  2,894   3,557   (663)
Legal, professional, and accounting fees  525   2,212   (1,687)  488   712   (224)  1,540   3,998   (2,458)
Amortization and valuation of MSRs  -   238   (238)
Change in value of MSRs  -   677   (677)  -   1,406   (1,406)
Other noninterest expenses:                                    
Marketing  106   160   (54)  89   112   (23)  355   474   (119)
Supplies  56   77   (21)  40   44   (4)  130   233   (103)
Postage  54   134   (80)  63   64   (1)  172   270   (98)
FDIC insurance premiums  127   311   (184)  72   182   (110)  289   705   (416)
Collection expenses  186   510   (324)  130   (173)  303   438   1,085   (647)
Other  1,589   2,372   (783)  1,280   2,702   (1,422)  4,571   7,243   (2,672)
Total other noninterest expenses  2,118   3,564   (1,446)  1,674   2,931   (1,257)  5,955   10,010   (4,055)
Total noninterest expenses $9,813  $13,916  $(4,103) $9,046  $11,673  $(2,627) $28,267  $38,474  $(10,207)

Noninterest expenses decreased $4.1$2.6 million to $9.8$9.0 million for the three months ended March 31,September 30, 2018 from $13.9$11.7 million for the three months ended March 31,September 30, 2017. NoninterestThere were decreases in all categories except collection expenses decreasedwhich was due to a recovery in almost all categories2017 of legal fees of $500 thousand.  Most notably, change in value of MSRs of $677 thousand due to the strategic business review initiativesale of the servicing loan portfolio in 2017.  Decreases were realized2017, a decrease in other noninterest expenses of $936 thousand due to an ESOP restorative contribution accrual in 2017 and $287 thousand due to the true-up of the provision for unfunded commitments, a decrease in salaries and benefit expenses of $258 thousand, a decrease in legal, professional, and accounting fees of $1.7$224 thousand, and a decrease in data processing expenses of $180 thousand.

Noninterest expenses decreased $10.2 million due to finalizing$28.3 million for the 2016 financial statement auditnine months ended September 30, 2018 from $38.5 million for the nine months ended September 30, 2017. There were decreases in 2017,all categories except occupancy expenses which were relatively flat.  Most notably,  decrease in legal, professional, and accounting fees of $2.4 million, a decrease in salaries and benefits of $486 thousand which is reflective$1.6 million, a decrease in the change in value of MSRs of $1.4 million due to the sale of the reductionloan servicing portfolio in force completed2017, a decrease in other noninterest expenses of $936 thousand due to an ESOP restorative contribution accrual in 2017 and $287 thousand due to the true-up of the provision for unfunded commitments, a decrease in data processing expenses of $345$663 thousand, which reflects the cost savings from the contract renegotiation completed at the end of 2017,a decrease in collection expenses of $324$647 thousand, a decrease in the valueFDIC insurance premiums of the MSR asset of $238$416 thousand, which reflects the sale of the MSR asset and transfer of the servicing portfolio at the end of 2017,a decrease 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 relatedmarketing expenses of $108$119 thousand, in recruiting expenses of $91 thousand, in postageand a decrease on supplies expense of $80 thousand, in customer perks and sponsorships of $78 thousand, in employee education and travel expenses of $57 thousand, and in fraud losses of $54$103 thousand.  These decreases were partially offset by an increase of $99 thousand in 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 $1.3 million provision for income taxes for the three months ended March 31,September 30, 2018 of $193 thousand.  There wasand a benefit$2.6 million provision for income taxes for the nine months ended September 30, 2018 compared to a $1.4 million provision for income taxes for the three months ended March 31,September 30, 2017 and $3.5 million provision for income taxes for the nine months ended September 30, 2017.  For further discussion of $214 thousand.income taxes, see Note 12 "Income Taxes" in Part I, Item 1, of this Form 10-Q.

