Trinity Capital 10Q 2018 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, 2018

	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 every Interactive Data File required to be submitted 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, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Act. (Check one):

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

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

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

As of October 31, 2018, there were 11,660,491 shares of voting common stock outstanding and 8,044,292 shares of non-voting common stock outstanding.

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION
Item 1. Financial Statements and Supplementary Data	1
Item 2. Management's Discussions and Analysis of Financial Condition and Results of Operations	24
Item 3. Quantitative and Qualitative Disclosures About Market Risk	35
Item 4. Controls and Procedures	35
PART II – OTHER INFORMATION
Item 1. Legal Proceedings	36
Item 1A. Risk Factors	36
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	36
Item 3. Defaults Upon Senior Securities	36
Item 4. Mine Safety Disclosures	36
Item 5. Other Information	36
Item 6. Exhibits	37
Signatures	38

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, 2018			December 31, 2017
ASSETS
Cash and due from banks	$	11,046		$	12,893
Interest-bearing deposits with banks		3,645			22,541
Cash and cash equivalents		14,691			35,434
Investment securities available for sale, at fair value		437,975			468,733
Investment securities held to maturity, at amortized cost (fair value of $7,151 and $7,369 as of September 30, 2018 and December 31, 2017, respectively)		7,769			7,854
Non-marketable equity securities		5,819			3,617
Loans held for sale, at lower of cost or market		6,815			-
Loans (net of allowance for loan losses of $9,528 and $13,803 as of September 30, 2018 and December 31, 2017, respectively)		695,296			686,341
Bank owned life insurance ("BOLI")		26,313			25,656
Premises and equipment, net		28,027			28,542
Other real estate owned ("OREO"), net		5,982			6,432
Deferred tax assets ("DTAs"), net		11,621			10,143
Other assets		13,283			14,781
Total assets	$	1,253,591		$	1,287,533

LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits:
Noninterest-bearing	$	175,655		$	161,677
Interest-bearing		921,758			965,670
Total deposits		1,097,413			1,127,347
Borrowings		15,400			2,300
Junior subordinated debt		26,766			36,941
Other liabilities		6,243			15,399
Total liabilities		1,145,822			1,181,987

Stock owned by Employee Stock Ownership Plan ("ESOP") participants; 723,127 shares and 831,645 shares as of September 30, 2018 and December 31, 2017, respectively, at fair value	$	5,183		$	5,961

Commitments and contingencies (Note 13)

Stockholders' equity
Common stock voting, no par; 20,000,000 shares authorized; 11,660,491 and 11,364,862 shares issued and outstanding as of September 30, 2018 and December 31, 2017, respectively		11,660			11,365
Common stock non-voting, no par; 20,000,000 shares authorized; 8,044,292 shares and 8,286,200 shares issued and outstanding as of June 30, 2018 and December 31, 2017, respectively		8,044			8,286
Additional paid-in capital		36,222			35,071
Retained earnings		64,093			54,587
Common stock related to ESOP		(5,183	)		(5,961	)
Accumulated other comprehensive loss		(12,250	)		(3,763	)
Total shareholders' equity		102,586			99,585
Total liabilities and shareholders' equity	$	1,253,591		$	1,287,533

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

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,
	2018			2017			2018			2017
Interest income:
Loans held for sale	$	125		$	-		$	167		$	0
Loans, including fees		8,534			9,016			25,272			27,613
Interest and dividends on investment securities:
Taxable		1,506			1,665			4,562			5,143
Nontaxable		1,042			506			3,127			1,085
Other interest income		78			275			256			574
Total interest income		11,285			11,462			33,384			34,415

Interest expense:
Deposits		424			432			1,255			1,333
Borrowings		131			37			313			114
Junior subordinated debt		363			599			1,501			1,912
Total interest expense		918			1,068			3,069			3,359
Net interest income		10,367			10,394			30,315			31,056
(Benefit) provision for loan losses		(1,000	)		(250	)		(1,480	)		(1,220	)
Net interest income after benefit for loan losses		11,367			10,644			31,795			32,276

Noninterest income:
Mortgage loan servicing fees		-			446			-			1,394
Trust and investment services fees		749			643			2,255			1,953
Service charges on deposits		226			202			712			784
Net gain on sale of OREO		191			130			764			800
Net gain on sale of loans		-			-			-			-
Net loss on sale of securities		-			-			-			(1,248	)
BOLI income		218			88			656			271
Mortgage referral fee income		288			431			874			1,175
Interchange fees		507			567			1,593			1,823
Other fees		301			312			936			984
Venture capital investment income		-			-			735			(21	)
Other noninterest income		18			13			32			85
Total noninterest income		2,498			2,832			8,557			8,000

Noninterest expenses:
Salaries and employee benefits		5,410			5,668			16,286			17,913
Occupancy		522			553			1,592			1,590
Data processing		952			1,132			2,894			3,557
Legal, professional and accounting fees		488			712			1,540			3,998
Change in value of Mortgage servicing rights ("MSRs")		-			677			-			1,406
Other noninterest expense		1,674			2,931			5,955			10,010
Total noninterest expenses		9,046			11,673			28,267			38,474
Income (loss) before provision for income taxes		4,819			1,803			12,085			1,802
Provision for income taxes		1,303			1,398			2,579			3,487
Net income (loss)		3,516			405			9,506			(1,685	)
Dividends and discount accretion on preferred shares		-			-			-			770
Net income (loss) attributable to common stockholders	$	3,516		$	405		$	9,506		$	(2,455	)
Basic earnings (loss) per common share	$	0.18		$	0.02		$	0.48		$	(0.16	)
Diluted earnings (loss) per common share	$	0.18		$	0.02		$	0.48		$	(0.16	)

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

TRINITY CAPITAL CORPORATION & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

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

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

TRINITY CAPITAL CORPORATION & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

(Unaudited)

	Common stock
	Voting Issued		Held in Treasury, at cost		Non-voting Issued		Preferred Stock			Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Common Stock Related to ESOP			Total Stockholders' Equity
Balance, December 31, 2016	$	9,509	$	-	$	-	$	74,007		$	(1,373	)	$	60,651		$	(5,495	)	$	(3,192	)	$	134,107
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														(372	)								(372	)
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 issuance costs								398						(398	)								-
Restricted stock units ("RSUs") vested		17									(17	)											-
RSUs compensation expense											91												91
Balance, September 30, 2017	$	9,566	$	-	$	8,286	$	-		$	27,657		$	58,196		$	-3,340		$	-3,192		$	97,173

	Common stock
	Voting Issued		Held in Treasury, at cost		Non-voting Issued			Preferred Stock		Additional Paid-in Capital			Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Common Stock Related to ESOP			Total Stockholders' Equity
Balance, December 31, 2017	$	11,365	$	-	$	8,286		$	-	$	35,071		$	54,587	$	(3,763	)	$	(5,961	)	$	99,585
Net income														9,506								9,506
Other comprehensive loss																(8,487	)					(8,487	)
Rights offering costs											(2	)										(2	)
Common stock issued to board		17									115											132
ESOP distributions																			778			778
RSU compensation expense											1,105											1,105
Common stock issued for vested RSUs		36									(67	)										(31	)
Conversion from non-voting to voting common stock		242				(242	)															-
Balance, September 30, 2018	$	11,660	$	-	$	8,044		$	-	$	36,222		$	64,093	$	(12,250	)	$	(5,183	)	$	102,586

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

TRINITY CAPITAL CORPORATION & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended September 30,
	2018			2017
Cash Flows From Operating Activities	(Dollars in thousands)
Net income (loss)	$	9,506			(1,685	)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		5,778			5,104
Benefit for loan losses		(1,480	)		(1,220	)
Net loss on sale of investment securities		-			1,248
Net gain on sale of loans		-			-
Gains and write-downs on OREO, net		(713	)		(166	)
Loss (gain) on disposal of premises and equipment		5			(37	)
Decrease in deferred income tax assets		1,451			1,081
Change in escrow liabilities		(5,306	)		712
Change in value of MSRs		-			1,406
BOLI income		(656	)		(271	)
Compensation expense recognized for restricted stock units		1,105			91
Decrease in accrued interest payable on sub debt		-			(9,676	)
Changes in operating assets and liabilities:
Other assets		731			4,703
Other liabilities		(3,849	)		(2,158	)
Net cash provided by (used in) operating activities before origination and gross sales of loans held for sale		6,572			(868	)
Gross sales of loans held for sale		-			-
Origination of loans held for sale		-			-
Net cash provided by (used in) operating activities	$	6,572			(868	)

Continued next page

TRINITY CAPITAL CORPORATION & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS CONTINUED

(Unaudited)

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

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

Note 1. Basis of Presentation

Consolidation: The accompanying unaudited consolidated financial statements include the consolidated balances and results of operations of Trinity Capital Corporation ("Trinity" or the "Company") and its wholly owned subsidiaries: Los Alamos National Bank (the "Bank") and TCC Advisors Corporation ("TCC Advisors"), collectively referred to as the "Company." Trinity Capital Trust I ("Trust I"), Trinity Capital Trust III ("Trust III"), Trinity Capital Trust IV ("Trust IV") and Trinity Capital Trust V ("Trust V"), collectively referred to as the "Trusts," are trust subsidiaries of Trinity. Trinity owns all of the outstanding common securities of the Trusts. The Trusts are considered variable interest entities ("VIEs") under Accounting Standards Codification ("ASC") Topic 810, "Consolidation." Because Trinity is not the primary beneficiary of the Trusts, the financial statements of the Trusts are not included in the consolidated financial statements of the Company. TCC Advisors Corporation and Trust I were dissolved in March 2018.

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

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

Reclassifications: Some items in the prior year financial statements 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, 2018 and 2017:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
	(In thousands, except share data)
Net income (loss)	$	3,516	$	405	$	9,506	$	(1,685	)
Dividends and discount accretion on preferred shares		-		-		-		770
Net income (loss) attributable to common stockholders	$	3,516	$	405	$	9,506	$	(2,455	)
Weighted average common shares issued		19,702,110		17,539,689		19,685,998		15,647,178
LESS: Weighted average treasury stock shares		-		-		-		-
Weighted average common shares outstanding, net		19,702,110		17,539,689		19,685,998		15,647,178
Basic earnings (loss) per common share	$	0.18	$	0.02	$	0.48	$	(0.16	)
Dilutive effect of stock-based compensation		255,541		13,134		244,759		-
Weighted average common shares outstanding including dilutive shares		19,957,651		17,552,823		19,930,757		15,647,178
Diluted earnings (loss) per common share	$	0.18	$	0.02	$	0.48	$	(0.16	)

Certain restricted stock units ("RSUs") were not included in the above calculation, as they would have had an anti-dilutive effect. There were no shares excluded from the calculation for the three months ended September 30, 2018September 30, 2017. There were no shares excluded from the calculation for the nine months ended September 30, 2018. The total number of excluded shares relating to such RSUs was approximately 97,000 shares for the nine months ended September 30, 2017.

