Trinity Capital 10-Q 2017 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2017

or

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                                                    to

Commission File Number 000-50266

TRINITY CAPITAL CORPORATION

(Exact name of registrant as specified in its charter)

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

(505) 662-5171

(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒  Yes    ☐  No

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

Indicate by check mark whether registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Act. (Check one):

Large accelerated filer ☐	Accelerated filer              ☐
Non-accelerated filer   ☐  (do not check if a smaller reporting company)	Smaller reporting company ☒
Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ☐  Yes   ☒  No

As of October 31, 2017, there were 9,256,785 shares of voting Common Stock outstanding and 8,286,200 shares of non-voting Common Stock outstanding.

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION
Item 1. Financial Statements and Supplementary Data	1
Item 2. Management's Discussions and Analysis of Financial Condition and Results of Operations	25
Item 3. Quantitative and Qualitative Disclosures About Market Risk	36
Item 4. Controls and Procedures	37
PART II – OTHER INFORMATION
Item 1. Legal Proceedings	39
Item 1A. Risk Factors	39
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	39
Item 3. Defaults Upon Senior Securities	39
Item 4. Mine Safety Disclosures	39
Item 5. Other Information	39
Item 6. Exhibits	40
Signatures	41

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

TRINITY CAPITAL CORPORATION & SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share and per share data)
	September 30, 2017			December 31, 2016
ASSETS
Cash and due from banks	$	11,733		$	13,537
Interest-bearing deposits with banks		68,234			105,798
Cash and cash equivalents		79,967			119,335
Investment securities available for sale, at fair value		434,521			439,650
Investment securities held to maturity, at amortized cost (fair value of $7,512 and $8,613 as of September 30, 2017 and December 31, 2016, respectively)		7,882			8,824
Non-marketable equity securities		3,615			3,812
Loans (net of allowance for loan losses of $13,200 and $14,352 as of September 30, 2017 and December 31, 2016, respectively)		721,817			771,138
Mortgage servicing rights ("MSRs"), net		5,499			6,905
Bank owned life insurance ("BOLI")		10,462			10,191
Premises and equipment, net		28,794			25,959
Other real estate owned ("OREO"), net		8,199			8,436
Other assets		21,730			31,187
Total assets	$	1,322,486		$	1,425,437
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits:
Noninterest-bearing	$	183,881		$	174,305
Interest-bearing		983,438			1,033,115
Total deposits		1,167,319			1,207,420
Borrowings		2,300			2,300
Junior subordinated debt		36,937			36,927
Other liabilities		15,566			41,491
Total liabilities		1,222,122			1,288,138
Stock owned by Employee Stock Ownership Plan ("ESOP") participants; 671,578 shares and 671,962 shares as of September 30, 2017 and December 31, 2016, respectively, at fair value	$	3,192		$	3,192
Commitments and contingencies (Note 13)
Stockholders' equity
Preferred stock, no par, 1,000,000 shares authorized
Series A, 9% cumulative perpetual, 0 shares and 35,539 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively; $1,000 liquidation value per share, at amortized cost	$	-		$	35,068
Series B, 9% cumulative perpetual, 0 shares and 1,777 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively; $1,000 liquidation value per share, at amortized cost		-			1,850
Series C, 0% convertible cumulative perpetual, 0 shares and 82,862 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively; $475 liquidation value per share, at amortized cost		-			37,089
Common stock voting, no par; 20,000,000 shares authorized; 9,256,785 and 9,199,306 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively		9,567			9,510
Common stock non-voting, no par; 20,000,000 shares authorized; 8,286,200 shares and 0 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively		8,286			-
Additional paid-in capital		29,724			694
Retained earnings		52,935			55,391
Accumulated other comprehensive loss		(3,340	)		(5,495	)
Total stockholders' equity		97,172			134,107
Total liabilities and stockholders' equity	$	1,322,486		$	1,425,437

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 September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Interest income:
Loans, including fees	$	9,016		$	9,413		$	27,613		$	29,532
Interest and dividends on investment securities:
Taxable		1,665			2,163			5,143			5,769
Nontaxable		506			175			1,085			323
Other interest income		275			98			567			524
Total interest income		11,462			11,849			34,408			36,148
Interest expense:
Deposits		432			556			1,333			1,770
Borrowings		37			37			114			110
Junior subordinated debt		599			742			1,912			2,179
Total interest expense		1,068			1,335			3,359			4,059
Net interest income		10,394			10,514			31,049			32,089
(Benefit) provision for loan losses		(250	)		-			(1,220	)		-
Net interest income after provision for loan losses		10,644			10,514			32,269			32,089
Noninterest income:
Mortgage loan servicing fees		446			456			1,394			1,546
Trust and investment services fees		643			654			1,953			1,900
Service charges on deposits		202			153			784			719
Net gain on sale of OREO		130			316			800			1,159
Net gain on sale of loans		-			630			-			1,853
Net (loss) gain on sale of securities		-			130			(1,248	)		184
BOLI income		88			98			271			98
Mortgage referral fee income		431			123			1,175			123
Other fees		598			684			1,732			1,240
Other noninterest income		12			(176	)		71			25
Total noninterest income		2,550			3,068			6,932			8,847
Noninterest expenses:
Salaries and employee benefits		5,668			6,536			17,913			19,460
Occupancy		805			671			2,360			2,414
Data processing		1,132			872			3,557			2,232
Legal, professional and accounting fees		541			1,539			4,488			4,949
Change in value of MSRs		677			(95	)		1,406			1,830
Other noninterest expense		2,568			3,268			7,675			8,044
Total noninterest expenses		11,391			12,791			37,399			38,929
Income before provision for income taxes		1,803			791			1,802			2,007
Provision for income taxes		1,398			-			3,487			-
Net income (loss)		405			791			(1,685	)		2,007
Dividends and discount accretion on preferred shares		-			1,083			771			3,176
Net income (loss) attributable to common stockholders	$	405		$	(292	)	$	(2,456	)	$	(1,169	)
Basic earnings (loss) per common share	$	0.02		$	(0.04	)	$	(0.16	)	$	(0.18	)
Diluted earnings (loss) per common share	$	0.02		$	(0.04	)	$	(0.16	)	$	(0.18	)

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 September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
	(In thousands)
Net income (loss)	$	405		$	791		$	(1,685	)	$	2,007
Other comprehensive income:
Unrealized gains on securities available for sale		229			(969	)		2,343			5,957
Securities losses (gains) reclassified into earnings		-			(130	)		1,248			(184	)
Related income tax (benefit) expense		(106	)		-			(1,436	)		-
Other comprehensive income (loss)		123			(1,099	)		2,155			5,773
Total comprehensive income (loss)	$	528		$	(308	)	$	470		$	7,780

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

-3-

TRINITY CAPITAL CORPORATION & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

(Unaudited)

	Common stock
(In thousands, except per share data)	Voting Issued		Held in treasury, at cost			Preferred stock		Additional paid-in capital			Retained earnings			Accumulated other comprehensive income (loss)			Total stockholders' equity
Balance, December 31, 2015	$	6,836	$	(9,880	)	$	36,740	$	1,153		$	44,232		$	(2,781	)	$	76,300
Net income												2,007						2,007
Other comprehensive income															5,773			5,773
Dividends declared on preferred shares												(3,176	)					(3,176	)
Amortization of preferred stock issuance      costs							134					(134	)					-
Treasury shares issued for board   compensation				897					(759	)								138
Net change in the fair value of stock owned by ESOP participants												1						1
Balance, September 30, 2016	$	6,836	$	(8,983	)	$	36,874	$	394		$	42,930		$	2,992		$	81,043

	Common stock
(In thousands, except per share data)	Voting Issued		Non-voting Issued		Preferred stock			Additional paid-in capital			Retained earnings			Accumulated other comprehensive income (loss)			Total stockholders' equity
Balance, December 31, 2016	$	9,510	$	-	$	74,007		$	694		$	55,391		$	(5,495	)	$	134,107
Net loss												(1,685	)					(1,685	)
Other comprehensive income															2,155			2,155
Redemption of Series A Preferred shares						(35,539	)											(35,539	)
Redemption of Series B Preferred shares						(1,777	)											(1,777	)
Dividends declared on preferred shares												(373	)					(373	)
Series C preferred shares converted to non-voting common stock				8,286		(37,089	)		28,803									-
Common stock issued for board compensation		40							153									193
Amortization of preferred stock						398						(398	)					-
Restricted stock units ("RSUs") vested		17							(17	)								-
Restricted stock units ("RSUs") compensation expense									91									91
Balance, September 30, 2017	$	9,567	$	8,286	$	-		$	29,724		$	52,935		$	(3,340	)	$	97,172

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

-4-

TRINITY CAPITAL CORPORATION & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 (Unaudited)

	Nine Months Ended September 30,
	2017			2016
Cash Flows From Operating Activities	(Dollars in thousands)
Net (loss) income	$	(1,685	)		2,007
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		5,104			4,509
Benefit for loan losses		(1,220	)		-
Net loss (gain) on sale of investment securities		1,248			(184	)
Net gain on sale of loans		-			(1,853	)
Gains and write-downs on OREO, net		(166	)		(1,036	)
(Gain) loss on disposal of premises and equipment		(37	)		1
Decrease in deferred income tax assets		1,081			-
Federal Home Loan Bank stock dividends received		(5	)		1
Change in value of MSRs		1,406			1,830
BOLI income		(271	)		(98	)
Compensation expense recognized for restricted stock units		91			-
Change in escrow liabilities		712			2,710
Decrease in accrued interest payable on sub debt		(9,676	)		-
Changes in operating assets and liabilities:
Other Assets		4,708			505
Other Liabilities		(2,158	)		6,076
Net cash (used in) provided by operating activities before origination and gross sales of loans held for sale		(868	)		14,468
Gross sales of loans held for sale		-			(51,746	)
Origination of loans held for sale		-			55,770
Net cash (used in) provided by operating activities	$	(868	)		18,492

Continued next page

-5-

TRINITY CAPITAL CORPORATION & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS CONTINUED

(Unaudited)

	Nine Months Ended September 30,
	2017			2016
Cash Flows From Investing Activities	(Dollars in thousands)
Proceeds from maturities and paydowns of investment securities, available for sale	$	38,647		$	46,694
Proceeds from sale of investment securities, available for sale		56,543			98,259
Purchase of investment securities, available for sale		(92,437	)		(225,741	)
Purchase of investment securities, other		(2	)		-
Proceeds from maturities and paydowns of investment securities, held to maturity		884			104
Proceeds from sale of investment securities, other		33			-
Purchase bank owned life insurance		-			(10,000	)
Proceeds from sale of other real estate owned		3,251			3,724
Loans paid down (funded), net		48,608			39,598
Purchases of premises and equipment		(3,907	)		(4,745	)
Proceeds from sale of premises and equipment		69			-
Net cash provided by (used in) investing activities		51,689			(52,107	)
Cash Flows From Financing Activities
Net decrease in demand deposits, NOW accounts and savings accounts		(2,770	)		39,303
Net decrease in time deposits		(37,331	)		(42,781	)
Redemption of Preferred stock		(37,316	)		-
Decrease in dividends payable on Preferred Stock		(12,965	)		-
Issuance of common stock for board compensation		193			138
Net cash used in financing activities		(90,189	)		(3,340	)
Net decrease in cash and cash equivalents		(39,368	)		(36,955	)
Cash and cash equivalents:
Beginning of period		119,335			188,875
End of period	$	79,967		$	151,920
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest	$	13,118		$	1,987
Non-cash investing and financing activities:
Transfers from loans to other real estate owned		2,848			2,944
Sales of other real estate owned financed by loans by the Bank		-			1,548
Transfer from Venture Capital to loans		150			-
Conversion of Preferred C stock to non-voting common stock		37,089			-
Dividends declared on preferred stock		373			3,176

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

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, 2016 (the "2016 Form 10-K"). Operating results for the three and nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017 or any other period.