28
Financial Condition

Balance Sheet-General. Total assets as of March 31,September 30, 2018 were $1.28$1.25 billion, decreasing $4.5$33.9 million from $1.29 billion as of December 31, 2017.  During the first quarternine months of 2018, interest bearinginterest-bearing deposits with banks decreased $13.0 million from December 31, 2017 while net loans increased $7.8$18.9 million and investment securities increased $2.1available for sale decreased $30.8 million, from December 31, 2017.but were partially offset by an increase in loans of $9.0 million and loans held for sale of $6.8 million.  During the same period total liabilities decreased to $1.18$1.15 billion, a decrease of $415 thousand.  Shareholders'$36.2 million, primarily due to a decrease in junior subordinated debt of $10.2 million due to the early redemption of the Trust I trust preferred securities and a decrease in deposits of $29.9 million, partially offset by an increase in short-term borrowings of $13.1 million.  Stockholders' equity (excluding stock owned by the ESOP) decreased $4.1increased $3.0 million to $95.5$102.6 million as of March 31,September 30, 2018 compared to $99.6 million as of December 31, 2017 primarily as a result ofdue to the changeyear-to-date earnings and partially offset by the increase in accumulated other comprehensive income due to the decrease in market value ofon the investmentavailable for sale securities 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 2017 Form 10-K.

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

 At March 31, 2018  At December 31, 2017  At September 30, 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 agency $69,310  $67,677  $69,315  $68,551 
State and political subdivision  163,991   160,478   157,652   158,706 
Residential mortgage-backed security  120,195   118,111   124,578   123,083 
Residential collateralized mortgage obligation  18,294   18,164   9,715   9,686 
Commercial mortgage backed security  110,244   105,941   110,483   108,162 
U.S. government sponsored agencies $69,300  $67,004  $69,315  $68,551 
State and political subdivisions  162,628   157,544   157,652   158,706 
Residential mortgage-backed securities  95,703   93,643   124,578   123,083 
Residential collateralized mortgage obligations  15,119   14,979   9,715   9,686 
Commercial mortgage backed securities  109,725   104,337   110,483   108,162 
SBA pools  554   539   560   545   486   468   560   545 
Totals $482,588  $470,910  $472,303  $468,733  $452,961  $437,975  $472,303  $468,733 
                                
Securities Held to Maturity:                                
SBA pools $7,824  $7,312  $7,854  $7,369  $7,769  $7,151  $7,854  $7,369 
Totals $7,824  $7,312  $7,854  $7,369  $7,769  $7,151  $7,854  $7,369 

U.S. government sponsored agency securities generally consist of fixed rate securities with maturities from two months to five years.  StateStates and political subdivision investment securities consist of a local issue rated Aaafrom "Aaa" to Aa2"Aa3" by Moody's Investment Services with maturities of four monthsone month to eighteen years.

The Company had a total of $18.2$15.1 million in residential collateralized mortgage obligations as of March 31,September 30, 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 March 31,September 30, 2018, the ratings of these securities were AaaA+ to BBB by Standard & Poors and Aaa to Ba1Ba2 by Moody's Investor Service.  Investment grade ratings of BBB- by Standard & Poors and Baa3 by Moody's Investor Service whichor higher are considered Investment Grade (rating of BBB or higher)"Investment Grade".  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 March 31,September 30, 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 March 31,September 30, 2018, and December 31, 2017, securities of no single issuer exceeded 10% of shareholders'stockholders' 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 March 31, 2018 (Dollars in thousands) 
As of September 30, 2018 (Dollars in thousands) 
Securities Available for Sale:                                                
U.S. government sponsored agency $-   0.00% $62,500   1.87% $5,177   2.27% $-   0.00%
States and political subdivision (1)  200   1.20%  1,508   1.91%  1,310   2.54%  157,460   2.56%
U.S. Government sponsored agencies $-   0.00% $67,004   1.90% $-   0.00% $-   0.00%
States and political subdivisions (1)  200   1.50%  1,696   2.08%  3,189   2.54%  152,459   2.56%
Mortgage backed  4   1.22%  39,118   1.88%  65,132   2.32%  137,962   2.40%  -   0.00%  42,770   1.93%  59,892   2.31%  110,297   2.73%
SBA pools  -   0.00%  -   0.00%  -   0.00%  539   2.12%  -   0.00%  -   0.00%  -   0.00%  468   2.61%
Asset-backed security  -   0.00%  -   0.00%  -   0.00%  -   0.00%
Totals $204   1.20% $103,126   1.87% $71,619   2.32% $295,961   2.49% $200   1.50% $111,470   1.91% $63,081   2.32% $263,224   2.63%
Securities Held to Maturity:                                                                
SBA pools $-   0.00% $-   0.00% $-   0.00% $7,824   3.89% $-   0.00% $-   0.00% $-   0.00% $7,769   3.90%
Totals $-   0.00% $-   0.00% $-   0.00% $7,824   3.89% $-   0.00% $-   0.00% $-   0.00% $7,769   3.90%