Note 3. Recent Accounting Pronouncements

Newly effective standards: In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers (Topic 606). This update requires an entity to recognize revenue as performance obligations are met, in order to reflect the transfer of promised goods or services to customers in an amount that reflects the consideration the entity is entitled to receive for those goods or services. The following steps are applied in the updated guidance: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the entity satisfies a performance obligation. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606) – Deferral of the Effective Date. This update deferred the effective date of ASU 2014-09 by one year, making it effective for annual reporting periods beginning after December 15, 2017 including interim reporting periods within that reporting period. The Company's revenue is primarily comprised of net interest income on financial assets and liabilities, which is explicitly excluded from the scope of this guidance, and non-interest income. The Company has reviewed non-interest income, such as deposit fees, assets management and investment advisory fees, OREO gains and losses on sale, and credit card interchange fees. The Company completed its overall assessment of revenue streams and related contracts affected by the guidance and adopted ASC 606 on January 1, 2018 with no impact on total shareholders' equity or net income.

In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (Topic 825). The amendments in this update require that public entities measure equity investments with readily determinable fair values, at fair value, with changes in their fair value recorded through net income. This ASU clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset ("DTA") related to available for sale securities in combination with the entity's other DTA. This ASU also prescribes an exit price be used to determine the fair value of financial instruments not measured at fair value for disclosure in the fair value note. The amendments within the update are effective for fiscal years and all interim periods beginning after December 15, 2017. The Company has determined that the evaluation of DTA valuation allowance and the exit price for financial instruments are within scope for the Company. The Company adopted this standard on January 1, 2018 and used a third-party to provide the exit pricing for Note 16, Fair Value Measurements, as required under ASU 2016-01. The adoption of ASU 2016-01 did not have an impact on the Company's financial statements.

In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718). ASU 2017-09 was effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. This ASU provides clarity on the guidance related to stock compensation when there have been changes to the terms or conditions of a share-based payment award to which an entity would be required to apply modification accounting under ASC 718. The ASU provides the three following criteria must be met in order to not account for the effect of the modification of terms or conditions: the fair value, the vesting conditions and the classification as an equity or liability instrument of the modified award is the same as the original award immediately before the original award is modified. The Company adopted ASU 2017-09 on January 1, 2018. The adoption of ASU 2017-09 did not have a material impact on the Company's Consolidated Financial Statements.

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

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company has created an internal committee focused on the implementation of ASU 2016-13 and is currently in the process of evaluating data needs and the effects of ASU 2016-13 on its financial statements and disclosures. The Company is also working with a third party allowance for loan and lease losses ("ALLL") software provider to help with implementation.

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

Note 4. Restrictions on Cash and Due From Banks

The Bank is required to maintain reserve balances in cash or on deposit with the Board of Governors of the Federal Reserve System ("FRB"), based on a percentage of deposits. As of September 30, 2018 and December 31, 2017, the reserve requirement on deposit at the FRB was $0 due to the small balance of demand deposits and the balances maintained at the FRB.

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

The Company maintains some of its cash in bank deposit accounts at financial institutions other than its subsidiaries that, at times, may exceed federally insured limits. The Company may lose all uninsured balances if one of the correspondent banks fails without warning. The Company has not experienced any losses in such accounts. The Company believes it is not exposed to any significant credit risk on cash and cash equivalents 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, 2018
U.S. government sponsored agencies	$	69,300	$	-	$	(2,296	)	$	67,004
State and political subdivisions		162,628		30		(5,114	)		157,544
Residential mortgage backed securities		95,703		37		(2,097	)		93,643
Residential collateralized mortgage obligations		15,119		48		(188	)		14,979
Commercial mortgage backed securities		109,725		-		(5,388	)		104,337
SBA pools		486		-		(18	)		468
Totals	$	452,961	$	115	$	(15,101	)	$	437,975

December 31, 2017
U.S. government sponsored agencies	$	69,315	$	-	$	(764	)	$	68,551
State and political subdivisions		157,652		1,306		(252	)		158,706
Residential mortgage backed securities		124,578		98		(1,593	)		123,083
Residential collateralized mortgage obligations		9,715		51		(80	)		9,686
Commercial mortgage backed securities		110,483		67		(2,388	)		108,162
SBA pools		560		-		(15	)		545
Totals	$	472,303	$	1,522	$	(5,092	)	$	468,733

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

December 31, 2017
SBA pools	$	7,854	$	-	$	(485	)	$	7,369
Totals	$	7,854	$	-	$	(485	)	$	7,369

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,
	2018			2017		2018		2017
	(In thousands)
Gross realized gains		$	-	$	-	$	-	$	6
Gross realized losses			-		-		-		(1,254	)
Net gains (losses)		$	-	$	-	$	-	$	(1,248	)

There was no tax benefit for the three or nine months ended September 30, 2018 related to net realized gains and losses. There was no tax benefit for the three months ended September 30, 2017 and a tax benefit of $482 thousand related to these net realized gains and losses for the nine months ended September 30, 2017.

A summary of unrealized loss information for investment securities, categorized by security type, as of September 30, 2018 and December 31, 2017 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, 2018
U.S. government sponsored agencies	$	26,449	$	(834	)	$	41,023	$	(1,462	)	$	67,472	$	(2,296	)
State and political subdivisions		111,103		(3,551	)		36,527		(1,563	)		147,630		(5,114	)
Residential mortgage backed securities		27,367		(653	)		59,894		(1,444	)		87,261		(2,097	)
Residential collateralized mortgage obligations		6,855		(52	)		4,234		(136	)		11,089		(188	)
Commercial mortgage backed securities		19,370		(614	)		84,965		(4,774	)		104,335		(5,388	)
SBA pools		-		-			468		(18	)		468		(18	)
Totals	$	191,144	$	(5,704	)	$	227,111	$	(9,397	)	$	418,255	$	(15,101	)

December 31, 2017
U.S. government sponsored agencies	$	49,070	$	(331	)	$	19,481	$	(433	)	$	68,551	$	(764	)
State and political subdivisions		23,217		(95	)		24,774		(157	)		47,991		(252	)
Residential mortgage backed securities		18,771		(199	)		88,100		(1,394	)		106,871		(1,593	)
Residential collateralized mortgage obligations		4,761		(67	)		3,502		(13	)		8,263		(80	)
Commercial mortgage backed securities		6,961		(94	)		81,042		(2,294	)		88,003		(2,388	)
SBA pools		-		-			545		(15	)		545		(15	)
Totals	$	102,780	$	(786	)	$	217,444	$	(4,306	)	$	320,224	$	(5,092	)

Securities Held to Maturity:
September 30, 2018
SBA pools	$	-	$	-		$	7,151	$	(618	)	$	7,151	$	(618	)
Totals	$	-	$	-		$	7,151	$	(618	)	$	7,151	$	(618	)

December 31, 2017
SBA pools	$	-	$	-		$	7,369	$	(485	)	$	7,369	$	(485	)
Totals	$	-	$	-		$	7,369	$	(485	)	$	7,369	$	(485	)

As of September 30, 2018, the Company's security portfolio consisted of 152 securities, 131 of which were in an unrealized loss position. As of September 30, 2018, $441.1 million in investment securities had unrealized losses with aggregate depreciation of 3.44% of the Company's amortized cost basis. Of these securities, $244.3 million had a continuous unrealized loss position for twelve months or longer with an aggregate depreciation of 3.94%. The unrealized losses relate principally to the general change in interest rates and illiquidity, and not credit quality, that has occurred since the securities 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, 2018, by contractual maturity are shown below. Maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties.

	Available for Sale				Held to Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(In thousands)
One year or less	$	201	$	200	$	-	$	-
One to five years		71,007		68,699		-		-
Five to ten years		3,209		3,189		-		-
Over ten years		157,997		152,928		7,769		7,151
Subtotal		232,414		225,016		7,769		7,151
Residential mortgage backed securities		95,703		93,643		-		-
Residential collateralized mortgage obligations		15,119		14,979		-		-
Commercial mortgage backed securities		109,725		104,337
Total	$	452,961	$	437,975	$	7,769	$	7,151

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

Note 6. Loans and Allowance for Loan Losses

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

	September 30, 2018			December 31, 2017
	(In thousands)
Commercial	$	63,539		$	61,388
Commercial real estate		404,790			378,802
Residential real estate		155,118			178,296
Construction real estate		72,550			63,569
Installment and other		9,998			18,952
Total loans		705,995			701,007
Unearned income		(1,171	)		(863	)
Gross loans		704,824			700,144
Allowance for loan losses		(9,528	)		(13,803	)
Net loans	$	695,296		$	686,341

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

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

Commercial real estate loans: These loans are subject to underwriting standards and processes similar to commercial loans, in addition to those of other real estate loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher original amounts than other types of loans and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Company's commercial real estate portfolio are geographically concentrated in the markets in which the Company operates. Management monitors and evaluates commercial real estate loans based on collateral, location and risk grade criteria. The Company also utilizes third-party sources to provide insight and guidance about economic conditions and trends affecting market areas it serves. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans. As of September 30, 2018, 24.8% of the outstanding principal balances of the Company's commercial real estate loans were secured by owner-occupied properties.

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

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.