Reclassifications: Some items in the prior year financial statements have 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

Average number of shares used in calculation of basic and diluted earnings (loss) per common share were as follows for the three and nine months ended September 30, 2017 and 2016:

	Three Months Ended September 30,					Nine Months Ended September 30,
	2017		2016			2017			2016
	(In thousands, except share data)
Net income (loss)	$	405	$	791		$	(1,685	)	$	2,007
Dividends and discount accretion on preferred shares		-		1,083			771			3,176
Net income (loss) attributable to common stockholders	$	405	$	(292	)	$	(2,456	)	$	(1,169	)
Weighted average common shares issued		17,539,689		6,856,800			15,647,178			6,856,800
LESS: Weighted average treasury stock shares		-		(330,498	)		-			(331,002	)
Weighted average common shares outstanding, net		17,539,689		6,526,302			15,647,178			6,525,798
Basic earnings (loss) per common share	$	0.02	$	(0.04	)	$	(0.16	)	$	(0.18	)
Dilutive effect of stock-based compensation		13,134		-			-			-
Weighted average common shares outstanding including dilutive shares		17,552,823		6,526,302			15,647,178			6,525,798
Diluted earnings (loss) per common share	$	0.02	$	(0.04	)	$	(0.16	)	$	(0.18	)

Certain restricted stock units ("RSUs") were not included in the above calculation, as they would have had an anti-dilutive effect.  The total number of excluded shares relating to such RSUs was approximately 62,000 for the three months ended September 30, 2016.  There were no shares excluded from the calcualtion for the three months ended September 30, 2017.  The total number of excluded shares relating to such RSUs was approximately 97,000 shares and 62,000 shares for the nine months ended September 30, 2017 and 2016, respectively.

Note 3. Recent Accounting Pronouncements

Newly Issued But Not Effective Accounting Standards

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). This update requires an entity to recognize revenue as performance obligations are met, in order to reflect the transfer of promised goods or services to customers in an amount that reflects the consideration the entity is entitled to receive for those goods or services. The following steps are applied in the updated guidance: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the entity satisfies a performance obligation. The FASB later issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606) – Deferral of the Effective Date.  This update deferred the effective date by one year.  The amended effective date is annual reporting periods beginning after December 15, 2017 including interim reporting periods within that reporting period. The Company plans to adopt ASU 2014-09 on January 1, 2018 utilizing the modified retrospective approach.  The Company's analysis suggests that the adoption of this accounting standard is not expected to have a material impact on the timing or amounts of income recognized, as we have determined the majority of the revenues earned by the Company are not within the scope of ASU 2014-09.  The Company is currently reviewing disclosures for any changes needed.  The FASB continues to release new accounting guidance related to the adoption of this standard, which could impact the Company's preliminary materiality analysis and may change the conclusions reached as to the application of this new guidance.

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. The Company is currently in the process of evaluating the impact of adoption of ASU 2016-02 on its financial statements and disclosures.

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

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

-7-

Note 4. Restrictions on Cash and Due From Banks

The Bank is required to maintain reserve balances in cash or on deposit with the Board of Governors of the Federal Reserve System ("FRB"), based on a percentage of deposits.  As of September 30, 2017 and December 31, 2016, the reserve requirement on deposit at the FRB was $0 due to the large balance maintained at the FRB.

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

Note 5. Investment Securities

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

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

Securities Held to Maturity	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In thousands)
September 30, 2017
SBA pools	$	7,882	$	-	$	(370	)	$	7,512
Totals	$	7,882	$	-	$	(370	)	$	7,512
December 31, 2016
SBA pools	$	8,824	$	-	$	(211	)	$	8,613
Totals	$	8,824	$	-	$	(211	)	$	8,613

Realized net gains (losses) on sale and call of securities available for sale are summarized as follows:

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

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

-8-

A summary of unrealized loss information for investment securities, categorized by security type, as of September 30, 2017 and December 31, 2016 was as follows:

	Less than 12 Months					12 Months or Longer					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(In thousands)
Securities Available for Sale:
September 30, 2017
U.S. Government sponsored agencies	$	24,647	$	(262	)	$	-	$	-		$	24,647	$	(262	)
State and political subdivision		53,485		(537	)		27,812		(478	)		81,297		(1,015	)
Residential mortgage backed securities		34,651		(276	)		78,039		(1,197	)		112,690		(1,473	)
Residential collateralized mortgage obligation		8,286		(57	)		518		(8	)		8,804		(65	)
Commercial mortgage backed securities		68,137		(1,242	)		22,747		(775	)		90,884		(2,017	)
SBA pools		-		-			599		(7	)		599		(7	)
Totals	$	189,206	$	(2,374	)	$	129,715	$	(2,465	)	$	318,921	$	(4,839	)
December 31, 2016
U.S. Government sponsored agencies	$	53,877	$	(498	)	$	-	$	-		$	53,877	$	(498	)
State and political subdivision		33,833		(1,417	)		-		-			33,833		(1,417	)
Residential mortgage backed securities		143,344		(1,539	)		50,474		(785	)		193,818		(2,324	)
Residential collateralized mortgage obligation		8,413		(87	)		122		(2	)		8,535		(89	)
Commercial mortgage backed securities		96,222		(3,157	)		-		-			96,222		(3,157	)
SBA pools		-		-			673		(9	)		673		(9	)
Totals	$	335,689	$	(6,698	)	$	51,269	$	(796	)	$	386,958	$	(7,494	)
Securities Held to Maturity:
September 30, 2017
SBA Pools	$	-	$	-		$	7,512	$	(370	)	$	7,512	$	(370	)
Totals	$	-	$	-		$	7,512	$	(370	)	$	7,512	$	(370	)
December 31, 2016
SBA Pools	$	8,613	$	(211	)	$	-	$	-		$	8,613	$	(211	)
Totals	$	8,613	$	(211	)	$	-	$	-		$	8,613	$	(211	)

As of September 30, 2017, the Company's security portfolio consisted of 131 securities, 88 of which were in an unrealized loss position. As of September 30, 2017, $326.4 million in investment securities had unrealized losses with aggregate depreciation of 1.57% of the Company's amortized cost basis.  Of these securities, $137.2 million had a continuous unrealized loss position for twelve months or longer with an aggregate depreciation of 2.02%.  The unrealized losses relate principally to the general change in interest rates and illiquidity, and not credit quality, that has occurred since the securities purchase dates, and such unrecognized losses or gains will continue to vary with general interest rate level fluctuations in the future.  As management does not intend to sell the securities, and it is likely that it will not be required to sell the securities before their anticipated recovery, no declines are deemed to be other than temporary.

The amortized cost and fair value of investment securities, as of September 30, 2017, 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
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(In thousands)
One year or less	$	5,201	$	5,200	$	-	$	-
One to five years		55,421		55,270		-		-
Five to ten years		16,710		16,863		-		-
Over ten years		108,722		108,267		7,882		7,512
Subtotal		186,054		185,600		7,882		7,512
Residential mortgage backed securities		131,099		129,738		-		-
Residential collateralized mortgage obligation		10,313		10,304		-		-
Commercial mortgage backed securities		110,720		108,879
Total	$	438,186	$	434,521	$	7,882	$	7,512

Securities with carrying amounts of $87.9 million and $87.9 million as of September 30, 2017 and December 31, 2016, 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 September 30, 2017 and December 31, 2016, loans consisted of:

	September 30, 2017			December 31, 2016
	(In thousands)
Commercial	$	65,157		$	69,161
Commercial real estate		389,831			405,900
Residential real estate		186,934			214,726
Construction real estate		76,399			75,972
Installment and other		17,676			21,053
Total loans		735,997			786,812
Unearned income		(980	)		(1,322	)
Gross loans		735,017			785,490
Allowance for loan losses		(13,200	)		(14,352	)
Net loans	$	721,817		$	771,138

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

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

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

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 category of loans as of September 30, 2017 and December 31, 2016, 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
September 30, 2017	(In thousands)
Commercial	$	64,256	$	89	$	381	$	431	$	901	$	65,157
Commercial real estate		387,717		420		323		1,371		2,114		389,831
Residential real estate		183,740		1,403		45		1,746		3,194		186,934
Construction real estate		71,194		424		75		4,706		5,205		76,399
Installment and other		17,460		99		31		86		216		17,676
Total loans	$	724,367	$	2,435	$	855	$	8,340	$	11,630	$	735,997
Nonaccrual loan classification, included above	$	7,073	$	344	$	368	$	7,946	$	8,658	$	15,731
December 31, 2016
Commercial	$	67,562	$	1,010	$	221	$	368	$	1,599	$	69,161
Commercial real estate		399,861		4,564		-		1,475		6,039		405,900
Residential real estate		208,200		3,089		1,355		2,082		6,526		214,726
Construction real estate		67,310		378		43		8,241		8,662		75,972
Installment and other		20,860		135		38		20		193		21,053
Total loans	$	763,793	$	9,176	$	1,657	$	12,186	$	23,019	$	786,812
Nonaccrual loan classification, included above	$	8,331	$	249	$	712	$	12,186	$	13,147	$	21,478

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

	September 30, 2017				December 31, 2016
	Nonaccrual		Loans past due 90 days or more and still accruing interest		Nonaccrual		Loans past due 90 days or more and still accruing interest
	(In thousands)
Commercial	$	108	$	394	$	1,192	$	-
Commercial real estate		6,202		-		5,823		-
Residential real estate		4,364		-		4,247		-
Construction real estate		4,921		-		10,159		-
Installment and other		136		-		57		-
Total	$	15,731	$	394	$	21,478	$	-

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 Special Mention.  Any time a situation warrants, the risk rating may be reviewed.