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

29
Loan Portfolio. As the Company addressed other pressing issues in prior years, levels of total loans decreased steadily from 2012 through 2017.  While the Bank has seen an overall increase in loan demand remains weak in our markets, management is working to increase its portfolioduring the first six months of performing loans.  The total2018, the amounts in the residential real estate portfolio hascontinue to steadily decreaseddecrease primarily due to the Bank's refined lending strategy to generate 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:

 March 31, 2018  December 31, 2017  September 30, 2018  December 31, 2017 
 Amount  Percent  Amount  Percent  Amount  Percent  Amount  Percent 
 (Dollars in thousands)  (Dollars in thousands) 
Commercial $67,557   9.57% $61,388   8.76% $63,539   9.00% $61,388   8.76%
Commercial real estate  384,247   54.41%  378,802   54.04%  404,790   57.33%  378,802   54.04%
Residential real estate  169,559   24.01%  178,296   25.43%  155,118   21.97%  178,296   25.43%
Construction real estate  68,002   9.63%  63,569   9.07%  72,550   10.28%  63,569   9.07%
Installment and other  16,794   2.38%  18,952   2.70%  9,998   1.42%  18,952   2.70%
Total loans  706,159   100.00%  701,007   100.00%  705,995   100.00%  701,007   100.00%
Unearned income  (813)      (863)      (1,171)      (863)    
Gross loans  705,346       700,144       704,824       700,144     
Allowance for loan losses  (11,238)      (13,803)      (9,528)      (13,803)    
Net loans $694,108      $686,341      $695,296      $686,341     

Net loans increased $7.8$9.0 million from $686.3 million as of December 31, 2017 to $694.1$695.3 million as of March 31,September 30, 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 real estate loans of $6.2$26.0 million, commercial real estate of $5.4 million, andgross construction real estate loans of $4.4$9.0 million, and gross commercial loans of $2.2 million.  These increases were partially offset by decreases in gross residential real estate loans of $8.7$23.2 million and gross installment and other loans of $2.2 million.$9.0 million primarily due to the credit card portfolio being moved to held for sale.

Loan Maturities. The following table sets forth the maturity or repricing information for loans outstanding as of March 31,September 30, 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 $1,523  $32,978  $22,814  $480  $9,762  $-  $34,099  $33,458  $1,230  $25,948  $24,245  $1,863  $10,253  $-  $35,728  $27,811 
Commercial real estate  12,477   99,492   97,768   69,884   103,372   1,254   213,617   170,630   3,829   99,897   125,965   55,054   120,045   -   249,839   154,951 
Residential real estate  268   86,314   3,772   15,590   63,217   398   67,257   102,302   116   85,209   5,169   4,421   59,811   392   65,096   90,022 
Construction real estate  10,519   31,905   5,235   5,707   14,636   -   30,390   37,612   18,127   39,840   969   5,022   8,592   -   27,688   44,862 
Installment and other  760   9,131   2,792   -   4,111   -   7,663   9,131   589   2,513   2,796   -   4,100   -   7,485   2,513 
Total loans $25,547  $259,820  $132,381  $91,661  $195,098  $1,652  $353,026  $353,133  $23,891  $253,407  $159,144  $66,360  $202,801  $392  $385,836  $320,159 