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, 2018 and December 31, 2017, including nonaccrual loans:

	Current		30-59 Days Past Due		60-89 Days Past Due		Loans Past Due 90 Days or More		Total Past Due		Total
September 30, 2018	(In thousands)
Commercial	$	63,512	$	27	$	-	$	-	$	27	$	63,539
Commercial real estate		403,507		920		-		363		1,283		404,790
Residential real estate		151,872		1,811		266		1,169		3,246		155,118
Construction real estate		72,178		334		-		38		372		72,550
Installment and other		9,860		47		-		91		138		9,998
Total loans	$	700,929	$	3,139	$	266	$	1,661	$	5,066	$	705,995

Nonaccrual loan classification, included above	$	4,888	$	1,895	$	266	$	1,661	$	3,822	$	8,710

December 31, 2017
Commercial	$	59,703	$	173	$	1,475	$	37	$	1,685	$	61,388
Commercial real estate		371,640		5,490		-		1,672		7,162		378,802
Residential real estate		174,388		1,899		-		2,009		3,908		178,296
Construction real estate		59,291		423		74		3,781		4,278		63,569
Installment and other		18,705		80		81		86		247		18,952
Total loans	$	683,727	$	8,065	$	1,630	$	7,585	$	17,280	$	701,007

Nonaccrual loan classification, included above	$	3,858	$	5,859	$	38	$	7,585	$	13,482	$	17,340

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, 2018 and December 31, 2017:

	September 30, 2018				December 31, 2017
	Nonaccrual		Loans Past Due 90 Days or More and Still Accruing Interest		Nonaccrual		Loans Past Due 90 Days or More and Still Accruing Interest
	(In thousands)
Commercial	$	603	$	-	$	102	$	-
Commercial real estate		3,717		-		8,617		-
Residential real estate		4,125		-		4,599		-
Construction real estate		165		-		3,911		-
Installment and other		100		-		111		-
Total	$	8,710	$	-	$	17,340	$	-

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

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

	Pass		Special Mention		Substandard		Doubtful		Total
September 30, 2018	(In thousands)
Commercial	$	58,035	$	3,779	$	1,725	$	-	$	63,539
Commercial real estate		384,653		3,592		16,545		-		404,790
Residential real estate		149,033		663		5,422		-		155,118
Construction real estate		71,549		876		125		-		72,550
Installment and other		9,900		-		98		-		9,998
Total	$	673,170	$	8,910	$	23,915	$	-	$	705,995

December 31, 2017
Commercial	$	58,769	$	2	$	2,617	$	-	$	61,388
Commercial real estate		359,768		4,762		14,272		-		378,802
Residential real estate		172,101		-		6,195		-		178,296
Construction real estate		56,661		917		5,991		-		63,569
Installment and other		18,523		-		429		-		18,952
Total	$	665,822	$	5,681	$	29,504	$	-	$	701,007

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

	Pass			Special Mention		Substandard		Doubtful		Total
September 30, 2018	(In thousands)
Current		$	671,996	$	8,910	$	20,023	$	-	$	700,929
Past due 30-59 days			1,174		-		1,965		-		3,139
Past due 60-89 days			-		-		266		-		266
Past due 90 days or more			-		-		1,661		-		1,661
Total		$	673,170	$	8,910	$	23,915	$	-	$	705,995

December 31, 2017
Current		$	662,445	$	5,681	$	15,601	$	-	$	683,727
Past due 30-59 days			1,785		-		6,280		-		8,065
Past due 60-89 days			1,592		-		38		-		1,630
Past due 90 days or more			-		-		7,585		-		7,585
Total		$	665,822	$	5,681	$	29,504	$	-	$	701,007

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

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

	September 30, 2018							December 31, 2017
	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated			Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
	(In thousands)
With no related allowance recorded:
Commercial	$	110	$	110				$	184	$	182
Commercial real estate		6,494		3,517					4,294		4,154
Residential real estate		5,948		5,032					6,585		5,808
Construction real estate		1,889		1,863					7,471		6,049
Installment and other		293		292					349		348
With an allowance recorded:
Commercial		13,671		13,669		$	321		13,361		13,359		$	211
Commercial real estate		5,870		5,870			851		10,987		10,987			3,735
Residential real estate		5,344		5,343			943		6,774		6,774			943
Construction real estate		1,161		1,161			42		3,244		3,244			231
Installment and other		240		240			34		236		236			32
Total	$	41,020	$	37,097		$	2,191	$	53,485	$	51,141		$	5,152

The table above includes $31.6 million of troubled debt restructurings at September 30, 2018 and $38.9 million of troubled debt restructurings at December 31, 2017.

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

	Three Months Ended								Nine Months Ended
	September 30, 2018				September 30, 2017				September 30, 2018				September 30, 2017
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(In thousands)
With no related allowance recorded:
Commercial	$	112	$	2	$	6,834	$	184	$	167	$	4	$	4,411	$	543
Commercial real estate		3,241		27		5,133		99		5,231		80		5,084		295
Residential real estate		5,033		32		4,712		54		6,962		94		4,586		162
Construction real estate		3,330		22		7,397		104		6,046		66		7,189		308
Installment and other		296		3		399		5		416		10		353		14
With an allowance recorded:
Commercial		13,487		210		7,547		22		17,866		622		10,741		66
Commercial real estate		6,144		64		6,350		69		9,916		189		6,352		205
Residential real estate		5,434		58		7,695		81		8,094		173		8,019		240
Construction real estate		1,255		13		3,302		43		2,987		40		3,755		129
Installment and other		239		2		289		2		319		6		347		7
Total	$	38,571	$	433	$	49,658	$	663	$	58,004	$	1,284	$	50,837	$	1,969

If nonaccrual loans outstanding had been current in accordance with their original terms, approximately $118 thousand and $197 thousand would have been recorded as loan interest income during the three months ended September 30, 2018 and 2017, respectively, and $222 thousand and $585 thousand during the nine months ended September 30, 2018 and 2017, respectively. Interest income recognized 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.

Allowance for Loan Losses:

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

	Commercial			Commercial Real Estate			Residential Real Estate			Construction Real Estate			Installment and Other			Unallocated			Total
	(In thousands)
Three Months Ended September 30, 2018:
Beginning balance	$	543		$	6,583		$	2,151		$	732		$	131		$	304		$	10,444
Provision (benefit) for loan losses		6			(768	)		(86	)		15			(30	)		(137	)		(1,000	)

Charge-offs		(1	)		-			(65	)		-			(21	)		-			(87	)
Recoveries		25			12			102			4			28			-			171
Net recoveries (charge-offs)		24			12			37			4			7			-			84
Ending balance	$	573		$	5,827		$	2,102		$	751		$	108		$	167		$	9,528

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

Nine Months Ended September 30, 2018:
Beginning balance	$	536		$	8,573		$	2,843		$	1,030		$	315		$	506		$	13,803
Provision (benefit) for loan losses		98			(62	)		(799	)		(120	)		(258	)		(339	)		(1,480	)

Charge-offs		(134	)		(2,736	)		(184	)		(212	)		(76	)		-			(3,342	)
Recoveries		73			52			242			53			127			-			547
Net recoveries (charge-offs)		(61	)		(2,684	)		58			(159	)		51			-			(2,795	)
Ending balance	$	573		$	5,827		$	2,102		$	751		$	108		$	167		$	9,528

Nine Months Ended September 30, 2017:
Beginning balance	$	1,449		$	6,472		$	4,524		$	1,119		$	715		$	73		$	14,352
Provision (benefit) for loan losses		(356	)		123			(626	)		1,739			(2,100	)		-			(1,220	)

Charge-offs		(270	)		(639	)		(309	)		(1,409	)		(253	)		-			(2,880	)
Recoveries		306			186			224			51			2,181			-			2,948
Net recoveries (charge-offs)		36			(453	)		(85	)		(1,358	)		1,928			-			68
Ending balance	$	1,129		$	6,142		$	3,813		$	1,500		$	543		$	73		$	13,200

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, 2018	(In thousands)
Allowance for loan losses allocated to:
Loans individually evaluated for impairment	$	321	$	851	$	943	$	42	$	34	$	-	$	2,191
Loans collectively evaluated for impairment		252		4,976		1,159		709		74		167		7,337
Ending balance	$	573	$	5,827	$	2,102	$	751	$	108	$	167	$	9,528
Loans:
Individually evaluated for impairment	$	13,779	$	9,387	$	10,375	$	3,024	$	532	$	-	$	37,097
Collectively evaluated for impairment		49,760		395,403		144,743		69,526		9,466		-		668,898
Total ending loans balance	$	63,539	$	404,790	$	155,118	$	72,550	$	9,998	$	-	$	705,995

December 31, 2017
Allowance for loan losses allocated to:
Loans individually evaluated for impairment	$	211	$	3,735	$	943	$	231	$	32	$	-	$	5,152
Loans collectively evaluated for impairment		325		4,838		1,900		799		283		506		8,651
Ending balance	$	536	$	8,573	$	2,843	$	1,030	$	315	$	506	$	13,803
Loans:
Individually evaluated for impairment	$	13,541	$	15,141	$	12,582	$	9,293	$	584	$	-	$	51,141
Collectively evaluated for impairment		47,847		363,661		165,714		54,276		18,368		-		649,866
Total ending loans balance	$	61,388	$	378,802	$	178,296	$	63,569	$	18,952	$	-	$	701,007

Troubled Debt Restructurings:

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 nine months ended September 30, 2018 and the three and nine months ended September 30, 2018 and 2017. There were no new TDRs for the three months ended September 30, 2018.

	Nine Months Ended September 30, 2018
	Number of Contracts		Pre-Modification Outstanding Recorded Investment			Post-Modification Outstanding Recorded Investment		Specific Reserves Allocated
			(Dollars in thousands)
Commercial		3		$	335	$	335	$	26
Commercial real estate		2			2,356		2,356		-
Residential real estate		2			237		237		-
Total		7		$	2,928	$	2,928	$	26

	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

The following tables present loans by category modified as TDRs for which there was a payment default within 12 months following the modification during the three and nine months ended September 30, 2018 and 2017. There were no TDRs with a payment default within 12 months following modification for the three months ended September 30, 2018.

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

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

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

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

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

	September 30, 2018				December 31, 2017
	Number of Contracts		Amount		Number of Contracts		Amount
	(Dollars in thousands)
Accrual		98	$	28,387	$	108	$	33,801
Nonaccrual		16		3,250		19		5,146
Total		114	$	31,637	$	127	$	38,947

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

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

Loans to Executive Officers and Directors

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

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

Note 7. Loan Servicing and Mortgage Servicing Rights

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

Note 8. Other Real Estate Owned

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

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

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

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

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

Note 9. Deposits

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

	September 30, 2018		December 31, 2017
	(In thousands )
Demand deposits, noninterest bearing	$	175,655	$	161,677
NOW		376,405		385,881
Money market accounts		18,976		18,344
Savings deposits		379,213		388,300
Time certificates, $250,000 or more		19,831		21,639
Other time certificates		127,333		151,506
Total	$	1,097,413	$	1,127,347

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

Note 10. Borrowings

Notes payable to the Federal Home Loan Bank ("FHLB") as of September 30, 2018 and December 31, 2017 were secured by a blanket assignment of mortgage loans or other collateral acceptable to FHLB, and interest on long-term borrowings is payable monthly and principal due at end of term, unless otherwise noted. Interest on short-term borrowings is due on maturity. As of September 30, 2018, there was $337.4 million in collateral value from loans pledged under the blanket assignment and $59.8 million from investment securities held in safekeeping at the FHLB. At September 30, 2018, there were $15.4 million in advances outstanding at the FHLB. An additional $381.8 million in advances is available based on the September 30, 2018 value of the remaining unpledged loans and investment securities. In the event that short-term liquidity is needed, the Bank has established a relationship with a large regional bank to provide short-term borrowings in the form of federal funds purchased. The Bank has the ability to borrow up to $20 million for a short period (15 to 60 days) from this bank.