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

	Pass		Special Mention		Substandard		Doubtful		Total
September 30, 2017	(In thousands)
Commercial	$	62,631	$	157	$	2,369	$	-	$	65,157
Commercial real estate		373,901		5,472		10,458		-		389,831
Residential real estate		180,522		152		6,260		-		186,934
Construction real estate		68,413		936		7,050		-		76,399
Installment and other		17,528		-		148		-		17,676
Total	$	702,995	$	6,717	$	26,285	$	-	$	735,997
December 31, 2016
Commercial	$	56,611	$	1,046	$	11,504	$	-	$	69,161
Commercial real estate		380,777		11,573		13,550		-		405,900
Residential real estate		209,049		588		5,089		-		214,726
Construction real estate		60,848		5,378		9,746		-		75,972
Installment and other		20,983		4		66		-		21,053
Total	$	728,268	$	18,589	$	39,955	$	-	$	786,812

-11-

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

	Pass			Special Mention		Substandard		Doubtful		Total
September 30, 2017	(In thousands)
Current		$	700,893	$	6,297	$	17,177	$	-	$	724,367
Past due 30-59 days			1,517		420		498		-		2,435
Past due 60-89 days			191		-		664		-		855
Past due 90 days or more			394		-		7,946		-		8,340
Total		$	702,995	$	6,717	$	26,285	$	-	$	735,997
December 31, 2016
Current		$	724,075	$	13,956	$	25,762	$	-	$	763,793
Past due 30-59 days			3,383		4,633		1,160		-		9,176
Past due 60-89 days			810		-		847		-		1,657
Past due 90 days or more			-		-		12,186		-		12,186
Total		$	728,268	$	18,589	$	39,955	$	-	$	786,812

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

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

	September 30, 2017							December 31, 2016
	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated			Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
	(In thousands)
With no related allowance recorded:
Commercial	$	12,626	$	12,624				$	2,203	$	2,166
Commercial real estate		6,962		6,455					6,368		6,136
Residential real estate		5,485		4,911					5,176		4,494
Construction real estate		8,934		7,091					7,522		6,031
Installment and other		405		404					313		313
With an allowance recorded:
Commercial		1,575		1,574		$	223		13,988		13,988		$	350
Commercial real estate		6,326		6,326			865		6,376		6,376			911
Residential real estate		7,682		7,678			1,381		8,601		8,598			1,424
Construction real estate		3,282		3,282			202		5,288		5,251			237
Installment and other		272		272			34		433		433			88
Total	$	53,549	$	50,617		$	2,705	$	56,268	$	53,786		$	3,010

The table above includes $39.8 million in trouble debt restructurings ("TDRs") at September 30, 2017, and $43.1 million at December 31, 2016.

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

	Three Months Ended								Nine Months Ended
	September 30, 2017				September 30, 2016				September 30, 2017				September 30, 2016
	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)
With no related allowance recorded:
Commercial	$	6,834	$	184	$	9,648	$	103	$	4,411	$	543	$	9,715	$	307
Commercial real estate		5,133		99		10,279		18		5,084		295		10,668		53
Residential real estate		4,712		54		5,955		10		4,586		162		6,541		31
Construction real estate		7,397		104		6,213		5		7,189		308		6,587		16
Installment and other		399		5		341		4		353		14		339		12
With an allowance recorded:
Commercial		7,547		22		14,338		196		10,741		66		14,451		584
Commercial real estate		6,350		69		9,003		92		6,352		205		9,056		273
Residential real estate		7,695		81		9,652		81		8,019		240		9,860		242
Construction real estate		3,302		43		4,443		45		3,755		129		4,178		134
Installment and other		289		2		529		4		347		7		554		13
Total	$	49,658	$	663	$	70,401	$	558	$	50,837	$	1,969	$	71,949	$	1,665

If nonaccrual loans outstanding had been current in accordance with their original terms, approximately $197.1 thousand and $517.3 thousand would have been recorded as loan interest income during the three months ended September 30, 2017 and 2016, respectively, and $584.8 thousand and $1.2 million during the nine months ended September 30, 2017 and 2016, respectively. Interest income recognized on a cash 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 September 30, 2017 and 2016, activity in the allowance for loan losses was as follows:

	Commercial			Commercial real estate			Residential real estate			Construction real estate			Installment and other			Unallocated		Total
	(In thousands)
Three Months Ended September 30, 2017:
Beginning balance	$	1,377		$	6,205		$	3,805		$	1,117		$	635		$	28	$	13,167
Provision (benefit) for loan losses		(297	)		461			(117	)		1,731			(2,073	)		45		(250	)
Charge-offs		(7	)		(612	)		-			(1,385	)		(19	)		-		(2,023	)
Recoveries		56			88			125			37			2,000			-		2,306
Net recoveries (charge-offs)		49			(524	)		125			(1,348	)		1,981			-		283
Ending balance	$	1,129		$	6,142		$	3,813		$	1,500		$	543		$	73	$	13,200
Three Months Ended September 30, 2016:
Beginning balance	$	2,220		$	7,919		$	5,629		$	1,039		$	758		$	27	$	17,592
Provision (benefit) for loan losses		(193	)		1			10			155			3			24		-
Charge-offs		(206	)		(46	)		(174	)		-			(98	)		-		(524	)
Recoveries		260			377			56			5			35			-		733
Net recoveries (charge-offs)		54			331			(118	)		5			(63	)		-		209
Ending balance	$	2,081		$	8,251		$	5,521		$	1,199		$	698		$	51	$	17,801
Nine Months Ended September 30, 2017:
Beginning balance	$	1,449		$	6,472		$	4,524		$	1,119		$	715		$	73	$	14,352
Provision (benefit) for loan losses		(356	)		123			(626	)		1,739			(2,100	)		-		(1,220	)
Charge-offs		(270	)		(639	)		(309	)		(1,409	)		(253	)		-		(2,880	)
Recoveries		306			186			224			51			2,181			-		2,948
Net recoveries (charge-offs)		36			(453	)		(85	)		(1,358	)		1,928			-		68
Ending balance	$	1,129		$	6,142		$	3,813		$	1,500		$	543		$	73	$	13,200
Nine Months Ended September 30, 2016:
Beginning balance	$	2,442		$	6,751		$	6,082		$	1,143		$	940		$	34	$	17,392
Provision (benefit) for loan losses		(629	)		1,039			(300	)		(44	)		(83	)		17		-
Charge-offs		(481	)		(46	)		(576	)		(22	)		(333	)		-		(1,458	)
Recoveries		749			507			315			122			174			-		1,867
Net recoveries (charge-offs)		268			461			(261	)		100			(159	)		-		409
Ending balance	$	2,081		$	8,251		$	5,521		$	1,199		$	698		$	51	$	17,801

-13-

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

	Commercial		Commercial real estate		Residential real estate		Construction real estate		Installment and other		Unallocated		Total
September 30, 2017	(In thousands)
Allowance for loan losses allocated to:
Loans individually evaluated for impairment	$	223	$	865	$	1,381	$	202	$	34	$	-	$	2,705
Loans collectively evaluated for impairment		906		5,277		2,432		1,298		509		73		10,495
Ending balance	$	1,129	$	6,142	$	3,813	$	1,500	$	543	$	73	$	13,200
Loans:
Individually evaluated for impairment	$	14,198	$	12,781	$	12,589	$	10,373	$	676	$	-	$	50,617
Collectively evaluated for impairment		50,959		377,050		174,345		66,026		17,000		-		685,380
Total ending loans balance	$	65,157	$	389,831	$	186,934	$	76,399	$	17,676	$	-	$	735,997
December 31, 2016
Allowance for loan losses allocated to:
Loans individually evaluated for impairment	$	350	$	911	$	1,424	$	237	$	88	$	-	$	3,010
Loans collectively evaluated for impairment		1,099		5,561		3,100		882		627		73		11,342
Ending balance	$	1,449	$	6,472	$	4,524	$	1,119	$	715	$	73	$	14,352
Loans:
Individually evaluated for impairment	$	16,154	$	12,512	$	13,092	$	11,282	$	746	$	-	$	53,786
Collectively evaluated for impairment		53,007		393,388		201,634		64,690		20,307		-		733,026
Total ending loans balance	$	69,161	$	405,900	$	214,726	$	75,972	$	21,053	$	-	$	786,812

Troubled Debt Restructurings:

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

The following tables present the loans restructured as TDRs during the three months ended September 30, 2017 and the nine months ended September 30, 2017 and 2016.  There were no loans restructured during the three months ended September 30, 2016.

	Three 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		2		$	105	$	105		$	29
Total		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

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

-14-

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

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

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

There were no loans modified as TDRs for which there was a payment default within 12 months following the modification during the three months ended September 30, 2017 and 2016.

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

The following table presents total TDRs, both in accrual and nonaccrual status:

	September 30, 2017				December 31, 2016
	Number of contracts		Amount		Number of contracts		Amount
	(Dollars in thousands)
Accrual		117	$	34,886	$	127	$	35,158
Nonaccrual		20		4,924		23		7,909
Total		137	$	39,810	$	150	$	43,067

             Specific reserves on TDRs at September 30, 2017 and December 31, 2016 were $2.1 million and $2.6 million, respectively.

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

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

	September 30, 2017			December 31, 2016
	(In thousands)
Balance, beginning	$	348		$	1,933
Additions		8			158
Changes in composition		(87	)		(648	)
Principal payments and other reductions		(59	)		(1,095	)
Balance, ending	$	210		$	348

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

Mortgage loans serviced for others are not included in the accompanying unaudited consolidated balance sheets.  The unpaid balance of these loans as of September 30, 2017 and December 31, 2016 is summarized as follows:

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

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

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

-15-

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

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

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

The fair values of the MSRs were $5.5 million and $5.6 million as of nine months ended September 30, 2017 and 2016, respectively.