- 26 -
Asset Quality. Over the past several years, the Bank experienced improvements in asset 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, 
 2018  2017  September 30, 2018  December 31, 2017 
 (Dollars in thousands)  (Dollars in thousands) 
Non-accruing loans $12,625  $17,340  $8,710  $17,340 
Loans 90 days or more past due, still accruing interest  -   -   -   - 
Total non-performing loans  12,625   17,340   8,710   17,340 
OREO  6,449   6,432   5,982   6,432 
Total non-performing assets $19,074  $23,772  $14,692  $23,772 
TDRs, still accruing interest $32,934  $33,801  $28,387  $33,801 
Total non-performing loans to total loans  1.79%  2.47%  1.23%  2.47%
Allowance for loan losses to non- performing loans  89.01%  79.60%
Allowance for loan losses to non-performing loans  109.39%  79.60%
Total non-performing assets to total assets  1.49%  1.85%  1.17%  1.85%

As of March 31,September 30, 2018, total non-performing assets decreased $4.7$9.1 million to $19.1$14.7 million from $23.8 million as of December 31, 2017 primarily due to a decrease in non-accruing loans of $4.7$8.6 million.  The decreaseThere were decreases in all categories of non-accruing loans was primarily due to awith the largest being the decrease in commercial real estate non-accruing loans of $3.6$4.9 million a decrease in residential real estate loans of $825 thousand, and a decrease in construction real estate loans of $266 thousand.$3.7 million.

30
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) 
March 31, 2018                  
September 30, 2018                  
$5.0 million or more  -  $-   -  $-   -  $-   -  $-   -  $-   -  $- 
$3.0 million to $4.9 million  -   -   -   -   -   -   -   -   -   -   -   - 
$1.5 million to $2.9 million  -   -   1   1,870   -   -   -   -   1   1,753   -   - 
Under $1.5 million  2   58   9   3,186   44   3,774   3   603   10   1,964   46   4,125 
Total  2  $58   10  $5,056   44  $3,774   3  $603   11  $3,717   46  $4,125 
                                                
Percentage of individual loan category      0.09%      1.32%      2.23%      0.95%      0.92%      2.66%
                                                
December 31, 2017                                                
$5.0 million or more  -  $-   -  $-   -  $-   -  $-   -  $-   -  $- 
$3.0 million to $4.9 million  -   -   1   4,709   -   -   -   -   1   4,709   -   - 
$1.5 million to $2.9 million  -   -   -   -   -   -   -   -   -   -   -   - 
Under $1.5 million  3   102   10   3,908   52   4,599   3   102   10   3,908   52   4,599 
Total  3  $102   11  $8,617   52  $4,599   3  $102   11  $8,617   52  $4,599 
                                                
Percentage of individual loan category      0.17%      2.27%      2.58%      0.17%      2.27%      2.58%

Continued:

 Construction real estate  Installment & other loans  Total  Construction Real Estate  Installment and 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)
 
March 31, 2018                  
September 30, 2018                  
$5.0 million or more  -  $-   -  $-   -  $-   -  $-   -  $-   -  $- 
$3.0 million to $4.9 million  -   -   -   -   -   -   -   -   -   -   -   - 
$1.5 million to $2.9 million  1   2,001   -   -   2   3,871   -   -   -   -   1   1,753 
Under $1.5 million  8   1,644   2   92   65   8,754   5   165   3   100   67   6,957 
Total  9  $3,645   2  $92   67  $12,625   5  $165   3  $100   68  $8,710 
                                                
Percentage of individual loan category      5.36%      0.55%      1.79%      0.23%      1.00%      1.23%
                                                
December 31, 2017                                                
$5.0 million or more  -  $-   -  $-   -  $-   -  $-   -  $-   -  $- 
$3.0 million to $4.9 million  -   -   -   -   1   4,709   -   -   -   -   1   4,709 
$1.5 million to $2.9 million  1   2,001   -   -   1   2,001   1   2,001   -   -   1   2,001 
Under $1.5 million  11   1,910   4   111   80   10,630   11   1,910   4   111   80   10,630 
Total  12  $3,911   4  $111   82  $17,340   12  $3,911   4  $111   82  $17,340 
                                                
Percentage of individual loan category      6.15%      0.59%      2.47%      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.  
- 27 -

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$118 thousand and $211$197 thousand for the three months ended March 31,September 30, 2018 and 2017, respectively, and $222 thousand and $585 thousand for the nine months ended September 30, 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.