The following table details borrowings as of September 30, 2018 and December 31, 2017:

Maturity Date	Rate			Type	Principal Due	September 30, 2018			December 31, 2017
						(In thousands)
October 1, 2018		2.450	%	Variable	At maturity		$	13,100	$	-
April 27, 2021		6.343	%	Fixed	At maturity			2,300		2,300
					Total		$	15,400	$	2,300

Note 11. Junior Subordinated Debt

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

	Trust III		Trust IV			Trust V
	(dollars in thousands)
Date of Issue	May 11, 2004		June 29, 2005			September 21, 2006
Amount of trust preferred securities issued	$	6,000	$	10,000		$	10,000
Rate on trust preferred securities	5.02125% (variable)			6.88000	%	3.98413% (variable)
Maturity	September 8, 2034		November 23, 2035			December 15, 2036
Date of first redemption	September 8, 2009		August 23, 2010			September 15, 2011
Common equity securities issued	$	186	$	310		$	310
Junior subordinated deferrable interest debentures owed	$	6,186	$	10,310		$	10,310
Rate on junior subordinated deferrable interest debentures	5.02125% (variable)			6.88000	%	3.98413% (variable)

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

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

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

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

As of September 30, 2018, there was $109 thousand in interest accrued and unpaid to security holders.

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

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

Note 12. Income Taxes

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

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

	Three Months Ended September 30,					Nine Months Ended September 30,
	2018					2018
	(In thousands)
Federal statutory tax rate	$	1,013		21	%	$	2,538		21	%
State income tax, net of federal benefit		196		4	%		476		4	%
Net tax exempt interest income		(210	)	(4	)%		(631	)	(5	)%
Other, net		(43	)	(1	)%		(151	)	(1	)%
Tax provision before change in valuation allowance		956		20	%		2,232		18	%
Change in valuation allowance		347		7	%		347		3	%
Provision for income taxes	$	1,303		27	%	$	2,579		21	%

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

A DTA or deferred tax 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. In evaluating its DTA as of September 30, 2018, 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 and that $347 thousand should be added to the valuation allowance due to an analysis of the venture capital investments DTA balance. Accordingly the DTA valuation increased by $347 thousand during the three and nine months ended September 30, 2018. The valuation balance as of September 30, 2018 was $2.7 million.

Note 13. Commitments and Off-Balance-Sheet Activities

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

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

	Contract Amount
	September 30, 2018			December 31, 2017
	(In thousands)
Unfunded commitments under lines of credit		$	132,886	$	122,910
Commercial and standby letters of credit			3,798		5,377
Commitments to make loans			18,750		1,909

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

Commitments to make loans are generally made for periods of 90 days or less. The Company had outstanding loan commitments, excluding undisbursed portion of loans in process and equity lines of credit, of approximately $136.7 million as of September 30, 2018 and $128.3 million as of December 31, 2017. Of these commitments outstanding, the breakdown between fixed rate and adjustable rate loans is as follows:

	September 30, 2018			December 31, 2017
	(In thousands)
Fixed rate		$	30,092	$	17,933
Adjustable rate			106,592		110,354
Total		$	136,684	$	128,287

The fixed loan commitments as of September 30, 2018 have interest rates ranging from 0.0% to 6.0% and maturities ranging from on demand to 11 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, 2018 was $397.2 million.

Commercial and standby letters of credit are conditional credit-related commitments issued by the Bank to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. Essentially all letters of credit issued have expiration dates within one year. The credit risk involved in issuing letters of credit is the same as that involved in extending loans to customers. The Bank generally holds collateral supporting those credit-related commitments, if deemed necessary. In the event the customer does not perform in accordance with the terms of the agreement with the third party, the Bank would be required to fund the credit-related commitment. The maximum potential amount of future payments the Bank could be required to make is represented by the contractual amount shown in the summary above. If the credit-related commitment is funded, the Bank would be entitled to seek recovery from the customer. As of September 30, 2018 and December 31, 2017, respectively, $151 thousand and $575 thousand had been recorded as liabilities for the Company's potential losses under these credit-related commitments. The fair value of these credit-related commitments is approximately equal to the fees collected when granting these letters of credit. These fees collected were $27 thousand and $23 thousand as of September 30, 2018 and December 31, 2017, respectively, and are included in "other liabilities" on the consolidated balance sheets.

Note 14. Preferred Equity Issues

The Company had no outstanding preferred shares as of September 30, 2018 or December 31, 2017.

Note 15. Stock Incentives

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

There were 12,500 RSU awards granted under the 2015 Plan and 3,750 forfeitures during the three months ended September 30, 2018. There were 312,775 RSUs awards granted under the 2015 Plan and 10,250 in forfeitures during the nine months ended September 30, 2018, leaving 252,952 shares of voting common stock available remaining to be issued under the 2015 Plan at September 30, 2018.

Because share-based compensation awards vesting in the current periods were granted on a variety of dates, the assumptions are presented as weighted averages in those assumptions. A summary of RSU activity under the 2015 Plan for the nine months ended September 30, 2018 is presented below:

	Shares			Weighted Average Grant Price		Weighted Average Remaining Contractual Term, in Years		Aggregate Intrinsic Value (in thousands)
RSUs
Nonvested as of January 1, 2018		452,782		$	4.70		2.01	$	2,128
Granted		312,775			7.66		1.25		2,396
Vested		(40,575	)		4.61		-		(187	)
Forfeited or expired		(10,250	)		5.21		-		(53	)
Outstanding Nonvested as of June 30, 2018		714,732		$	6.00		1.22	$	4,284

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

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

	Total			Level 1			Level 2			Level 3
September 30, 2018	(In thousands)
Financial Assets:
Investment securities available for sale:
U.S. government sponsored agencies		$	67,004		$	-		$	67,004		$	-
States and political subdivision			157,544			-			157,544			-
Residential mortgage backed securities			93,643			-			93,643			-
Residential collateralized mortgage obligation			14,979			-			14,979			-
Commercial mortgage backed securities			104,337			-			104,337			-
SBA pools			468			-			468			-
Total		$	437,975		$	-		$	437,975		$	-

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

There were no financial 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, 2018 or the year ended December 31, 2017.

Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis

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

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

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

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

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

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

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

`	Total		Level 1		Level 2		Level 3
	(In thousands)
September 30, 2018
Financial Assets
Impaired loans	$	24,092	$	-	$	-	$	24,092
Non-Financial Assets
OREO		222		-		-		222

December 31, 2017
Financial Assets
Impaired loans	$	34,600	$	-	$	-	$	34,600
Non-Financial Assets
OREO		405		-		-		405

Assumptions used to determine impaired loans and OREO are presented below by classification, measured at fair value and on a nonrecurring basis as of September 30, 2018 and December 31, 2017:

	Fair Value		Valuation Technique(s)	Unobservable Input(s)	Adjustment Range, Weighted Average
September 30, 2018	(In thousands)
Impaired loans
Commercial	$	13,348	Sales comparison	Adjustments for differences of comparable sales	(5.00)% to (150.00)%, (7.32)%
Commercial real estate		5,019	Sales comparison	Adjustments for differences of comparable sales	(5.50) to (37.50), (7.16)
Residential real estate		4,400	Sales comparison	Adjustments for differences of comparable sales	(3.13) to (37.50), (7.29)
Construction real estate		1,119	Sales comparison	Adjustments for differences of comparable sales	(4.00) to (40.00), (5.97)
Installment and other		206	Sales comparison	Adjustments for differences of comparable sales	(4.13) to (37.50), (7.34)
Total impaired loans	$	24,092
OREO
Commercial real estate		74	Sales comparison	Adjustments for differences of comparable sales	(33.33)% to (33.33)%, (33.33)%
Residential real estate		148	Sales comparison	Adjustments for differences of comparable sales	(3.16)% to (3.16)%, (3.16)%
Total OREO	$	222

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

Fair Value Assumptions

ASC Topic 825 requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis.

The carrying amount and estimated fair values (representing exit price) of other financial instruments as of September 30, 2018 and December 31, 2017 are as follows:

	Carrying Amount		Level 1		Level 2		Level 3		Total
	(In thousands)
September 30, 2018
Financial assets:
Cash and due from banks	$	11,046	$	11,046	$	-	$	-	$	11,046
Interest-bearing deposits with banks		3,645		3,645		-		-		3,645
Investments:
Available for sale		437,975		-		437,976		-		437,976
Held to maturity		7,769		-		7,151		-		7,151
Non-marketable equity securities		5,819		N/A		N/A		N/A		N/A
Loans held for sale		6,815		-		6,815		-		6,815
Loans, net		695,296		-		-		690,610		690,610
Accrued interest receivable on securities		2,632		-		2,632		-		2,632
Accrued interest receivable on loans		2,246		-		-		2,246		2,246
Accrued interest receivable other		5		-		-		5		5

Off-balance-sheet instruments:
Loan commitments and standby letters of credit	$	27	$	-	$	27	$	-	$	27

Financial liabilities:
Non-interest bearing deposits	$	175,655	$	175,655	$	-	$	-	$	175,655
Interest bearing deposits		921,758		-		919,644		-		919,644
Borrowings		15,400		-		15,591		-		15,591
Junior subordinated debt		26,766		-		-		17,750		17,750
Accrued interest payable		284		-		175		109		284

December 31, 2017
Financial assets:
Cash and due from banks	$	12,893	$	12,983	$	-	$	-	$	12,983
Interest-bearing deposits with banks		22,541		22,541		-		-		22,541
Securities purchased under resell agreements		-		-		-		-		-
Investments:
Available for sale		468,733		-		468,733		-		468,733
Held to maturity		7,854		-		7,369		-		7,369
Non-marketable equity securities		3,617		N/A		N/A		N/A		N/A
Loans, net		686,341		-		-		680,911		680,911
Accrued interest receivable on securities		2,795		-		2,795		-		2,795
Accrued interest receivable on loans		2,238		-		-		2,238		2,238
Accrued interest receivable other		21		-		-		21		21

Off-balance-sheet instruments:
Loan commitments and standby letters of credit	$	23	$	-	$	23	$	-	$	23

Financial liabilities:
Non-interest bearing deposits	$	161,677	$	161,677	$	-	$	-	$	161,677
Interest bearing deposits		965,670		-		964,717		-		964,717
Long-term borrowings		2,300		-		2,592		-		2,592
Junior subordinated debt		37,116		-		-		27,128		27,128
Accrued interest payable		628		-		172		456		628

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.

Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Failure to meet capital requirements can initiate regulatory action. The Basel III Rules became effective for the Company on January 1, 2015 with full compliance with all of the requirements being phased in over a multi-year schedule, and fully phased in by January 1, 2019. See Item 1 - "Supervision & Regulation" of the 2017 Form 10-K, for further discussion regarding the Basel III Rules. The Company and the Bank met all capital adequacy requirements to which they were subject as of September 30, 2018 and December 31, 2017.

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required.

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
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
September 30, 2018
Total capital (to risk-weighted assets):
Consolidated	$	151,865		17.5493	%	$	69,229		8.00	%		N/A		N/A
Bank only		146,106		16.9333	%		69,027		8.00	%	$	86,283		10.00	%
Tier 1 capital (to risk weighted assets):
Consolidated		142,186		16.4308	%		51,922		6.00	%		N/A		N/A
Bank only		136,427		15.8115	%		51,770		6.00	%		69,027		8.00	%
Common Equity Tier 1 Capital (to risk weighted assets):
Consolidated		116,952		13.5148	%		38,941		4.50	%		N/A		N/A
Bank only		136,427		15.8115	%		38,827		4.50	%		56,084		6.50	%
Tier 1 leverage (to average assets):
Consolidated		142,186		11.2026	%		50,769		4.00	%		N/A		N/A
Bank only		136,427		10.7753	%		50,644		4.00	%		63,306		5.00	%

N/A—not applicable

	Actual					For Capital Adequacy Purposes					To be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
December 31, 2017
Total capital (to risk-weighted assets):
Consolidated	$	152,076		18.1982	%	$	66,853		8.00	%		N/A		N/A
Bank only		134,959		16.1823	%		66,720		8.00	%	$	83,399		10.00	%
Tier 1 capital (to risk weighted assets):
Consolidated		132,900		15.9035	%		50,140		6.00	%		N/A		N/A
Bank only		124,481		14.9259	%		50,040		6.00	%		66,720		8.00	%
Common Equity Tier 1 Capital (to risk weighted assets):
Consolidated		106,320		12.7228	%		37,605		4.50	%		N/A		N/A
Bank only		124,481		14.9259	%		37,530		4.50	%		54,210		6.50	%
Tier 1 leverage (to average assets):
Consolidated		132,900		10.1821	%		33,427		4.00	%		N/A		N/A
Bank only		124,481		9.6006	%		33,360		4.00	%		41,700		5.00	%

N/A - not applicable

The Bank's capital ratios fall into the category of "well-capitalized" as of September 30, 2018 and December 31, 2017.

Trinity and the Bank are also required to maintain a "capital conservation buffer" of 2.5% above the regulatory minimum risk-based capital requirements. The purpose of the conservation buffer is to ensure that banks maintain a buffer of capital that can be used to absorb losses during periods of financial and economic stress. The capital conservation buffer began to be phased in beginning in January 2016 at 0.625% of risk-weighted assets and will increase by that amount each year until fully implemented in January 2019. An institution would be subject to limitations on certain activities, including payment of dividends, share repurchases and discretionary bonuses to executive officers, if its capital level is below the buffered ratio. Factoring in the fully phased-in conservation buffer increases the minimum ratios described above to 7.0% for Common Equity Tier 1, 8.5% for Tier 1 Capital and 10.5% for Total Capital. At September 30, 2018 the Bank's capital conservation buffer was 8.9333% and the consolidated capital conservation buffer was 9.0148%. At December 31, 2017 the Bank's capital conservation buffer was 8.1823% and the consolidated capital conservation buffer was 8.2228%.

Note 18. Subsequent Event

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

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

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

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

Management's Discussion and Analysis of Financial Condition and Results of Operations analyzes the major elements of the Company's balance sheets and statements of income. This section should be read in conjunction with the Company's unaudited consolidated financial statements and accompanying notes included elsewhere in this Quarterly Report on Form 10-Q ("Form 10-Q") and with the audited consolidated financial statements and accompanying notes and other detailed information appearing elsewhere in the Company's Annual Report on Form 10-K for the year ended December 31, 2017 ("2017 Form 10-K")

Special Note Concerning Forward-Looking Statements

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

The Company's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. The factors, which could cause actual results to differ materially from those expressed in, or implied by, the forward-looking statements and could have a material adverse effect on the operations and future prospects of the Company and its subsidiaries including difficulties and delays in integrating the Company and EFSC and achieving anticipated synergies, cost savings and other benefits from the merger; higher than anticipated merger costs; deposit attrition, operating costs, customer loss and business disruption following the merger, including difficulties in maintaining relationships with employees, may be greater than expected; required governmental approvals of the merger may not be obtained on the merger's proposed terms and schedule, or without regulatory constraints that may limit growth, and those additional risks are detailed in the "Risk Factors" section included under Item 1A of Part I of the 2017 Form 10-K. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.

Critical Accounting Policies

Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. We believe that the most critical accounting policies upon which our financial condition and results of operation depend, and which involve the most complex subjective decisions or assessments, are included in the discussion entitled "Critical Accounting Policies" in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," in the 2017 Form 10-K, and all amendments thereto as filed with the Securities and Exchange Commission. There have been no material changes to the critical accounting policies disclosed in the 2017 Form 10-K.

Results of Operations

The profitability of the Company's operations depends primarily on its net interest income, which is the difference between total interest earned on interest-earning assets and total interest paid on interest-bearing liabilities. The Company's net income is also affected by its provision for loan losses as well as noninterest income and noninterest expenses.

Net interest income is affected by changes in the volume and mix of interest-earning assets, the level of interest rates earned on those assets, the volume and mix of interest-bearing liabilities, and the level of interest rates paid on those interest-bearing liabilities. Provision for loan losses is dependent on changes in the loan portfolio and management's assessment of the collectability of the loan portfolio, as well as economic and market conditions. Noninterest income and noninterest expenses are impacted by growth of operations and growth in the number of accounts. Noninterest expenses are impacted by additional employees, branch facilities and promotional marketing expenses. A number of accounts affect noninterest income, including service fees 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, 2018 was $3.5 million, or earnings per common share of $0.18, compared to net income attributable to common stockholders of $405 thousand for the three months ended September 30, 2017, or earnings per common share of $0.02, representing an increase of $3.1 million in net income and an increase of $0.16 in earnings per common share. This increase in net income attributable to common stockholders was primarily due to a decrease in other noninterest expenses of $936 thousand due to an ESOP restorative contribution accrual in 2017 and $287 thousand due to a true-up of the unfunded commitment reserve, an increase in the reverse provision for loan loss of $750 thousand, a decrease in the change in value of MSRs of $677 thousand due to the sale of the loan servicing portfolio in 2017, an increase in tax exempt investment securities interest income of $536 thousand, a decrease in salaries and benefits of $258 thousand, a decrease in legal, professional, and accounting expense of $224 thousand, a decrease in data processing expense of $180 thousand, a decrease in regulatory premium expense of $149 thousand, and increase in BOLI income of $130 thousand, an increase in loans held for sale interest income of $125 thousand, and an increase in trust and investment fees of $106 thousand. These were partially offset by a decrease in loan interest income of $482 thousand, a decrease in mortgage loan servicing income of $446 thousand due to the sale of the loan servicing portfolio in 2017, a decrease in income taxes of $442 thousand partially offset by an increase in deferred tax asset valuation allowance of $347 thousand, an increase in collection expenses of $303 thousand due to a recovery of collection legal expenses in 2017, a decrease in junior subordinated debt of $236 thousand due to the early redemption of the Trust I trust preferred securities, a decrease in interest income on due from accounts of $174 thousand due to lower balances, a decrease in taxable investment securities of $159 thousand, and a decrease in mortgage referral fees of $143 thousand due to lower volume.

Net income attributable to common stockholders for the nine months ended September 30, 2018 was $9.5 million, or earnings per common share of $0.48, compared to net loss attributable to common stockholders of $2.5 million for the nine months ended September 30, 2017, or loss per common share of $0.16, an increase of $12.0 million in net income and an increase in earnings per common share of $0.64. This increase in net income attributable to common stockholders was primarily due to a decrease in legal, professional, and accounting fees of $2.5 million, an increase in tax-exempt investment securities income of $2.0 million, a decrease in salaries and benefits of $1.6 million, a decrease in the change in value of MSRs of $1.4 million due to the sale of the loan servicing portfolio in 2017, a decrease in loss on sale of investment securities of $1.2 million, a decrease in other noninterest expenses if $936 thousand due to the ESOP restorative contribution accrual in 2017 and $287 thousand due to the true-up of the unfunded commitment reserve, a decrease in income taxes of $1.3 million partially offset by an increase in deferred tax asset valuation allowance of $347 thousand, a decrease in preferred stock dividends and discount accretion of $770 thousand, an increase on venture capital investment income of $756 thousand primarily due to a recovery on an investment that was previously written down, a decrease in data processing expenses of $663 thousand, a decrease in collections expenses of $647 thousand, a decrease in regulatory premium expense of $547 thousand, a decrease in junior subordinated debt of $411 thousand due to the early redemption of the Trust I trust preferred securities, an increase in BOLI income of $385 thousand due to the purchase of additional BOLI investments in 2017, an increase in trust and investment income of $302 thousand, an increase in reverse provision for loan losses of $260 thousand, a decrease in furniture and equipment expense of $193 thousand, a decrease in employee recruitment expense of $185 thousand, a decrease in check card expenses of $127 thousand, a decrease in customer relations and sponsorships of $126 thousand, and a decrease in employee travel and training expenses of $110 thousand. These were partially offset by decreases in loan interest income of $2.3 million, a decrease in mortgage loan servicing income of $1.4 million due to the sale of the loan servicing portfolio in 2017, a decrease in taxable investment securities income of $581 thousand, a decrease in mortgage referral fees of $301 thousand due to decrease volume, and a decrease in interchange fees of $230 thousand.