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

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

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

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

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

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

Loans secured by residential real estate properties for which formal foreclosure proceedings were in process at September 30, 2017 and December 31, 2016 were $1.9 million and $2.1 million, respectively.

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
	(In thousands)
Balance at beginning of period	$	7,085		$	8,653		$	8,436		$	8,346
Transfers in at fair value		2,154			59			2,848			2,944
Write-down of value		(29	)		(23	)		(615	)		(23	)
Gain on disposal		124			308			781			1,059
Cash received upon disposition		(1,135	)		(1,366	)		(3,251	)		(3,724	)
Sales financed by loans by the Bank		-			(577	)		-			(1,548	)
Balance at end of period	$	8,199		$	7,054		$	8,199		$	7,054

Note 9. Deposits

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

	September 30, 2017		December 31, 2016
	(In thousands )
Demand deposits, noninterest bearing	$	183,881	$	174,305
NOW and money market accounts		401,269		405,268
Savings deposits		399,258		407,606
Time certificates, $250,000 or more		23,067		28,531
Other time certificates		159,844		191,710
Total	$	1,167,319	$	1,207,420

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

Note 10. Borrowings

Notes payable to the Federal Home Loan Bank ("FHLB") as of September 30, 2017 and December 31, 2016 were secured by an assignment of mortgage loans or other collateral acceptable to FHLB, and generally had a fixed rate of interest, interest payable monthly and principal due at end of term, unless otherwise noted. As of September 30, 2017, there was $341.6 thousand in pledged loans. Investment securities are held in safekeeping at the FHLB with $2.3 million pledged as collateral for outstanding advances. An additional $75.8 million in advances is available based on the September 30, 2017 value of the remaining unpledged investment securities.

-16-

The following table details borrowings as of September 30, 2017 and December 31, 2016:

Maturity Date	Rate			Type	Principal due	September 30, 2017			December 31, 2016
						(In thousands)
April 27, 2021		6.343	%	Fixed	At maturity			2,300		2,300
					Total		$	2,300	$	2,300

Note 11. Junior Subordinated Debt

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

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

On the dates of issue indicated above, the Trusts, being Delaware statutory business trusts, issued trust preferred securities (the "trust preferred securities") in the amounts and at the rates indicated above.  These 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.

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

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

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

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

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

Note 12. Income Taxes

For the three months ended September 30, 2017, the Company recorded a tax expense of $1.4 million which included an additional deferred tax asset ("DTA") valuation allowance of $900 thousand.  For the nine months ended September 30, 2017, the Company recorded a tax expense of $3.5 million due to a number of one time items. There was no income tax expense or benefit recorded for the three and nine months ended September 30, 2016 because the Company had a full valuation allowance against the deferred tax assets on those dates.

A DTA or liability is recognized to reflect the net tax effects of temporary differences between the carrying amounts of existing assets and liabilities for financial reporting purposes and the amounts used for income tax reporting purposes.  A valuation allowance is established when it is more likely than not that all or a portion of a net deferred tax asset will not be realized.  As discussed in Note 14 "Income Taxes" in Item 8, "Financial Statements and Supplementary Data" of the 2016 Form 10-K, the Company had a valuation allowance on part of the net DTAs, most of which was reversed during 2016.  In evaluating its deferred tax asset ("DTA") as of September 30, 2017, it was determined that it was more likely than not that a portion of the Company's federal and state tax credit carryforwards would expire unrealized.  Accordingly the DTA valuation was increased by a charge to tax expense of $900 thousand.  As of September 30, 2017, there was a total of $2.4 million for the valuation allowance.

-17-

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

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

Note 13. Commitments and Off-Balance-Sheet Activities

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

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

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

	Contract Amount
	September 30, 2017			December 31, 2016
	(In thousands)
Unfunded commitments under lines of credit		$	112,116	$	118,252
Commercial and standby letters of credit			5,249		7,152
Commitments to make loans			1,554		5,835

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 portion of loans in process and equity lines of credit, of approximately $117.4 million as of September 30, 2017 and $125.4 million as of December 31, 2016.  Of these commitments outstanding, the breakdown between fixed rate and adjustable rate loans is as follows:

	September 30, 2017			December 31, 2016
	(In thousands)
Fixed rate		$	18,888	$	19,663
Adjustable rate			98,477		105,741
Total		$	117,365	$	125,404

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

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 FHLB.  The amount of collateral with the FHLB at September 30, 2017 was $78.1 million.

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

Note 14. Preferred Equity Issues

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

-18-

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

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

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

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

Private Placement to Certain Institutional and Accredited Investors

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

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

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

Redemption of Series A Preferred Stock and Series B Preferred Stock

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

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

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

Note 15. Stock Incentives

At the Company's Annual Shareholder Meeting held on January 22, 2015, the Company's shareholders approved the Trinity Capital Corporation 2015 Long-Term Incentive Plan ("2015 Plan"). Under the 2015 Plan, 500,000 shares of voting common stock from shares held in treasury or authorized but unissued voting common stock are reserved for granting stock-based incentive awards.  The Compensation Committee determines the terms and conditions of the awards.  For the three months ended September 30, 2017 there were 356,225 performance-based RSUs granted.  See Exhibit 10.2 of this Form 10Q for more information on the performance-based RSUs.  As of September 30, 2017, there were 96,557 RSUs and 356,225 performance-based RSUs issued under the 2015 Plan.

A summary of changes in the RSUs and performance-based RSUs for the nine months ended September 30, 2017 follows: 

	Shares
Nonvested as of January 1, 2017		50,228
Granted		424,930
Vested		(16,741)
Forfeited or expired		(5,635)
Nonvested as of September 30, 2017		452,782

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

-19-

Note 16. Fair Value Measurements

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

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

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

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

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

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

Financial Instruments Recorded at Fair Value on a Recurring Basis

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

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

September 30, 2017	Total			Level 1			Level 2			Level 3
	(In thousands)
Financial Assets:
Investment securities available for sale:
U.S. Government sponsored agencies		$	74,229		$	-		$	74,229		$	-
States and political subdivision			110,772			-			110,772			-
Residential mortgage backed securities			129,738			-			129,738			-
Residential collateralized mortgage obligation			10,304			-			10,304			-
Commercial mortgage backed securities			108,879			-			108,879			-
SBA Pools			599			-			599			-
Total		$	434,521		$	-		$	434,521		$	-

December 31, 2016
Financial Assets:
Investment securities available for sale:
U.S. Government sponsored agencies	$	68,828	$	-	$	68,828	$	-
States and political subdivision		37,343		-		37,343		-
Residential mortgage backed securities		203,819		-		203,819		-
Residential collateralized mortgage obligation		14,816		-		14,816		-
Commercial mortgage backed securities		114,172		-		114,172		-
SBA Pools		672		-		672		-
Total	$	439,650	$	-	$	439,650	$	-

There were no financial instruments 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 classes during the three and nine months ended September 30, 2017 or the year ended December 31, 2016.

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.

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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.

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

As of September 30, 2017, impaired loans with a carrying value of $19.1 million had a valuation allowance of $2.7 million. As of December 31, 2016, impaired loans with a carrying value of $34.6 million had a valuation allowance of $3.0 million recorded during 2016.

In the table below, OREO had write-downs during the nine months ended September 30, 2017 of $72 thousand.  In the table below, OREO had writedowns during the year ended December 31, 2016 of $63 thousand.  The valuation adjustments on OREO have been recorded through earnings.

Assets measured at fair value on a nonrecurring basis as of September 30, 2017 and December 31, 2016 are included in the table below:

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

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

	Fair value		Valuation Technique(s)	Unobservable Input(s)	Adjustment Range, Weighted Average
September 30, 2017	(In thousands)
Impaired loans
Commercial	$	1,351	Sales comparison	Adjustments for differences of comparable sales	(0.00)% to (7.50)%, (6.35)%
Commercial real estate		5,461	Sales comparison	Adjustments for differences of comparable sales	(4.25) to (7.62), (5.98)
Residential real estate		6,297	Sales comparison	Adjustments for differences of comparable sales	(3.13) to (7.67), (5.86)
Construction real estate		3,080	Sales comparison	Adjustments for differences of comparable sales	(4.00) to (7.25), (6.17)
Installment and other		238	Sales comparison	Adjustments for differences of comparable sales	(0.00) to (8.00), (6.41)
Total impaired loans	$	16,427
OREO
Residential real estate		840	Sales comparison	Adjustments for differences of comparable sales	(1.56) to (23.29),(6.10)
Construction real estate		11	Sales comparison	Adjustments for differences of comparable sales	(61.05) to (61.05),(61.05)
Total OREO	$	851

December 31, 2016
Impaired loans
Commercial	$	13,638	Sales comparison	Adjustments for differences of comparable sales	(0.00)% to (7.75)%, (5.79)%
Commercial real estate		5,465	Sales comparison	Adjustments for differences of comparable sales	(4.25) to (7.62), (5.96)
Residential real estate		7,174	Sales comparison	Adjustments for differences of comparable sales	(3.13) to (37.50), (6.73)
Construction real estate		5,014	Sales comparison	Adjustments for differences of comparable sales	(4.00) to (7.50), (5.79)
Installment and other		345	Sales comparison	Adjustments for differences of comparable sales	(0.00) to (37.50), (7.70)
Total impaired loans	$	31,636
OREO
Residential real estate	$	483	Sales comparison	Adjustments for differences of comparable sales	(3.16) to (11.76) (9.29)
Construction real estate		99	Sales comparison	Adjustments for differences of comparable sales	(12.00) to (12.00) (12.00)
Total OREO	$	582

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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 of its other financial instruments:

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

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

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

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

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

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

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

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

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

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

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

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

The carrying amount and estimated fair values of other financial instruments as of September 30, 2017 and December 31, 2016 are as follows:

	Carrying amount		Level 1		Level 2		Level 3		Total
	(In thousands)
September 30, 2017
Financial assets:
Cash and due from banks	$	11,733	$	11,733	$	-	$	-	$	11,733
Interest-bearing deposits with banks		68,234		68,234		-		-		68,234
Investments:
Available for sale		434,521		-		434,521		-		434,521
Held to maturity		7,882		-		7,512		-		7,512
Non-marketable equity securities		3,615		N/A		N/A		N/A		N/A
Loans, net		721,817		-		-		720,008		720,008
Accrued interest receivable on securities		2,008		-		2,008		-		2,008
Accrued interest receivable on loans		2,285		-		-		2,285		2,285
Accrued interest receivable other		8		-		-		8		8
Off-balance-sheet instruments:
Loan commitments and standby letters of credit	$	17	$	-	$	17	$	-	$	17
Financial liabilities:
Non-interest bearing deposits	$	183,881	$	183,881	$	-	$	-	$	183,881
Interest bearing deposits		983,438		-		983,534		-		983,534
Borrowings		2,300		-		2,644		-		2,644
Junior subordinated debt		36,937		-		-		22,750		22,750
Accrued interest payable		360		-		186		174		360

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December 31, 2016
Financial assets:
Cash and due from banks	$	13,537	$	13,537	$	-	$	-	$	13,537
Interest-bearing deposits with banks		105,798		105,798		-		-		105,798
Securities purchased under resell agreements		-		-		-		-		-
Investments:
Available for sale		439,650		-		439,650		-		439,650
Held to maturity		8,824		-		8,613		-		8,613
Non-marketable equity securities		3,812		N/A		N/A		N/A		N/A
Loans, net		771,138		-		-		770,254		770,254
Accrued interest receivable on securities		1,873		-		1,873		-		1,873
Accrued interest receivable on loans		3,874		-		-		3,874		3,874
Accrued interest receivable other		296		-		-		296		296
Off-balance-sheet instruments:
Loan commitments and standby letters of credit	$	26	$	-	$	26	$	-	$	26
Financial liabilities:
Non-interest bearing deposits	$	174,305	$	174,305	$	-	$	-	$	174,305
Interest bearing deposits		1,033,115		-		1,040,560		-		1,040,560
Long-term borrowings		2,300		-		2,698		-		2,698
Junior subordinated debt		36,927		-		-		20,582		20,582
Accrued interest payable		10,119		-		270		9,849		10,119

Note 17. Regulatory Matters

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

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

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

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

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total Common Equity Tier 1 and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined in the regulations), and of Tier 1 capital (as defined in the regulations) to average assets (as defined in the regulations).  The Company and the Bank met all capital adequacy requirements to which they were subject as of September 30, 2017 and December 31, 2016.

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

	Actual					For Capital Adequacy Purposes					To be well capitalized under prompt corrective action provisions					Minimum Levels Under Consent Order Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
September 30, 2017
Total capital (to risk-weighted assets):
Consolidated	$	144,827		16.9750	%	$	68,254		8.00	%		N/A		N/A			N/A		N/A
Bank only		139,379		16.3432	%		68,226		8.00	%	$	85,283		10.00	%	$	93,811		11.00	%
Tier 1 capital (to risk weighted assets):
Consolidated		124,036		14.5381	%		51,191		6.00	%		N/A		N/A			N/A		N/A
Bank only		128,674		15.0880	%		51,170		6.00	%		68,226		8.00	%		N/A		N/A
Common Equity Tier 1 Capital (to risk weighted assets):
Consolidated		99,229		11.6305	%		38,393		4.50	%		N/A		N/A			N/A		N/A
Bank only		128,674		15.0880	%		38,377		4.50	%		55,434		6.50	%		N/A		N/A
Tier 1 leverage (to average assets):
Consolidated		124,036		9.4951	%		52,253		4.00	%		N/A		N/A			N/A		N/A
Bank only		128,674		9.8963	%		52,009		4.00	%		65,011		5.00	%		104,018		8.00	%

N/A—not applicable

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	Actual					For Capital Adequacy Purposes					To be well capitalized under prompt corrective action provisions					Minimum Levels Under Consent Order Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
December 31, 2016
Total capital (to risk-weighted assets):
Consolidated	$	178,906		20.0509	%	$	71,381		8.00	%		N/A		N/A			N/A		N/A
Bank only		137,873		15.3793	%		71,719		8.00	%	$	89,649		10.00	%	$	98,614		11.00	%
Tier 1 capital (to risk weighted assets):
Consolidated		167,290		18.7490	%		53,536		6.00	%		N/A		N/A			N/A		N/A
Bank only		126,598		14.1216	%		53,789		6.00	%		71,719		8.00	%		N/A		N/A
Common Equity Tier 1 Capital (to risk weighted assets):
Consolidated		60,840		6.8186	%		40,152		4.50	%		N/A		N/A			N/A		N/A
Bank only		126,598		14.1216	%		40,342		4.50	%		58,272		6.50	%		N/A		N/A
Tier 1 leverage (to average assets):
Consolidated		167,290		12.0120	%		35,690		4.00	%		N/A		N/A			N/A		N/A
Bank only		126,598		9.1596	%		35,859		4.00	%		44,824		5.00	%		71,719		8.00	%

N/A - not applicable

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

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

Note 18. Subsequent Events

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

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

Management's Discussion and Analysis of Financial Condition and Results of Operations analyzes the major elements of the Company's balance sheets and statements of income. This section should be read in conjunction with the Company's unaudited consolidated financial statements and accompanying notes included elsewhere in this Quarterly Report on Form 10-Q ("Form 10-Q") and with the unaudited consolidated financial statements and accompanying notes and other detailed information appearing elsewhere in the Company's Annual Report on Form 10-K for the year ended December 31, 2016 ("2016 Form 10-K").

Special Note Concerning Forward-Looking Statements

This Form 10-Q contains, and future oral and written statements of the Company and its management may contain, forward-looking statements, within the meaning of such term in the Private Securities Litigation Reform Act of 1995, with respect to the financial condition, results of operations, plans, objectives, future performance and business of the Company.  Forward-looking statements, which are based upon the reasonable beliefs, expectations and assumptions of the Company's management and on information currently available to management, are generally identifiable by the use of words such as "believe," "expect," "anticipate," "plan," "intend," "estimate," "may," "will," "would," "could," "should" or other similar expressions.  Additionally, all statements in this Form 10-Q, including forward-looking statements, speak only as of the date they are made, and the Company undertakes no obligation to update any statement in light of new information or future events, except as required by law.

The Company's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. The factors, which could cause actual results to differ materially from those expressed in, or implied by, the forward-looking statements and could have a material adverse effect on the operations and future prospects of the Company and its subsidiaries are detailed in the "Risk Factors" section included under Item 1A of Part I of the 2016 Form 10-K.  These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.

Recent Developments

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

Overview

Trinity Capital Corporation, a bank holding company organized under the laws of the State of New Mexico, is the sole stockholder of Los Alamos National Bank (the "Bank"), a national banking organization created under the laws of the United States of America.  The Bank is regulated by the OCC. Trinity is also the sole shareholder of Title Guaranty & Insurance Company ("Title Guaranty") and TCC Funds.  The Bank is the sole stockholder of TCC Advisors Corporation ("TCC Advisors"), the sole member of Triscensions ABQ, LLC, a New Mexico limited liability company, and the sole member of FNM Investment Fund IV, LLC, a Delaware Limited Liability Company ("FNM Investment Fund IV").  The Bank is also a member of Cottonwood Technology Group, LLC ("Cottonwood"), a management consulting and counseling company for technology startup companies, which is also designed to manage venture capital funds. FNM Investment Fund IV is a member of Finance New Mexico—Investor Series IV, LLC, a New Mexico Limited Liability Company ("FNM CDE IV"), an entity created by the Bank to fund loans and investments in a New Market Tax Credit project.  TCC Funds was dissolved in January 2017.  Title Guaranty was dissolved in September 2017.

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

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

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

Regulatory Actions against the Company and the Bank

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

Critical Accounting Policies

Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. We believe that the most critical accounting policies upon which our financial condition and results of operation depend, and which involve the most complex subjective decisions or assessments, are included in the discussion entitled "Critical Accounting Policies" in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," in the 2016 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 2016 Form 10-K.

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

Net Income (Loss)

Net income attributable to common stockholders for the three months ended September 30, 2017 was $405 thousand, or earnings per common share of $0.02, compared to net loss available to common stockholders of $292 thousand for the three months ended September 30, 2016, or loss per common share of $0.04, representing an increase of $697 thousand in net income and an increase of $0.06 in earnings per common share.  This increase in net income available to common stockholders was primarily due to a decrease in dividends on preferred stock of $1.1 million, a decrease in legal, professional, and accounting fees of $998 thousand due in part to the recovery of $500 thousand in legal fees pertaining to one loan relationship that was fully charged-off in 2012, a decrease in salaries and benefits of $868 thousand, a decrease in FDIC insurance expense of $598 thousand, a decrease in supplies expense of $410 thousand, an increase in mortgage referral fees of $308 thousand, a decrease in interest rate contracts of $305 thousand, a decrease in interest expense of $267 thousand, a reverse provision in allowance for loan losses of $250 thousand, an increase in other non-interest income of $188 thousand, an increase in interest bearing due from accounts interest income of $179 thousand, a decrease in fraud losses of $130 thousand, a decrease in loan closing expenses of $92 thousand, and a decrease in employee training and travel of $80 thousand.  These were partially offset by an increase in income taxes of $1.4 million primarily due to an additional DTA valuation allowance of $900 thousand, an ESOP restorative contribution accrual of $936 thousand, decrease in the fair value of MSRs of $772 thousand, a decrease in gain on sale of loans of $630 thousand, a decrease in loan interest income of $397 thousand, an increase in data processing expenses of $260 thousand, a decrease in gain on sale of OREO of $186 thousand, a decrease in interest income on securities of $167 thousand, an increase in occupancy expenses of $134 thousand, and a decrease in gains on security sales of $130 thousand.