31
The following table presents an analysis of the allowance for loan losses for the periods indicated:

 
Three Months Ended
March 31,
  Three Months Ended September 30,  Nine Months Ended September 30, 
 2018  2017  2018  2017  2018  2017 
 (In thousands)  (Dollars in thousands) 
Balance at beginning of year $13,803   14,352 
Provision for loan losses  220   30 
Balance at beginning of period $10,444  $13,167  $13,803  $14,352 
(Benefit) provision for loan losses  (1,000)  (250)  (1,480)  (1,220)
Charge-offs:                        
Commercial  9   186   1   7   134   270 
Commercial real estate  2,736   -   -   612   2,736   639 
Residential real estate  105   244   65   -   184   309 
Construction real estate  112   16   -   1,385   212   1,409 
Installment and other  28   137   21   19   76   253 
Total charge-offs  2,990   583   87   2,023   3,342   2,880 
Recoveries :        
Recoveries:                
Commercial  24   173   25   56   73   306 
Commercial real estate  22   88   12   88   52   186 
Residential real estate  47   55   102   125   242   224 
Construction real estate  49   10   4   37   53   51 
Installment and other  63   62   28   2,000   127   2,181 
Total recoveries  205   388   171   2,306   547   2,948 
Net charge-offs  2,785   195 
Net (recoveries) charge-offs  (84)  (283)  2,795   (68)
Balance at end of period $11,238   14,187  $9,528  $13,200  $9,528  $13,200 

Net charge-offsrecoveries for the three months ended March 31,September 30, 2018 totaled $84 thousand, a decrease in net recoveries of $199 thousand from the three months ended September 30, 2017 primarily due to a decrease in net recoveries in installment and other loans of $2.0 million, partially offset by decreases in net charge-offs in construction real estate loans of $1.4 million and in commercial real estate loans of $536 thousand.

 Net charge-offs for the nine months ended September 30, 2018 totaled $2.8 million, an increase in net charge-offs of $2.6$2.9 million from the threenine months ended March 31,September 30, 2017 primarily due to increases in net charge-offs infor commercial real estate loans of $2.8 million.  The change in net charge-offs in the commercial real estate loans$2.2 million which was primarily due to one loan relationship.relationship and decrease in net recoveries in installment and other of $1.9 million, partially offset by a decrease in net charge-offs in construction real estate loans of $1.2 million.

The following table sets forth the allocation of the allowance for the periods presentedloan losses and the percentage of allowance in each classification to total allowance:allowance for the periods indicated:

 March 31, 2018  December 31, 2017  September 30, 2018  December 31, 2017 
 Amount  Percent  Amount  Percent  Amount  Percent  Amount  Percent 
 (Dollars in thousands)  (Dollars in thousands) 
Commercial $597   5.31% $536   3.88% $573   6.01% $536   3.88%
Commercial real estate  6,905   61.45%  8,573   62.11%  5,827   61.17%  8,573   62.11%
Residential real estate  2,462   21.91%  2,843   20.60%  2,102   22.06%  2,843   20.60%
Construction real estate  914   8.13%  1,030   7.46%  751   7.88%  1,030   7.46%
Installment and other  255   2.27%  315   2.28%  108   1.13%  315   2.28%
Unallocated  105   0.93%  506   3.67%  167   1.75%  506   3.67%
Total $11,238   100.00% $13,803   100.00% $9,528   100.00% $13,803   100.00%

The allowance for loan losses decreased $2.6$4.3 million from $13.8 million as of December 31, 2017 to $11.2$9.5 million as of March 31,September 30, 2018. This reductiondecrease was largely due to net charge-offs.  A $220 thousand provision forimproving credit quality, a charge-off on one loan lossrelationship that 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.  Thepreviously allocated, a decrease in allowance was primarily driven by the commercial real estateimpaired loan charge-offs.  The additional provision was primarily due to the $7.8 million dollar increase in the loan portfolio.balances, and decreasing delinquencies.