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,
	2018							2017
	Average Balance		Interest		Yield/Rate			Average Balance		Interest		Yield/Rate
					(Dollars in thousands)
Interest-earning Assets:
Loans held for sale	$	6,804	$	125		7.30	%	$	-	$	-		-
Loans (1)		704,210		8,534		4.82	%		742,994		9,016		4.83	%
Taxable investment securities		305,431		1,506		1.97	%		340,534		1,665		1.96	%
Investment securities exempt from federal income taxes		163,077		1,042		2.56	%		81,246		506		2.49	%
Other interest-bearing deposits		3,668		19		2.00	%		71,813		222		1.23	%
Non-marketable equity securities		5,121		59		4.55	%		3,975		53		5.31	%
Total interest-earning assets		1,188,311		11,285		3.78	%		1,240,562		11,462		3.68	%
Non-interest-earning assets		74,407							68,684
Total assets	$	1,262,718						$	1,309,246
Interest-bearing Liabilities:
Deposits:
NOW deposits	$	376,374	$	64		0.07	%	$	375,275	$	62		0.07	%
Money market deposits		19,466		4		0.09	%		17,480		4		0.09	%
Savings deposits		379,479		75		0.08	%		401,057		81		0.08	%
Time deposits over $100,000		77,915		161		0.82	%		99,290		176		0.70	%
Time deposits under $100,000		73,683		120		0.65	%		88,469		109		0.49	%
Short-term borrowings		15,895		94		2.37	%		-		-		-
Long-term borrowings		2,300		37		6.34	%		2,300		37		6.34	%
Long-term capital lease obligation		-		-		0.00	%		-		-		0.00	%
Junior subordinated debt		26,765		363		5.30	%		36,934		599		6.36	%
Total interest-bearing liabilities		971,877		918		0.37	%		1,020,805		1,068		0.41	%
Demand deposits, noninterest-bearing		176,270							171,882
Other noninterest-bearing liabilities		6,185							13,073

Stockholders' equity, including stock owned by ESOP		108,386							103,486
Total liabilities and stockholders' equity	$	1,262,718						$	1,309,246
Net interest income/interest rate spread (2)			$	10,367		3.41	%			$	10,394		3.27	%
Net interest margin (3)						3.44	%						3.34	%

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

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

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

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

Stockholders' equity, including stock owned by ESOP		105,413							103,835
Total liabilities and stockholders' equity	$	1,271,856						$	1,329,617
Net interest income/interest rate spread (2)			$	30,315		3.31	%			$	31,049		3.22	%
Net interest margin (3)						3.36	%						3.29	%

(1)	Average loans include nonaccrual loans of $11.3 million and $14.5 million for the nine months ended September 30, 2018 and 2017, respectively. Interest income includes loan origination fees of $208 thousand and $827 thousand for the nine months ended September 30, 2018 and 2017, respectively.

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

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

Net interest income decreased $27 thousand to $10.4 million for the three months ended September 30, 2018 from $10.4 million for the three months ended September 30, 2017 due to a decrease in interest income of $177 thousand and a decrease in interest expense of $150 thousand. Net interest income decreased primarily due to a decrease in average volume of other interest-bearing deposits of $68.1 million, a decrease in average volume of loans of $38.8 million, and a decrease in average volume of taxable investment securities of $35.1 million, partially offset by an increase in average tax-exempt investment securities of $81.8 million and an increase in average volume of loans held for sale of $6.8 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 10 basis points to 3.78% for the three months ended September 30, 2018 from 3.68% for the three months ended September 30, 2017. The decrease in interest expense was primarily due to a decrease in the average volume of time deposits of $36.2 million, a decrease in average volume in savings deposits of $21.6 million, and a decrease in average junior subordinated debt of $10.2 million due to the early redemption of the Trust I trust preferred securities. This was partially offset by an increase in average volume in short-term borrowings of $15.9 million, an increase in average volume in money market deposits of $2.0 million, and an increase in average volume in NOW deposits of $1.1 million. The reduction in volume and shift in mix caused the cost of interest-bearing liabilities to decline four basis points to 0.37% for the three months ended September 30, 2018 from 0.41% for the three months ended September 30, 2017. Net interest margin increased ten basis points to 3.44% for the three months ended September 30, 2018 from 3.34% for the three months ended September 30, 2017.

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

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,
	2018 Compared to 2017
	Change Due to Volume			Change Due to Rate			Total Change
	(In thousands)
Interest-earning Assets:
Loans held for sale	$	125		$	-		$	125
Loans		(471	)		(11	)		(482	)
Taxable investment securities		(172	)		13			(159	)
Investment securities exempt from federal income taxes		510			26			536
Other interest bearing deposits		(211	)		8			(203	)
Non-marketable equity securities		15			(9	)		6
Total (decrease) increase in interest income	$	(204	)	$	27		$	(177	)
Interest-bearing Liabilities:
Now deposits	$	-		$	2		$	2
Money market deposits		-			-			-
Savings deposits		(4	)		(2	)		(6	)
Time deposits over $100,000		(38	)		23			(15	)
Time deposits under $100,000		(18	)		29			11
Short-term borrowings		94			-			94
Long-term borrowings		-			-			-
Capital long-term lease obligation		-			-			-
Junior subordinated debt		(165	)		(71	)		(236	)
Total increase (decrease) in interest expense	$	(131	)	$	(19	)	$	(150	)
Increase (decrease) in net interest income	$	(73	)	$	46		$	(27	)

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

Provision for Loan Losses. Our allowance is established through charges to income in the form of the provision in order to bring our allowance to a level deemed appropriate by management. The allowance at September 30, 2018 and September 30, 2017 was $9.5 million and $13.2 million, respectively, representing 1.4% and 1.8% of total loans, respectively, as of such dates. We recorded a $1.0 million reverse provision for loan losses for the three months ended September 30, 2018 compared with a reverse provision for loan losses of $250 thousand for the three months ended September 30, 2017. For the nine months ended September 30, 2018 and September 30, 2017 we recorded a reverse provision for the loan losses of $1.5 million and $1.2 million, respectively. The reverse provision was primarily due to improving credit quality, a decrease in impaired loan balances, and decreasing delinquencies. See the "Financial Condition" section below for further information on provision for loan losses.

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

	Three Months Ended September 30,							Nine Months Ended September 30,
	2018		2017		Net Difference			2018		2017			Net Difference
	(In thousands)
Noninterest income:
Mortgage loan servicing fees	$	-	$	446	$	(446	)	$	-	$	1,394		$	(1,394	)
Trust and investment services fees		749		643		106			2,255		1,953			302
Service charges on deposits		226		202		24			712		784			(72	)
Net gain on sale of OREO		191		130		61			764		800			(36	)
Net (loss) gain on sale of securities		-		-		-			-		(1,248	)		1,248
BOLI income		218		88		130			656		271			385
Mortgage referral fees		288		431		(143	)		874		1,175			(301	)
Interchange fees		507		567		(60	)		1,593		1,823			(230	)
Other fees		301		312		(11	)		936		984			(48	)
Venture capital investment income		-		-		-			735		(21	)		756
Other noninterest income		18		13		5			32		85			(53	)
Total noninterest income	$	2,498	$	2,832	$	(334	)	$	8,557	$	8,000		$	557

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

Noninterest income increased $557 thousand to $8.6 million for the nine months ended September 30, 2018 from $8.0 million for the nine months ended September 30, 2017, primarily attributable to the decrease in loss on sale of securities of $1.2 million, an increase in venture capital investment income of $756 thousand resulting from a recovery on an investment that was previously written down, an increase in BOLI income of $385 thousand due to additional investments in 2017, and an increase in trust and investment fees of $302 thousand. This was partially offset by a decrease in mortgage loan servicing fees of $1.4 million due to the sale of the servicing portfolio in 2017, a decrease in mortgage referral fees of $301 thousand, a decrease in interchange fees of $230 thousand, and a decrease in service charges on deposit accounts of $72 thousand.

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

	Three Months Ended September 30,								Nine Months Ended September 30,
	2018		2017			Net Difference			2018		2017		Net Difference
	(In thousands)
Noninterest expenses:
Salaries and employee benefits	$	5,410	$	5,668		$	(258	)	$	16,286	$	17,913	$	(1,627	)
Occupancy		522		553			(31	)		1,592		1,590		2
Data processing		952		1,132			(180	)		2,894		3,557		(663	)
Legal, professional, and accounting fees		488		712			(224	)		1,540		3,998		(2,458	)
Change in value of MSRs		-		677			(677	)		-		1,406		(1,406	)
Other noninterest expenses:
Marketing		89		112			(23	)		355		474		(119	)
Supplies		40		44			(4	)		130		233		(103	)
Postage		63		64			(1	)		172		270		(98	)
FDIC insurance premiums		72		182			(110	)		289		705		(416	)
Collection expenses		130		(173	)		303			438		1,085		(647	)
Other		1,280		2,702			(1,422	)		4,571		7,243		(2,672	)
Total other noninterest expenses		1,674		2,931			(1,257	)		5,955		10,010		(4,055	)
Total noninterest expenses	$	9,046	$	11,673		$	(2,627	)	$	28,267	$	38,474	$	(10,207	)

Noninterest expenses decreased $2.6 million to $9.0 million for the three months ended September 30, 2018 from $11.7 million for the three months ended September 30, 2017. There were decreases in all categories except collection expenses which was due to a recovery in 2017 of legal fees of $500 thousand. Most notably, change in value of MSRs of $677 thousand due to the sale of the servicing loan portfolio in 2017, a decrease in other noninterest expenses of $936 thousand due to an ESOP restorative contribution accrual in 2017 and $287 thousand due to the true-up of the provision for unfunded commitments, a decrease in salaries and benefit expenses of $258 thousand, a decrease in legal, professional, and accounting fees of $224 thousand, and a decrease in data processing expenses of $180 thousand.

Noninterest expenses decreased $10.2 million to $28.3 million for the nine months ended September 30, 2018 from $38.5 million for the nine months ended September 30, 2017. There were decreases in all categories except occupancy expenses which were relatively flat. Most notably, decrease in legal, professional, and accounting fees of $2.4 million, a decrease in salaries and benefits of $1.6 million, a decrease in the change in value of MSRs of $1.4 million due to the sale of the loan servicing portfolio in 2017, a decrease in other noninterest expenses of $936 thousand due to an ESOP restorative contribution accrual in 2017 and $287 thousand due to the true-up of the provision for unfunded commitments, a decrease in data processing expenses of $663 thousand, a decrease in collection expenses of $647 thousand, a decrease in FDIC insurance premiums of $416 thousand, a decrease in marketing expenses of $119 thousand, and a decrease on supplies expense of $103 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 $1.3 million provision for income taxes for the three months ended September 30, 2018 and a $2.6 million provision for income taxes for the nine months ended September 30, 2018 compared to a $1.4 million provision for income taxes for the three months ended September 30, 2017 and $3.5 million provision for income taxes for the nine months ended September 30, 2017. For further discussion of income taxes, see Note 12 "Income Taxes" in Part I, Item 1, of this Form 10-Q.

Financial Condition

Balance Sheet-General. Total assets as of September 30, 2018 were $1.25 billion, decreasing $33.9 million from $1.29 billion as of December 31, 2017. During the first nine months of 2018, interest-bearing deposits with banks decreased $18.9 million and investment securities available for sale decreased $30.8 million, but were partially offset by an increase in loans of $9.0 million and loans held for sale of $6.8 million. During the same period total liabilities decreased to $1.15 billion, a decrease of $36.2 million, primarily due to a decrease in junior subordinated debt of $10.2 million due to the early redemption of the Trust I trust preferred securities and a decrease in deposits of $29.9 million, partially offset by an increase in short-term borrowings of $13.1 million. Stockholders' equity (excluding stock owned by the ESOP) increased $3.0 million to $102.6 million as of September 30, 2018 compared to $99.6 million as of December 31, 2017 primarily due to the year-to-date earnings and partially offset by the increase in accumulated other comprehensive income due to the decrease in market value on the available for sale securities portfolio.