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

-26-

Net Interest Income. The following table presents the total dollar amount of interest income from average interest-earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities, and the resultant costs, expressed both in dollars and rates for the periods indicated:

	Three Months Ended September 30,
	2017							2016
	Average Balance		Interest		Yield /Rate			Average Balance		Interest		Yield /Rate
					(Dollars in thousands)
Interest-earning Assets:
Loans(1)	$	742,994	$	9,016		4.83	%	$	802,334	$	9,413		4.67	%
Taxable investment securities		340,534		1,665		1.96	%		417,801		2,163		2.06	%
Investment securities exempt from federal income taxes		81,246		506		2.49	%		32,131		175		2.17	%
Other interest-bearing deposits		71,813		222		1.23	%		61,843		43		0.28	%
Non-marketable equity securities		3,975		53		5.31	%		4,001		55		5.47	%
Total interest-earning assets		1,240,562		11,462		3.68	%		1,318,110		11,849		3.58	%
Non-interest-earning assets		68,684							85,930
Total assets	$	1,309,246						$	1,404,040
Interest-bearing Liabilities:
Deposits:
NOW deposits	$	375,275	$	62		0.07	%	$	390,389	$	61		0.06	%
Money market deposits		17,480		4		0.09	%		18,283		5		0.11	%
Savings deposits		401,057		81		0.08	%		411,440		86		0.08	%
Time deposits over $100,000		99,290		176		0.70	%		136,780		251		0.73	%
Time deposits under $100,000		88,469		109		0.49	%		112,615		153		0.54	%
Short-term borrowings		-		-		-			-		-		-
Long-term borrowings		2,300		37		6.34	%		2,300		37		6.40	%
Long-term capital lease obligation		-		-		0.00	%		2,211		-		0.00	%
Junior subordinated debt		36,934		599		6.36	%		37,116		742		7.95	%
Total interest-bearing liabilities		1,020,805		1,068		0.41	%		1,111,134		1,335		0.48	%
Demand deposits, noninterest-bearing		171,882							169,326
Other noninterest-bearing liabilities		13,073							38,563
Stockholders' equity, including stock owned by ESOP		103,486							85,017
Total liabilities and stockholders equity	$	1,309,246						$	1,404,040
Net interest income/interest rate spread (2)			$	10,394		3.27	%			$	10,514		3.10	%
Net interest margin (3)						3.34	%						3.17	%

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

(2) Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.

(3)Net interest margin represents net interest income as a percentage of average interest-earning assets.

-27-

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

(1) Average loans include nonaccrual loans of $14.5 million and $24.2 million for the nine months ended September 30, 2017 and 2016, respectively.  Interest income includes loan origination fees of $827 thousand and $915 thousand for the nine months ended September 30, 2017 and 2016, respectively.

(2) Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.

(3) Net interest margin represents net interest income as a percentage of average interest-earning assets.

Net interest income decreased $120 thousand to $10.4 million for the three months ended September 30, 2017 from $10.5 million for the three months ended September 30, 2016 due to a decrease in interest income of $387 thousand and a decrease in interest expense of $267 thousand.  Net interest income decreased primarily due to a decrease in average taxable investment securities of $77.3 million and a decrease in average volume of loans of $59.3 million partially offset by an increase in average tax-exempt investment securities of $49.1 million and an increase in average other interest bearing deposits of $10.0 million.  The net 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 ten basis points to 3.68% for the three months ended September 30, 2017 from 3.58% for the three months ended September 30, 2016.  The decrease in interest expense was primarily due to a decrease in the average volume of time deposits of $61.6 million, a decrease in average volume of $15.1 million in NOW deposits, and a decrease in the average volume of $10.4 million in savings deposits.  The reduction in volume and shift in deposit mix caused the cost of interest-bearing liabilities to decline seven basis points to 0.41% for the three months ended September 30, 2017 from 0.48% for the three months ended September 30, 2016.  Net interest margin increased 17 basis points to 3.34% for the three months ended September 30, 2017 from 3.17% for the three months ended September 30, 2016.

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

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Volume, Mix and Rate Analysis of Net Interest Income. The following table presents the extent to which changes in volume and interest rates of interest-earning assets and interest-bearing liabilities have affected interest income and interest expense during the periods indicated.  Information is provided on changes in each category due to (i) changes attributable to changes in volume (change in volume times the prior period interest rate) and (ii) changes attributable to changes in interest rate (changes in rate times the prior period volume). Changes attributable to the combined impact of volume and rate have been allocated proportionally to the changes due to volume and the changes due to rate.

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

	Nine Months Ended September 30,
	2017 Compared to 2016
	Change Due to Volume			Change Due to Rate			Total Change
	(In thousands)
Interest-earning Assets:
Loans	$	(1,918	)	$	(1	)	$	(1,919	)
Taxable investment securities		(213	)		(413	)		(626	)
Investment securities exempt from federal income taxes		572			190			762
Securities purchased under resell agreements		(43	)		-			(43	)
Other interest bearing deposits		(159	)		247			88
Non-marketable equity securities		-			(2	)		(2	)
Total (decrease) increase in interest income	$	(1,761	)	$	21		$	(1,740	)
Interest-bearing Liabilities:
Now deposits	$	(7	)	$	15		$	8
Money market deposits		(8	)		(2	)		(10	)
Savings deposits		5			(14	)		(9	)
Time deposits over $100,000		(237	)		(17	)		(254	)
Time deposits under $100,000		(109	)		(63	)		(172	)
Short-term borrowings		4			-			4
Long-term borrowings		-			(1	)		(1	)
Capital long-term lease obligation		-			-			-
Junior subordinated debt		(4	)		(262	)		(266	)
Total increase (decrease) in interest expense	$	(356	)	$	(344	)	$	(700	)
Increase (decrease) in net interest income	$	(1,405	)	$	365		$	(1,040	)

-29-

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

	Three Months Ended September 30,								Nine Months Ended September 30,
	2017		2016			Net difference			2017			2016		Net difference
	(In thousands)
Noninterest income:
Mortgage loan servicing fees	$	446	$	456		$	(10	)	$	1,394		$	1,546	$	(152	)
Trust and investment services fees		643		654			(11	)		1,953			1,900		53
Service charges on deposits		202		153			49			784			719		65
Net gain on sale of OREO		130		316			(186	)		800			1,159		(359	)
Net gain on sale of loans		-		630			(630	)		-			1,853		(1,853	)
Net (loss) gain on sale of securities		-		130			(130	)		(1,248	)		184		(1,432	)
BOLI income		88		98			(10	)		271			98		173
Mortgage referral fees		431		123			308			1,175			123		1,052
Other fees		598		684			(86	)		1,732			1,240		492
Other noninterest income (loss)		12		(176	)		188			71			25		46
Total noninterest income	$	2,550	$	3,068		$	(518	)	$	6,932		$	8,847	$	(1,915	)

Noninterest income decreased $518 thousand to $2.6 million for the three months ended September 30, 2017 from $3.1 million for the three months ended September 30, 2016, primarily attributable to the decrease in gains on sale of loans of $630 thousand due to the change in strategy in 2016 to generate applications for non-affiliated mortgage companies on a fee basis, a decrease in gain on sale of OREO of $186 thousand, a decrease in gain on sale of securities of $130 thousand, partially offset by increases in mortgage referral fees of $308 thousand due to the change in lending strategy whereby the Bank generates residential mortgage applications for non-affiliated residential mortgage companies on a fee basis, and an increase in other fees of $188 thousand.

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

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

	Three Months Ended September 30,								Nine Months Ended September 30,
	2017		2016			Net difference			2017		2016		Net difference
	(In thousands)
Noninterest expenses:
Salaries and employee benefits	$	5,668	$	6,536		$	(868	)	$	17,913	$	19,460	$	(1,547	)
Occupancy		805		671			134			2,360		2,414		(54	)
Data processing		1,132		872			260			3,557		2,232		1,325
Legal, professional, and accounting fees		541		1,539			(998	)		4,488		4,949		(461	)
Change in value of MSRs		677		(95	)		772			1,406		1,830		(424	)
Other noninterest expenses:
Marketing		183		172			11			667		864		(197	)
Supplies		44		454			(410	)		233		664		(431	)
Postage		119		71			48			429		416		13
FDIC insurance premiums		182		780			(598	)		705		2,259		(1,554	)
Collection expenses		112		151			(39	)		951		579		372
Other		1,928		1,640			288			4,690		3,262		1,428
Total other noninterest expenses		2,568		3,268			(700	)		7,675		8,044		(369	)
Total noninterest expenses	$	11,391	$	12,791		$	(1,400	)	$	37,399	$	38,929	$	(1,530	)

Noninterest expenses decreased $1.4 million to $11.4 million for the three months ended September 30, 2017 from $12.8 million for the three months ended September 30, 2016. This decrease was primarily attributable to a decrease in legal, professional, and accounting fees of $998 thousand due in part to the recovery of $500 thousand in legal fees pertaining to one loan relationship that was fully charged-off in 2012, a decrease in salaries and benefits of $868 thousand, decreases in FDIC insurance premiums of $598 thousand, a decrease in supplies expense of $410 thousand, and a decrease of $305 thousand in interest rate contracts mark-to-market that were included in 2016 and decreases in fraud and other losses of $130 thousand, both of which are included in other.  These were partially offset by the ESOP restorative contribution accrual of $936 thousand included in Other, a decrease in MSR fair value of $772 thousand, an increase in data processing expenses of $260 thousand, and an increase in occupancy expenses of $134 thousand.

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

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

-30-

Financial Condition

Balance Sheet-General. Total assets as of September 30, 2017 were $1.3 billion, decreasing $103.0 million from $1.4 billion as of December 31, 2016.  During 2017, interest-bearing deposits with banks decreased $37.6 million, net loans decreased $49.3 million, and investment securities available for sale decreased $5.1 million, but were partially offset by an increase in premises and equipment of $2.8 million.  The increase in premises and equipment was primarily due to the purchase of the land on which the Cerrillos branch is located, but was offset by the decrease in the capitalized lease the Bank held on this property.  During the same period total liabilities decreased to $1.2 billion, a decrease of $66.0 million, primarily due to decreases in deposits.  Stockholders' equity (excluding stock owned by the ESOP) decreased $36.9 million to $97.2 million as of September 30, 2017 compared to $134.1 million as of December 31, 2016 primarily due to the redemption of the Series A Preferred Stock and Series B Preferred Stock.

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 2016 Form 10-K.

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

	At September 30, 2017				At December 31, 2016
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(In thousands)
Securities Available for Sale:
U.S. Government sponsored agencies	$	74,321	$	74,229	$	69,306	$	68,828
State and political subdivision		111,127		110,772		38,718		37,343
Residential mortgage-backed securities		131,099		129,738		206,101		203,819
Residential collateralized mortgage obligation		10,313		10,304		14,828		14,816
Commercial mortgage backed securities		110,720		108,879		117,272		114,172
SBA pools		606		599		681		672
Totals	$	438,186	$	434,521	$	446,906	$	439,650
Securities Held to Maturity:
SBA pools	$	7,882	$	7,512	$	8,824	$	8,613
Totals	$	7,882	$	7,512	$	8,824	$	8,613

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

The Company had a total of $10.3 million in residential collateralized mortgage obligations as of September 30, 2017.  The residential collateralized mortgage obligations were private label issued or issued by U.S. government sponsored agencies.  At the time of purchase, the ratings of these securities ranged from AAA to Aaa.  As of September 30, 2017, the ratings of these securities were Aaa, which are considered "Investment Grade" (rating of "BBB" or higher).  At the time of purchase and on a monthly basis, the Company reviews these securities for impairment on an other than temporary basis.  The Company utilizes several external sources to evaluate prepayments, delinquencies, loss severity, and other factors in determining if there is impairment.  As of September 30, 2017, 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.