We consider a loan to be impaired when, based on current information and events, we determine that it is probable that we will not be able to collect all amounts due according to the original terms of the note, including interest payments.  When management identifies a loan as impaired, impairment is measured based on the present value of expected future cash flows and 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 equal to the recorded investment in the loan using one of three methods to measure impairment:based on 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.  An impairment reserve that exceeds collateral value isImpairment reserves are generally 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 March 31,September 30, 2018 and December 31, 2017 were $45.7$37.1 million and $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 $2.6$2.2 million and $5.2 million allocated in the allowance for loan losses as of March 31,September 30, 2018 and December 31, 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 March 31,September 30, 2018 and December 31, 2017 were $39.8$31.6 million and $38.9 million, respectively.  Of these, $32.9$28.4 million and $33.8 million were still performing in accordance with modified terms as of March 31,September 30, 2018 and December 31, 2017, respectively.

- 28 -
Although the Company believes the allowance for loan losses is sufficient at March 31,September 30, 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 "SpecialSpecial Mention."

32
Our determination as to the classification of our assets and the amount of our valuation allowances is subject to review by the OCC,Office of the Comptroller of the Currency (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 the Loan Committee of our Audit Committee.Board of Directors.

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.

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

March 31, December 31, 
2018 2017 September 30, 2018 December 31, 2017 
(In thousands) (In thousands) 
Performing loans classified as:        
Substandard $11,600  $12,164  $15,939  $12,164 
Total performing adversely classified loans $11,600  $12,164  $15,939  $12,164 
Special mention loans $5,630  $5,681  $8,910  $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 March 31,September 30, 2018 were $11.6$15.9 million, a decreasean increase of $564 thousand$3.8 million from $12.2 million as of December 31, 2017.  The declinesincreases were primarily in the commercial real estate loan, residential real estate loan, andloans of $7.9 million partially offset by decreases in construction real estate loan categories.loans of $2.1 million and commercial loans of $1.4 million.  In addition, special mention loans decreased $51 thousand.increased $3.2 million primarily due to an increase in commercial loans.  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 2017 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, moneyMoney market deposit accounts ("MMDA"), 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:

 
March 31, 2018
(In thousands)
  
September 30, 2018
(In thousands)
 
Maturing within three months $4,561  $2,742 
After three but within six months  2,533   3,056 
After six but within twelve months  5,599   5,778 
After twelve but within three years  2,321   2,203 
After three years  6,325   6,052 
Total time deposits $250,000 and over $21,339  $19,831 

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 wereare advances from the FHLB with remaining maturities under one year.  Long-term borrowings are advances from the FHLB with remaining maturities over one year.

The Company had $2.3There was a total of $15.4 million outstanding in FHLB borrowings at March 31,September 30, 2018 of which $2.3 million were long-term advances and $13.1 million were short-term advances.  There was $2.3 million outstanding in FHLB long-term borrowings at September 30, 2017.

Liquidity

Bank Liquidity. Liquidity management is monitored by the Asset/Liability Management Committee and the 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.