Investment Securities. We primarily utilize our investment portfolio to provide a source of earnings, to manage liquidity, to provide collateral to pledge against public deposits, and to manage interest rate risk. In managing the portfolio, the Company seeks to obtain the objectives of safety of principal, liquidity, diversification and maximized return on funds. For an additional discussion with respect to these matters, see "Sources of Funds" included in Item 7 and "Asset Liability Management" included under Item 7A of the 2017 Form 10-K.

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

	At September 30, 2018				At December 31, 2017
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(In thousands)
Securities Available for Sale:
U.S. government sponsored agencies	$	69,300	$	67,004	$	69,315	$	68,551
State and political subdivisions		162,628		157,544		157,652		158,706
Residential mortgage-backed securities		95,703		93,643		124,578		123,083
Residential collateralized mortgage obligations		15,119		14,979		9,715		9,686
Commercial mortgage backed securities		109,725		104,337		110,483		108,162
SBA pools		486		468		560		545
Totals	$	452,961	$	437,975	$	472,303	$	468,733

Securities Held to Maturity:
SBA pools	$	7,769	$	7,151	$	7,854	$	7,369
Totals	$	7,769	$	7,151	$	7,854	$	7,369

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

The Company had a total of $15.1 million in residential collateralized mortgage obligations as of September 30, 2018. The residential collateralized mortgage obligations were private label issued or issued by U.S. government sponsored agencies. At the time of purchase, the ratings of these securities ranged from AAA to Aaa. As of September 30, 2018, the ratings of these securities were A+ to BBB by Standard & Poors and Aaa to Ba2 by Moody's Investor Service. Investment grade ratings of BBB- by Standard & Poors and Baa3 by Moody's Investor Service or higher are considered "Investment Grade". At the time of purchase and on a monthly basis, the Company reviews these securities for impairment on an other than temporary basis. The Company utilizes several external sources to evaluate prepayments, delinquencies, loss severity, and other factors in determining if there is impairment. As of September 30, 2018, none of these securities were deemed to have other than temporary impairment. The Company continues to closely monitor the performance and ratings of these securities.

As of September 30, 2018, 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, 2018	(Dollars in thousands)
Securities Available for Sale:
U.S. Government sponsored agencies	$	-		0.00	%	$	67,004		1.90	%	$	-		0.00	%	$	-		0.00	%
States and political subdivisions (1)		200		1.50	%		1,696		2.08	%		3,189		2.54	%		152,459		2.56	%
Mortgage backed		-		0.00	%		42,770		1.93	%		59,892		2.31	%		110,297		2.73	%
SBA pools		-		0.00	%		-		0.00	%		-		0.00	%		468		2.61	%
Totals	$	200		1.50	%	$	111,470		1.91	%	$	63,081		2.32	%	$	263,224		2.63	%
Securities Held to Maturity:
SBA pools	$	-		0.00	%	$	-		0.00	%	$	-		0.00	%	$	7,769		3.90	%
Totals	$	-		0.00	%	$	-		0.00	%	$	-		0.00	%	$	7,769		3.90	%

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

Loan Portfolio. As the Company addressed other pressing issues in prior years, levels of total loans decreased steadily from 2012 through 2017. While the Bank has seen an overall increase in loan demand during the first six months of 2018, the amounts in the residential real estate portfolio continue to steadily decrease primarily due to the Bank's refined lending strategy to generate applications for residential mortgage loans for non-affiliated mortgage companies on a fee basis versus underwriting to carry in the portfolio.

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

	September 30, 2018						December 31, 2017
	Amount			Percent			Amount			Percent
	(Dollars in thousands)
Commercial	$	63,539			9.00	%	$	61,388			8.76	%
Commercial real estate		404,790			57.33	%		378,802			54.04	%
Residential real estate		155,118			21.97	%		178,296			25.43	%
Construction real estate		72,550			10.28	%		63,569			9.07	%
Installment and other		9,998			1.42	%		18,952			2.70	%
Total loans		705,995			100.00	%		701,007			100.00	%
Unearned income		(1,171	)					(863	)
Gross loans		704,824						700,144
Allowance for loan losses		(9,528	)					(13,803	)
Net loans	$	695,296					$	686,341

Net loans increased $9.0 million from $686.3 million as of December 31, 2017 to $695.3 million as of September 30, 2018. The largest increases were in gross commercial real estate loans of $26.0 million, gross construction real estate loans of $9.0 million, and gross commercial loans of $2.2 million. These increases were partially offset by decreases in gross residential real estate loans of $23.2 million and gross installment and other loans of $9.0 million primarily due to the credit card portfolio being moved to held for sale.

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

	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	$	1,230	$	25,948	$	24,245	$	1,863	$	10,253	$	-	$	35,728	$	27,811
Commercial real estate		3,829		99,897		125,965		55,054		120,045		-		249,839		154,951
Residential real estate		116		85,209		5,169		4,421		59,811		392		65,096		90,022
Construction real estate		18,127		39,840		969		5,022		8,592		-		27,688		44,862
Installment and other		589		2,513		2,796		-		4,100		-		7,485		2,513
Total loans	$	23,891	$	253,407	$	159,144	$	66,360	$	202,801	$	392	$	385,836	$	320,159

Asset Quality. Over the past several years, the Bank experienced improvements in asset quality.

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

	September 30, 2018			December 31, 2017
	(Dollars in thousands)
Non-accruing loans	$	8,710		$	17,340
Loans 90 days or more past due, still accruing interest		-			-
Total non-performing loans		8,710			17,340
OREO		5,982			6,432
Total non-performing assets	$	14,692		$	23,772
TDRs, still accruing interest	$	28,387		$	33,801
Total non-performing loans to total loans		1.23	%		2.47	%
Allowance for loan losses to non-performing loans		109.39	%		79.60	%
Total non-performing assets to total assets		1.17	%		1.85	%

As of September 30, 2018, total non-performing assets decreased $9.1 million to $14.7 million from $23.8 million as of December 31, 2017 primarily due to a decrease in non-accruing loans of $8.6 million. There were decreases in all categories of non-accruing loans with the largest being the decrease in commercial real estate loans of $4.9 million and construction real estate loans of $3.7 million.

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, 2018
$5.0 million or more		-	$	-			-	$	-			-	$	-
$3.0 million to $4.9 million		-		-			-		-			-		-
$1.5 million to $2.9 million		-		-			1		1,753			-		-
Under $1.5 million		3		603			10		1,964			46		4,125
Total		3	$	603			11	$	3,717			46	$	4,125

Percentage of individual loan category				0.95	%				0.92	%				2.66	%

December 31, 2017
$5.0 million or more		-	$	-			-	$	-			-	$	-
$3.0 million to $4.9 million		-		-			1		4,709			-		-
$1.5 million to $2.9 million		-		-			-		-			-		-
Under $1.5 million		3		102			10		3,908			52		4,599
Total		3	$	102			11	$	8,617			52	$	4,599

Percentage of individual loan category				0.17	%				2.27	%				2.58	%

Continued:

	Construction Real Estate					Installment and Other Loans					Total
Dollar Range	Number of Borrowers		Amount			Number of Borrowers		Amount			Number of Borrowers		Amount
	(Dollars in thousands)
September 30, 2018
$5.0 million or more		-	$	-			-	$	-			-	$	-
$3.0 million to $4.9 million		-		-			-		-			-		-
$1.5 million to $2.9 million		-		-			-		-			1		1,753
Under $1.5 million		5		165			3		100			67		6,957
Total		5	$	165			3	$	100			68	$	8,710

Percentage of individual loan category				0.23	%				1.00	%				1.23	%

December 31, 2017
$5.0 million or more		-	$	-			-	$	-			-	$	-
$3.0 million to $4.9 million		-		-			-		-			1		4,709
$1.5 million to $2.9 million		1		2,001			-		-			1		2,001
Under $1.5 million		11		1,910			4		111			80		10,630
Total		12	$	3,911			4	$	111			82	$	17,340

Percentage of individual loan category				6.15	%				0.59	%				2.47	%

Non-performing loans include (i) loans accounted for on a nonaccrual basis and (ii) accruing loans contractually past due 90 days or more as to interest and principal. Management reviews the loan portfolio for problem loans on a regular basis with additional resources dedicated to resolving the non-performing loans.

During the ordinary course of business, management may become aware of borrowers who may not be able to meet the contractual requirements of loan agreements. Such loans are placed under close supervision with consideration given to placing the loan on nonaccrual status, increasing the allowance, and (if appropriate) partial or full charge-off. After a loan is placed on nonaccrual status, any interest previously accrued, but not yet collected, is reversed against current income. When payments are received on nonaccrual loans, such payments will be applied to principal and any interest portion included in the payments are not included in income, but rather are applied to the principal balance of the loan. Loans will not be placed back on accrual status unless all unpaid interest and principal payments are received. If interest on nonaccrual loans had been accrued, such income would have amounted to $118 thousand and $197 thousand for the three months ended September 30, 2018 and 2017, respectively, and $222 thousand and $585 thousand for the nine months ended September 30, 2018 and 2017, respectively. Our policy is to place loans 90 days or more past due on nonaccrual status.

Non-performing assets also consist of other repossessed assets and OREO. OREO represents properties acquired through foreclosure or other proceedings and are initially recorded at the fair value less estimated costs of disposal. OREO is evaluated regularly to ensure that the recorded amount is supported by its recorded value. Valuation allowances to reduce the carrying amount to fair value less estimated costs of disposal are recorded as necessary. Revenues and expenses from the operations of OREO and changes in the valuation are included in noninterest expenses on the consolidated statements of operations with the exception of costs expended to improve the long term value of the property. These costs increase the recorded value of the OREO asset, not to exceed the fair value less estimated costs of disposal.