As of September 30, 2017, securities of no single issuer exceeded 10% of 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
	Balance		Weighted Average Yield			Balance		Weighted Average Yield			Balance		Weighted Average Yield			Balance		Weighted Average Yield
As of September 30, 2017	(Dollars in thousands)
Securities Available for Sale:
U.S. Government sponsored agencies	$	4,998		0.89	%	$	53,725		1.82	%	$	15,506		2.20	%	$	-		0.00	%
States and political subdivision (1)		202		1.20	%		1,545		1.91	%		1,357		2.54	%		107,669		2.53	%
Mortgage backed		-		0.00	%		31,743		1.71	%		75,537		2.34	%		141,640		2.04	%
SBA pools		-		0.00	%		-		0.00	%		-		0.00	%		599		2.04	%
Totals	$	5,200		0.90	%	$	87,013		1.78	%	$	92,400		2.32	%	$	249,908		2.25	%
Securities Held to Maturity:
SBA pools	$	-		0.00	%	$	-		0.00	%	$	-		0.00	%	$	7,882		3.57	%
Totals	$	-		0.00	%	$	-		0.00	%	$	-		0.00	%	$	7,882		3.57	%

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

-31-

Loan Portfolio. With management's focus on reducing the amount of non-performing loans, levels of total loans decreased steadily from 2012 to 2017.  While loan demand remains weak in our markets, management is working to increase its portfolio of performing loans.  The total amounts in the residential real estate and commercial real estate loan portfolios have steadily decreased primarily due to the Bank's strategy to diversify its portfolio.

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

	September 30, 2017						December 31, 2016
	Amount			Percent			Amount			Percent
	(Dollars in thousands)
Commercial	$	65,157			8.85	%	$	69,161			8.79	%
Commercial real estate		389,831			52.97	%		405,900			51.58	%
Residential real estate		186,934			25.40	%		214,726			27.29	%
Construction real estate		76,399			10.38	%		75,972			9.66	%
Installment and other		17,676			2.40	%		21,053			2.68	%
Total loans		735,997			100.00	%		786,812			100.00	%
Unearned income		(980	)					(1,322	)
Gross loans		735,017						785,490
Allowance for loan losses		(13,200	)					(14,352	)
Net loans	$	721,817					$	771,138

Net loans decreased $49.3 million from $771.1 million as of December 31, 2016 to $721.8 million as of September 30, 2017.  The largest decreases were in gross residential real estate loans of $27.8 million, gross commercial real estate loans of $16.1 million, gross commercial loans of $4.0 million, and installment and other loans of $3.4 million.  These were partially offset by increases in construction real estate of $427 thousand.

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

	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
	(Dollars in thousands)
Commercial	$	2,465	$	29,351	$	23,474	$	374	$	9,493	$	-	$	35,432	$	29,725
Commercial real estate		18,649		101,268		82,518		71,816		107,663		7,917		208,830		181,001
Residential real estate		361		96,139		3,727		14,855		70,561		1,291		74,649		112,285
Construction real estate		14,846		42,969		2,734		305		9,836		5,709		27,416		48,983
Installment and other		852		9,090		3,461		-		4,273		-		8,586		9,090
Total loans	$	37,173	$	278,817	$	115,914	$	87,350	$	201,826	$	14,917	$	354,913	$	381,084

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

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

	September 30, 2017			December 31, 2016
	(Dollars in thousands)
Non-accruing loans	$	15,731		$	21,478
Loans 90 days or more past due, still accruing interest		394			-
Total non-performing loans		16,125			21,478
OREO		8,199			8,436
Total non-performing assets	$	24,324		$	29,914
TDRs, still accruing interest	$	34,886		$	35,158
Total non-performing loans to total loans		2.19	%		2.73	%
Allowance for loan losses to non- performing loans		81.86	%		66.82	%
Total non-performing assets to total assets		1.84	%		2.10	%

As of September 30, 2017, total non-performing assets decreased $5.6 million to $24.3 million from $29.9 million as of December 31, 2016 primarily due to a decrease in non-accruing loans of $5.7 million.  Construction real estate non-accruing loans decreased $5.2 million and commercial loans decreased $1.1 million.  These were partially offset by increases in commercial real estate loans of $379 thousand, residential real estate loans of $117 thousand, and installment and other loans of $79 thousand.

-32-

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
Dollar Range	Number of Borrowers		Amount			Number of Borrowers		Amount			Number of Borrowers		Amount
	(Dollars in thousands)
September 30, 2017
$5.0 million or more		-	$	-			-	$	-			-	$	-
$3.0 million to $4.9 million		-		-			-		-			-		-
$1.5 million to $2.9 million		-		-			1		2,233			-		-
Under $1.5 million		3		108			9		3,969			50		4,364
Total		3	$	108			10	$	6,202			50	$	4,364
Percentage of individual loan category				0.17	%				1.59	%				2.33	%
December 31, 2016
$5.0 million or more		-	$	-			-	$	-			-	$	-
$3.0 million to $4.9 million		-		-			-		-			-		-
$1.5 million to $2.9 million		-		-			1		2,212			-		-
Under $1.5 million		14		1,192			11		3,611			50		4,247
Total		14	$	1,192			12	$	5,823			50	$	4,247
Percentage of individual loan category				1.72	%				1.43	%				1.98	%

Continued:

	Construction real estate					Installment & other loans					Total
Dollar Range	Number of Borrowers		Amount			Number of Borrowers		Amount			Number of Borrowers		Amount
	(Dollars in thousands)
September 30, 2017
$5.0 million or more		-	$	-			-	$	-			-	$	-
$3.0 million to $4.9 million		-		-			-		-			-		-
$1.5 million to $2.9 million		1		2,002			-		-			2		4,235
Under $1.5 million		15		2,919			6		136			83		11,496
Total		16	$	4,921			6	$	136			85	$	15,731
Percentage of individual loan category				6.44	%				0.77	%				2.14	%
December 31, 2016
$5.0 million or more		-	$	-			-	$	-			-	$	-
$3.0 million to $4.9 million		-		-			-		-			-		-
$1.5 million to $2.9 million		3		6,596			-		-			4		8,808
Under $1.5 million		17		3,563			4		57			96		12,670
Total		20	$	10,159			4	$	57			100	$	21,478
Percentage of individual loan category				13.37	%				0.27	%				2.73	%

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.

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
	(Dollars in thousands)
Balance at beginning of period	$	13,167		$	17,592		$	14,352		$	17,392
(Benefit) provision for loan losses		(250	)		-			(1,220	)		-
Charge-offs:
Commercial		7			206			270			481
Commercial real estate		612			46			639			46
Residential real estate		-			174			309			576
Construction real estate		1,385			-			1,409			22
Installment and other		19			98			253			333
Total charge-offs		2,023			524			2,880			1,458
Recoveries :
Commercial		56			260			306			749
Commercial real estate		88			377			186			507
Residential real estate		125			56			224			315
Construction real estate		37			5			51			122
Installment and other		2,000			35			2,181			174
Total recoveries		2,306			733			2,948			1,867
Net (recoveries) charge-offs		(283	)		(209	)		(68	)		(409	)
Balance at end of period	$	13,200		$	17,801		$	13,200		$	17,801

-33-

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

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

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

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

	September 30, 2017					December 31, 2016
	Amount		Percent			Amount		Percent
	(Dollars in thousands)
Commercial	$	1,129		8.55	%	$	1,449		10.10	%
Commercial real estate		6,142		46.54	%		6,472		45.09	%
Residential real estate		3,813		28.89	%		4,524		31.52	%
Construction real estate		1,500		11.36	%		1,119		7.80	%
Installment and other		543		4.11	%		715		4.98	%
Unallocated		73		0.55	%		73		0.51	%
Total	$	13,200		100.00	%	$	14,352		100.00	%

The allowance for loan losses decreased $1.2 million from $14.4 million as of December 31, 2016 to $13.2 million as of September 30, 2017. This decrease was largely due to improving credit quality, a decrease in loan balances, and decreasing delinquencies.

A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due according to the original contractual terms of the loan agreement, including both principal and interest.  

The allocation of the allowance for impaired credits is 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.  Impairment 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 September 30, 2017 and December 31, 2016 were $50.6 million and $53.8 million, respectively.  Impaired loans that are deemed collateral dependent have been charged down to the value of the collateral (based upon the most recent valuations), less estimated disposition costs.  Impaired loans with specifically identified allocations of allowance for loan losses had a total of $2.7 million and $3.0 million allocated in the allowance for loan losses as of September 30, 2017 and December 31, 2016, respectively.

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

Although the Company believes the allowance for loan losses is sufficient 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 assets include those characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected.  Assets 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 highly questionable and improbable, on the basis of currently existing facts, conditions and values.  Assets classified as "Loss" are those considered uncollectible and viewed as valueless assets and have been charged-off.  Assets that do not currently expose us to sufficient risk to warrant classification in one of the aforementioned categories, but possess weaknesses that deserve management's close attention are deemed to be Special Mention.

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

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

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

-34-

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

	September 30, 2017			December 31, 2016
	(In thousands)
Performing loans classified as:
Substandard		$	12,787		$	22,573
Total performing adversely classified loans		$	12,787		$	22,573
Special mention loans		$	6,717		$	18,589

The table above does not include nonaccrual loans that are less than 30 days past due.  Total performing adversely classified assets as of September 30, 2017 were $12.8 million, a decrease of $9.8 million from $22.6 million as of December 31, 2016.  The declines were primarily in the commercial, commercial real estate loans, and construction real estate loan categories.  In addition, Special Mention loans decreased $11.9 million.  These declines were primarily in commercial real estate loans, construction real estate loans, commercial real estate loans, and residential real estate loans.  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 2016 Form 10-K.  