- 29 -33
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.
● Cumulative Liquidity Gap (% of cumulative net cash outflow over a six month period under a worst case scenario) of 100%.
●Fed Funds Purchased are limited to 60% of the total Available Fed Fund Lines, leaving 40% available for emergency needs and potential funding needs.
● Fed Funds Purchased are limited to 60% of the total Available Lines, leaving 40%
●FHLB Advances are limited to 75% of the Total Collateral Advance Capacity leaving 25% available for emergency liquidity needs and potential funding needs.
● FHLB Advances are limited to 75% of the Total Collateral Advance Capacity leaving 25% 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).
● Total Borrowings are limited to no more than 25% of Total Funding (which is defined as equal to Total Assets).
●Total Borrowings are limited to no more than 25% of Total Funding. 
● Wholesale (CDs) Funds is limited to no more than 25% of the Bank's Total Funding.
●Wholesale Funds, as that term is defined above, is limited to no more than 25% of the Bank's Total Funding (total assets)
● 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 March 31,September 30, 2018 and December 31, 2017, we were in compliance with the foregoing policy.

As of March 31,September 30, 2018, we had outstanding loan origination commitments and unused commercial and retail lines of credit of $133.2$132.9 million and standby letters of credit of $5.3$3.8 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  $127.8 million as of March 31,September 30, 2018. As of March 31,September 30, 2018, total certificates of depositdeposits declined $9.5$26.0 million or 5.50%15.0% from the prior year end.

In the event that additional short-term liquidity is needed, we have established a relationship with a large regional bank 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 this bank.bank on a collective basis. Management believes that we will be able to continue to borrow federal funds from our correspondent bankbanks in the future. Additionally, we are a member of the FHLB and, as of March 31,September 30, 2018, we had the ability to borrow from the FHLB up to $402.4$369.0 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.

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, which could 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 2017 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.  As of March 31, 2018, the Bank was in compliance with these requirements.
 
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 2017 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 March 31,September 30, 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 2017 Form 10-K.

Commitments. There have been no material changes to the commitments as of March 31,September 30, 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 2017 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 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 eareach 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 2017 Form 10-K for details on the effect these have on risk based capital. See "Risk Factors" in Part I, Item 1A of the 2017 Form 10-K for further information regarding changes in the regulatory environment affecting capital.

- 30 -34
The Bank's capital ratios as of March 31,September 30, 2018 fall into the category of "well-capitalized."  The required and actual amounts and ratios for Trinity and the Bank as of March 31,September 30, 2018 are presented below:

 Actual  
For Capital Adequacy
Purposes
  
To be well capitalized
under prompt
corrective action
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 
                   (Dollars in thousands) 
March 31, 2018                  
September 30, 2018                  
Total capital (to risk-weighted assets):                                    
Consolidated $144,143   16.8772% $68,326   8.0000%  N/A   N/A  $151,865   17.5493% $69,229   8.00%  N/A   N/A 
Bank only  137,691   16.1420%  68,240   8.0000% $85,300   10.0000%  146,106   16.9333%  69,027   8.00% $86,283   10.00%
Tier 1 capital (to risk weighted assets):                                                
Consolidated  133,453   15.6256%  51,244   6.0000%  N/A   N/A   142,186   16.4308%  51,922   6.00%  N/A   N/A 
Bank only  127,014   14.8903%  51,180   6.0000%  68,240   8.0000%  136,427   15.8115%  51,770   6.00%  69,027   8.00%
Common Equity Tier 1 Capital (to risk weighted assets):                                                
Consolidated  107,453   12.5813%  38,433   4.5000%  N/A   N/A   116,952   13.5148%  38,941   4.50%  N/A   N/A 
Bank only  127,014   14.8903%  38,385   4.5000%  55,445   6.5000%  136,427   15.8115%  38,827   4.50%  56,084   6.50%
Tier 1 leverage (to average assets):                                                
Consolidated  133,453   10.4275%  51,193   4.0000%  N/A   N/A   142,186   11.2026%  50,769   4.00%  N/A   N/A 
Bank only  127,014   9.9331%  51,148   4.0000%  63,935   5.0000%  136,427   10.7753%  50,644   4.00%  63,306   5.00%

N/A—not applicable

At March 31,September 30, 2018 the Bank's capital conservation buffer was 8.1420 %8.9333% and the consolidated Company's consolidated capital conservation buffer was 8.0813 %.9.0148%.


- 31 -
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.


Item 4. Controls and Procedures

An evaluation was carried out under the supervision and with the participation of the Company's management, 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 the end of the reporting period covered by this report.