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,
	2018			2017			2018			2017
	(Dollars in thousands)
Balance at beginning of period	$	10,444		$	13,167		$	13,803		$	14,352
(Benefit) provision for loan losses		(1,000	)		(250	)		(1,480	)		(1,220	)
Charge-offs:
Commercial		1			7			134			270
Commercial real estate		-			612			2,736			639
Residential real estate		65			-			184			309
Construction real estate		-			1,385			212			1,409
Installment and other		21			19			76			253
Total charge-offs		87			2,023			3,342			2,880
Recoveries:
Commercial		25			56			73			306
Commercial real estate		12			88			52			186
Residential real estate		102			125			242			224
Construction real estate		4			37			53			51
Installment and other		28			2,000			127			2,181
Total recoveries		171			2,306			547			2,948
Net (recoveries) charge-offs		(84	)		(283	)		2,795			(68	)
Balance at end of period	$	9,528		$	13,200		$	9,528		$	13,200

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

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

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

	September 30, 2018					December 31, 2017
	Amount		Percent			Amount		Percent
	(Dollars in thousands)
Commercial	$	573		6.01	%	$	536		3.88	%
Commercial real estate		5,827		61.17	%		8,573		62.11	%
Residential real estate		2,102		22.06	%		2,843		20.60	%
Construction real estate		751		7.88	%		1,030		7.46	%
Installment and other		108		1.13	%		315		2.28	%
Unallocated		167		1.75	%		506		3.67	%
Total	$	9,528		100.00	%	$	13,803		100.00	%

The allowance for loan losses decreased $4.3 million from $13.8 million as of December 31, 2017 to $9.5 million as of September 30, 2018. This decrease was largely due to improving credit quality, a charge-off on one loan relationship that was previously allocated, a decrease in impaired loan balances, and decreasing delinquencies.

We consider a loan to be impaired when, based on current information and events, we determine that it is probable that we will not be able to collect all amounts due according to the original terms of the note, including interest payments. When management identifies a loan as impaired, impairment is measured based on the present value of expected future cash flows and discounted at the loan's effective interest rates, except when the sole remaining source of repayment for the loan is the liquidation of the collateral. In these cases management uses the current fair value of the collateral, less estimated selling costs when foreclosure is probable, rather than discounted cash flows. If management determines that the value of the impaired loan is less than the recorded investment in the loan, an impairment is recognized through a charge-off to the allowance.

The allocation of the allowance for impaired credits is 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, 2018 and December 31, 2017 were $37.1 million and $51.1 million, respectively. Impaired loans that are deemed collateral dependent have been charged down to the value of the collateral (based upon the most recent valuations), less estimated disposition costs. Impaired loans with specifically identified allocations of allowance for loan losses had a total of $2.2 million and $5.2 million allocated in the allowance for loan losses as of September 30, 2018 and December 31, 2017, respectively.

TDRs are defined as those loans whose terms have been modified, due to deterioration in the financial condition of the borrower in which the Company grants concessions to the borrower in the restructuring that it would not otherwise consider. Total loans which were considered TDRs as of September 30, 2018 and December 31, 2017 were $31.6 million and $38.9 million, respectively. Of these, $28.4 million and $33.8 million were still performing in accordance with modified terms as of September 30, 2018 and December 31, 2017, respectively.

Although the Company believes the allowance for loan losses is sufficient at September 30, 2018 to cover probable incurred losses inherent in the loan portfolio, there can be no assurance that the allowance will prove sufficient to cover actual loan losses.

Potential Problem Loans. We utilize an internal asset classification system as a means of reporting problem and potential problem assets. At the scheduled meetings of the Board of Directors of the Bank, a watch list is presented, listing significant loan relationships as "Special Mention," "Substandard," "Doubtful" and "Loss." Substandard 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 Office of the Comptroller of the Currency (the "OCC"), which can order the establishment of additional general or specific loss allowances. There can be no assurance that regulators, in reviewing our loan portfolio, will not request us to materially adjust our allowance for loan losses. The OCC, in conjunction with the other federal banking agencies, has adopted an interagency policy statement on the allowance for loan losses. The policy statement provides guidance for financial institutions on both the responsibilities of management for the assessment and establishment of adequate allowances and guidance for banking agency examiners to use in determining the adequacy of general valuation guidelines. Generally, the policy statement recommends that: (i) institutions establish effective systems and controls to identify, monitor and address asset quality problems; (ii) management has analyzed all significant factors that affect the collectability of the portfolio in a reasonable manner; and (iii) management established acceptable allowance evaluation processes that meet the objectives set forth in the policy statement. Management believes it has established an adequate allowance for probable loan losses. We analyze our process regularly, with modifications made if needed, and report those results four times per year at meetings of the Loan Committee of our Board of Directors.

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

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

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

	September 30, 2018			December 31, 2017
	(In thousands)
Performing loans classified as:
Substandard		$	15,939		$	12,164
Total performing adversely classified loans		$	15,939		$	12,164
Special mention loans		$	8,910		$	5,681

The table above does not include nonaccrual loans that are less than 30 days past due. Total performing adversely classified assets as of September 30, 2018 were $15.9 million, an increase of $3.8 million from $12.2 million as of December 31, 2017. The increases were primarily in the commercial real estate loans of $7.9 million partially offset by decreases in construction real estate loans of $2.1 million and commercial loans of $1.4 million. In addition, special mention loans increased $3.2 million primarily due to an increase in commercial loans. For further discussion of loans, see Note 6 "Loans and Allowance for Loan Losses" in Part I, Item 1, "Financial Statements and Supplementary Data" of the 2017 Form 10-K.

Sources of Funds

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

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

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

	September 30, 2018 (In thousands)
Maturing within three months	$	2,742
After three but within six months		3,056
After six but within twelve months		5,778
After twelve but within three years		2,203
After three years		6,052
Total time deposits $250,000 and over	$	19,831

Borrowings. We have access to a variety of borrowing sources and use short-term and long-term borrowings to support our asset base. Short-term borrowings 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 a total of $15.4 million outstanding in FHLB borrowings at September 30, 2018 of which $2.3 million were long-term advances and $13.1 million were short-term advances. There was $2.3 million outstanding in FHLB long-term borrowings at September 30, 2017.

Liquidity

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

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

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, 2018 and December 31, 2017, we were in compliance with the foregoing policy.

As of September 30, 2018, we had outstanding loan origination commitments and unused commercial and retail lines of credit of $132.9 million and standby letters of credit of $3.8 million. We anticipate we will have sufficient funds available to meet current origination and other lending commitments. Certificates of deposit scheduled to mature within one year totaled million as of September 30, 2018. As of September 30, 2018, total certificates of deposits declined $26.0 million or 15.0% from the prior year end.

In the event that additional short-term liquidity is needed, we have established a relationship with a large regional bank to provide short-term borrowings in the form of federal funds purchases. We have the ability to borrow up to $20.0 million for a short period (15 to 60 days) from this bank 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, 2018, we had the ability to borrow from the FHLB up to $369.0 million in additional funds. As a contingency plan for significant funding needs, the Asset/Liability Management Committee may also consider the sale of investment securities, selling securities under agreement to repurchase, sale of certain loans and/or the temporary curtailment of lending activities.

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

The Bank is subject to various regulatory capital requirements administered by federal and state banking agencies, which could affect its ability to pay dividends to Trinity. See "Business—Supervision and Regulation—Trinity—Dividends Payments" and "Business—Supervision and Regulation—The Bank—Dividend Payments" in Part I, Item 1 of the Company's 2017 Form 10-K. Failure to meet minimum capital requirements can initiate certain mandatory and discretionary actions by regulators that, if undertaken, could have a direct material effect on our financial statements.

The Bank has an internal Capital Plan which identifies potential sources for additional capital should it be deemed necessary. For more information, see "Capital Resources" included in Item 7 and Note 20 "Regulatory Matters" in Item 8, "Financial Statements and Supplementary Data" of the 2017 Form 10-K.

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

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

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

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

Capital Resources

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

The Basel III 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 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.

A certain amount of Trinity's Tier 1 Capital is in the form of trust preferred securities. See Note 10, "Junior Subordinated Debt" in Item 8, "Financial Statements and Supplementary Data" of the 2017 Form 10-K for details on the effect these have on risk based capital. See "Risk Factors" in Part I, Item 1A of the 2017 Form 10-K for further information regarding changes in the regulatory environment affecting capital.

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

	Actual					For Capital Adequacy Purposes					To be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
September 30, 2018
Total capital (to risk-weighted assets):
Consolidated	$	151,865		17.5493	%	$	69,229		8.00	%		N/A		N/A
Bank only		146,106		16.9333	%		69,027		8.00	%	$	86,283		10.00	%
Tier 1 capital (to risk weighted assets):
Consolidated		142,186		16.4308	%		51,922		6.00	%		N/A		N/A
Bank only		136,427		15.8115	%		51,770		6.00	%		69,027		8.00	%
Common Equity Tier 1 Capital (to risk weighted assets):
Consolidated		116,952		13.5148	%		38,941		4.50	%		N/A		N/A
Bank only		136,427		15.8115	%		38,827		4.50	%		56,084		6.50	%
Tier 1 leverage (to average assets):
Consolidated		142,186		11.2026	%		50,769		4.00	%		N/A		N/A
Bank only		136,427		10.7753	%		50,644		4.00	%		63,306		5.00	%

N/A—not applicable

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

Item 4. Controls and Procedures

An evaluation was carried out under the supervision and with the participation of the Company's management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company's disclosure controls and procedures, as that term is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended ("Exchange Act"), as of the end of the reporting period covered by this report.

The Company maintains disclosure controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Based upon this evaluation of those disclosure controls and procedures, the Chief Executive Officer and Chief Financial Officer of the Company concluded, as of the end of the period covered by this report, that the Company's disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports the Company files and submits under the Exchange Act is recorded, processed, summarized and reported as and when required.

In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Further, no evaluation of a cost-effective system of controls can provide absolute assurance that all control issues and instances of fraud, if any, will be detected.

There have been no changes in the Company's internal control over financial reporting as that term is defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act, during the nine months ended September 30, 2018 that have materially affected or are reasonably likely to materially affect, the Company's internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

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

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 2018, we made no repurchases or unregistered sales of any class of our equity securities.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not Applicable.

Item 5. Other Information

None.

Item 6. Exhibits

3.1		Amended and Restated Articles of Incorporation of Trinity Capital Corporation (incorporated herein by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed on July 7, 2017 (File No. 000-50266)

3.2		Form of Second Amended and Restated Bylaws of Trinity Capital Corporation (incorporated herein by reference to Exhibit 3.1 of the Company's Current report on Form 8-K filed January 30, 2018 (file No. 000-50266)

31.1		Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a)

31.2		Certification on Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a)

32.1*		Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2*		Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101		Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017; (ii) Consolidated Statements of Operations for the three and nine months ended September 30, 2018 and 2017; (iii) Consolidated Statements of Changes in Stockholders' Equity for the nine months ended September 30, 2018 and 2017; (iv) Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and 2017; and (v) Notes to Consolidated Financial Statements, tagged as blocks of text

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

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 9, 2018
	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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Trinity Capital Inactive 10-Q2018 Q3 Quarterly report

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