Sources of Funds

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

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

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

	September 30, 2017 (In thousands)
Maturing within three months	$	6,198
After three but within six months		2,514
After six but within twelve months		6,287
After twelve but within three years		1,846
After three years		6,222
Total time deposits $250,000 and over	$	23,067

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

There was $2.3 million outstanding in FHLB borrowings at September 30, 2017 and 2016.

Liquidity

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

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

We adhere to a liquidity policy, approved by the Board of Directors, which requires that we maintain the following liquidity ratios:

● Fed Funds Purchased are limited to 60% of the total Available Fed Fund Lines, leaving 40% available for emergency 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. 

● 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 without the prior approval of the Board of Directors.

● The total aggregate balance of Wholesale Funds, Brokered Funds and Borrowings as defined above is limited to no more than 35% of Total Funding.

● The Liquidity Coverage Ratio is defined as the Anticipated Sources of Liquidity divided by the Anticipated Liquidity Needs must be greater than 1.15.

● Cumulative Liquidity Gap (percent of cumulative net cash outflow over a six month period under a worst case scenario) at least 100%.

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

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

In the event that additional short-term liquidity is needed, we have established relationships with several large regional banks to provide short-term borrowings in the form of federal funds purchases.  We have the ability to borrow up to $20.0 million for a short period (15 to 60 days) from these banks on a collective basis. Management believes that we will be able to continue to borrow federal funds from our correspondent banks in the future. Additionally, we are a member of the FHLB and, as of September 30, 2017, we had the ability to borrow from the FHLB up to $75.8 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.

-35-

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

The Bank is subject to various regulatory capital requirements administered by federal and state banking agencies, and has been subject to the restrictions imposed by the Consent Order, which affect its ability to pay dividends to Trinity.  See "Business—Supervision and Regulation—Trinity—Dividends Payments" and "Business—Supervision and Regulation—The Bank—Dividend Payments" in Part I, Item 1 of the Company's 2016 Form 10-K.  Failure to meet minimum capital requirements can initiate certain mandatory and discretionary actions by regulators that, if undertaken, could have a direct material effect on our financial statements.  The Consent Order also required that the Bank maintain (i) a leverage ratio of Tier 1 Capital to total assets of at least 8%; and (ii) a ratio of Total Capital to total risk-weighted assets of at least 11%. As of September 30, 2017, the Bank was in compliance with these requirements.  The OCC terminated the Consent Order effective as of November 3, 2017.

The Bank has an internal Capital Plan which identifies potential sources for additional capital should it be deemed necessary.  For more information, see "Capital Resources" included in Item 7 and Note 20 "Regulatory Matters" in Item 8, "Financial Statements and Supplementary Data" of the 2016 Form 10-K.

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

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

Contractual Obligations. There have been no material changes to contractual obligations as of September 30, 2017.  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 2016 Form 10-K.

Commitments.There have been no material changes to the commitments as of September 30, 2017.  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 2016 Form 10-K.

Capital Resources

Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies.  Capital adequacy guidelines and, additionally for bank, 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 rules also established a "capital conservation buffer" of 2.5% above the regulatory minimum risk-based capital requirements.  The capital conservation buffer requirement phased in beginning January 1, 2016 at 0.625% of risk-weighted assets and will increase by that amount ear year until fully implemented in January 2019.  An institution would be subject to limitations on certain activities including payment of dividends, share repurchases and discretionary bonuses to executive officers if its capital level is below the buffered ratio.

A certain amount of Trinity's Tier 1 Capital is in the form of trust preferred securities. See Note 10, "Junior Subordinated Debt" in Item 8, "Financial Statements and Supplementary Data" of the 2015 Form 10-K for details on the effect these have on risk based capital. See "Risk Factors" in Part I, Item 1A of the 2016 Form 10-K for further information regarding changes in the regulatory environment affecting capital.

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

	Actual					For Capital Adequacy Purposes					To be well capitalized under prompt corrective action provisions					Minimum Levels Under Consent Order Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in thousands )
September 30, 2017
Total capital (to risk-weighted assets):
Consolidated	$	144,827		16.9750	%	$	68,254		8.00	%		N/A		N/A			N/A		N/A
Bank only		139,379		16.3432	%		68,226		8.00	%	$	85,283		10.00	%	$	93,811		11.00	%
Tier 1 capital (to risk weighted assets):
Consolidated		124,036		14.5381	%		51,191		6.00	%		N/A		N/A			N/A		N/A
Bank only		128,674		15.0880	%		51,170		6.00	%		68,226		8.00	%		N/A		N/A
Common Equity Tier 1 Capital (to risk weighted assets):
Consolidated		99,229		11.6305	%		38,393		4.50	%		N/A		N/A			N/A		N/A
Bank only		128,674		15.0880	%		38,377		4.50	%		55,434		6.50	%		N/A		N/A
Tier 1 leverage (to average assets):
Consolidated		124,036		9.4951	%		52,253		4.00	%		N/A		N/A			N/A		N/A
Bank only		128,674		9.8963	%		52,009		4.00	%		65,011		5.00	%		104,018		8.00	%

N/A—not applicable

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

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Item 4. Controls and Procedures

As discussed in the 2016 Form 10-K, filed on April 14, 2017, subsequent to the issuance of the Company's consolidated financial statements as of and for the quarterly period ended June 30, 2012, the Company's management determined that the Bank had not properly recognized certain losses and risks inherit in its loan portfolio on a timely basis as disclosed in the Company's Current Reports on Form 8-K filed on November 13, 2012, April 26, 2013 and October 27, 2014 with the Securities and Exchange Commission ("SEC").  This failure was caused by the override of controls by certain former members of management and material weaknesses in internal control over financial reporting.

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

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

Controls and Procedures

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

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

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

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

Internal Control over Financial Reporting

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

All internal control systems, no matter how well designed, have inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements will not be prevented or detected on a timely basis by internal control over financial reporting. Further, because of changes in conditions, the effectiveness of internal control may vary over time. A material weakness is a deficiency or a combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis.

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

(1)    Internal Control Environment.  Weaknesses in the control environment resulted in an environment in which management was able to override controls in the past, including:

· An internal control matrix has not been established to define the internal controls "key" to ensuring financial statements are free of material misstatement.  As a result the work performed to test key internal controls was not sufficient to comply with all of the Company's obligations under Section 112 of the Federal Deposit Insurance Corporation Improvement Act (FDICIA).

· Management has not yet adopted COSO's 2013 Integrated Framework, and is still reporting under the 1992 Integrated Framework.

· Management has not yet implemented input and file maintenance controls over financially significant systems to detect errors in initial input and unauthorized changes.

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(2) Information Systems and Reports.  Weaknesses in the control environment over implementation, change management and monitoring of in-house systems were present, including:

· In many cases management has relied on outputs from financially significant systems (such as accrued interest receivable / payable calculations, trust fees, days past due, average balances) without completing a periodic review / testing of these outputs to corroborate system accuracy.  These calculations are critical to ensuring accurate revenue and expense recognition.

· A review of user access to all financial significant applications was not performed in calendar year 2016.  In addition, security events were not being tracked through available application logs for several applications.

· During the year many financially significant applications were converted to another application.  Management indicated work had been performed to validate the accurate transfer of the data, however for a few financially significant applications much of the documentation supporting this review was not retained.

(3) Financial Reporting.  Management reviews of control procedures designed to validate and detect errors at period end were informal in some cases and in most cases lacked the precision necessary to identify material errors:

· Segregation of duties were not in place in several financially significant areas.

· Review controls over financial significant, manually prepared reports and calculations, as well as reports from third parties, were not sufficiently documented to evidence a precise review occurred which would detect a material misstatement.

· The preparation of memorandums supporting conclusions are imprecise and lack detailed documentation.  Additionally, evidence reviewed suggested that these memos were not being reviewed in a precise enough manner to detect misstatements.

· Management has not yet developed a formal and sufficiently precise review control over the preparation of financial and regulatory reports, which includes a thorough review for material misstatements, clerical errors, formatting errors, transpositions, or noncompliance with GAAP / SEC / regulatory reporting requirements.

· Although management implemented a reconciliation checklist in the current year, the reconciliations tracked within the checklist were not completed in a timely manner, and included stale reconciling items.

(4) Allowance for Loan Losses. Processes and controls designed to monitor loan quality and determine the allowance for loan loss reserve were inadequate as follows:

· Reserve calculations and reports utilized to estimate required reserves were subject to informal control procedures, leading to weaknesses in the quality of documentation utilized by management to support loan impairments, specific reserve requirements, and qualitative adjustments.

· Reports utilized by the Loan Risk Rating Committee were not subject to formal reviews to ensure that decisions are being made based on accurate and complete information.

· Review of the allowance for loan loss calculation was informal and insufficiently precise.

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

Except for such remedial measures, no changes in the Company's internal control over financial reporting occurred during the fiscal quarter ended September 30, 2017 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 2016 Form 10-K.  There are no material developments in the legal actions described in the 2016 Form 10-K.  The Company may become a party to legal proceedings.  Except as described 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 third quarter of 2017, we made no repurchases or unregistered sales of any class of our equity securities.

Item 3.   Defaults Upon Senior Securities

 None

Item 4.   Mine Safety Disclosures

Not Applicable

Item 5.   Other Information

 None

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Item 6.    Exhibits

1.1	Form of Agency Agreement between the Company and Boenning & Scattergood, Inc., as financial advisor (incorporated herein by reference to Exhibit 1.1 of Amendment No. 2 to the Company's Registration Statement on Form S-1 filed on September 19, 2017 (No. 333-218952))
3.1	Amended and Restated Articles of Incorporation of Trinity Capital Corporation Corporation (incorporated herein by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed on July 7, 2017 (File No. 000-50266)
10.1	Form of Amended and Restated Standby Purchase Agreement by and among the Company and Strategic Value Bank Partners LLC (incorporated herein by reference to Exhibit 10.20 of Amendment No. 1 to the Company's Registration Statement on Form S-1 filed on August 28, 2017 (No. 333-218952))
10.2	Form of Restricted Stock Unit Award Agreement under the Company's 2015 Long-Term Incentive Plan
31.1	Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a)
31.2	Certification on Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a)
32.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101	Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016; (ii) Consolidated Statements of Operations for the three and nine months ended September 30, 2017 and 2016; (iii) Consolidated Statements of Changes in Stockholders' Equity for the nine months ended September 30, 2017 and 2016; (iv) Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016; and (v) Notes to Consolidated Financial Statements, tagged as blocks of text

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SIGNATURES

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

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

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