The Company maintains disclosure controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of 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 in the reports the Company files and submits under the Exchange Act is recorded, processed, summarized and reported as and when required.

In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, 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 cost-effective system of controls can provide absolute assurance that all control issues and instances of fraud, if any, will be detected.

There have been no changes in the Company's internal control over financial reporting as that term is defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act, during the threenine months ended March 31,September 30, 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 2017 Form 10-K.  There are no material developments in the legal actions described in the 2017 Form 10-K.  In addition, the Bank is party to the lawsuit styled Los Alamos National Bank, N.A. v. Fidelity Bank, in the United States District Court, District of New Mexico, Case No. 1:18-cv-00613-KK-JHR.  In December 2017, pursuant to a Mortgage Loan Servicing Rights Purchase Agreement, the Bank sold to Fidelity Bank servicing rights to mortgages it had previously originated.  In or about April 2018, Fidelity Bank alleged that certain of the mortgage loans at issue were "defective" and must be repurchased by the Bank on the basis that certain Pueblos in New Mexico claimed that the properties at issue, or roads accessing those properties, trespass on Pueblo-owned lands.  On June 28, 2018, the Bank filed the lawsuit seeking a judgment that, among other things, declares that the Bank does not have an obligation under the purchasing agreement to repurchase any servicing rights or any related loans.  Fidelity Bank filed an answer on July 30, 2018 and included counterclaims for specific performance, breach of contract, and fraud, among others.  The Bank responded with a motion to dismiss the counterclaims entirely, and on September 20, 2018, Fidelity Bank amended its counterclaim, dropping a cause of action and adding factual assertions purportedly supporting its claims.  In the amended counterclaim, Fidelity Bank seeks repurchase of the unspecified number of "defective" loans and asserts that it is owed $100 per day until the repurchase occurs, together with other unspecified damages.  On October 18, 2018, the Bank filed a motion to dismiss Fidelity Bank's amended counterclaim on various grounds, including that Fidelity Bank failed to plausibly allege that it has suffered any actual injury.  The outcome of the motion to dismiss could significantly impact the litigation and the allegations which the Bank is required to defend.  Accordingly, the outcome and timing of the ultimate resolution for this lawsuit is inherently difficult to predict at this early stage.

The Company may also become a party to legal proceedings in the ordinary course of business.  Except as described in the first paragraph of this Item,above, 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 firstthird quarter of 2018, we made no repurchases or unregistered sales of any class of our equity securities.

Item 3.   Defaults Upon Senior Securities

 NoneNone.

Item 4.   Mine Safety Disclosures

Not ApplicableApplicable.

Item 5.   Other Information

 NoneNone.

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Item 6.    Exhibits

3.1
 
Amended and Restated Articles of Incorporation of Trinity Capital 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
 Form of Second Amended and Restated Bylaws of Trinity Capital Corporation (incorporated herein by reference to Exhibit 3.1 toof the Company's Current Reportreport on Form 8-K filed January 30, 2018 (File(file No. 000-50266))
10.1
Change in Control Agreement, dated April 20, 2018, by and between Trinity Capital Corporation and Los Alamos National Bank and Yin Y. Ho (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))
10.2
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 Trinity 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)
   
32.132.1*
 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
   
32.232.2*
 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
101 Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets as of March 31,September 30, 2018 and December 31, 2017; (ii) Consolidated Statements of Operations for the three and nine months ended March 31,September 30, 2018 and 2017; (iii) Consolidated Statements of Changes in Shareholders'Stockholders' Equity for the threenine months ended March 31,September 30, 2018 and 2017; (iv) Consolidated Statements of Cash Flows for the threenine months ended March 31,September 30, 2018 and 2017; and (v) Notes to Consolidated Financial Statements, tagged as blocks of text

* These exhibits are furnished herewith and shall not be deemed "filed" for purposes of Section 18 of the Exchange Act, or otherwise subject tothe liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act or Exchange Act.


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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: May 11,November 9, 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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