TRINITY CAPITAL CORP - FORM 10-Q

Attached files

file	filename
EX-32.2 - EXHIBIT 32.2 - TRINITY CAPITAL CORP	ex32_2.htm
EX-32.1 - EXHIBIT 32.1 - TRINITY CAPITAL CORP	ex32_1.htm
EX-31.2 - EXHIBIT 31.2 - TRINITY CAPITAL CORP	ex31_2.htm
EX-31.1 - EXHIBIT 31.1 - TRINITY CAPITAL CORP	ex31_1.htm

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, 2016

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

For the transition period from to

Commission File Number 000-50266

TRINITY CAPITAL CORPORATION

(Exact name of registrant as specified in its charter)

New Mexico		85-0242376
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1200 Trinity Drive Los Alamos, New Mexico		87544
(Address of principal executive offices)		(Zip Code)

(505) 662-5171

(Registrant's telephone number, including area code)

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

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

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

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

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

As of December 31, 2016, there were 9,199,306 shares of Common Stock outstanding.

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION
Item 1. Financial Statements and Supplementary Data	2
Item 2. Management's Discussions and Analysis of Financial Condition and Results of Operations	33
Item 3. Quantitative and Qualitative Disclosures About Market Risk	34
Item 4. Controls and Procedures	35
PART II – OTHER INFORMATION
Item 1. Legal Proceedings	36
Item 1A. Risk Factors	39
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	41
Item 3. Defaults Upon Senior Securities	63
Item 4. Mine Safety Disclosures	66
Item 5. Other Information	117
Item 6. Exhibits	118
Signatures	122

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

TRINITY CAPITAL CORPORATION & SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share data)
	September 30, 2016			December 31, 2015
ASSETS
Cash and due from banks	$	14,142		$	13,506
Interest-bearing deposits with banks		137,778			151,049
Securities purchased under resell agreements		-			24,320
Cash and cash equivalents		151,920			188,875
Investment securities available for sale, at fair value		399,421			316,040
Investment securities held to maturity, at amortized cost (fair value of $8,625 and $8,988 as of September 30, 2016 and December 31, 2015, respectively)		8,866			8,986
Non-marketable equity securities		3,809			3,854
Loans held for sale		307			3,041
Loans (net of allowance for loan losses of $17,801 and $17,392 as of September 30, 2016 and December 31, 2015, respectively)		781,395			822,396
Mortgage servicing rights ("MSRs"), net		5,615			6,882
Bank owned life insurance ("BOLI")		10,098			-
Premises and equipment, net		26,201			23,373
Other real estate owned ("OREO"), net		7,054			8,346
Other assets		17,524			17,192
Total assets	$	1,412,210		$	1,398,985

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits:
Noninterest-bearing	$	22,509		$	75,867
Interest-bearing		1,230,681			1,178,091
Total deposits		1,253,190			1,253,958
Borrowings		2,300			2,300
Junior subordinated debt		37,116			37,116
Other liabilities		35,872			26,621
Total liabilities		1,328,478			1,319,995

Stock owned by Employee Stock Ownership Plan ("ESOP") participants; 672,654 shares and 672,623 shares as of September 30, 2016 and December 31, 2015, respectively, at fair value	$	2,689		$	2,690

Commitments and contingencies (Note 13)

Stockholders' equity
Preferred stock, no par, 1,000,000 shares authorized
Series A, 9% cumulative perpetual, 35,539 shares issued and outstanding, $1,000 liquidation value per share, at amortized cost	$	35,016		$	34,858
Series B, 9% cumulative perpetual, 1,777 shares issued and outstanding, $1,000 liquidation value per share, at amortized cost		1,858			1,882
Common stock, no par; 20,000,000 shares authorized; 6,856,800 shares issued; 6,526,302 shares and 6,491,802 shares outstanding as of September 30, 2016 and December 31, 2015, respectively		6,836			6,836
Additional paid-in capital		394			1,153
Retained earnings		42,930			44,232
Accumulated other comprehensive income (loss)		2,992			(2,781	)
Total stockholders' equity before treasury stock		90,026			86,180
Treasury stock, at cost; 330,498 shares and 364,998 shares as of September 30, 2016 and December 31, 2015, respectively		(8,983	)		(9,880	)
Total stockholders' equity		81,043			76,300
Total liabilities and stockholders' equity	$	1,412,210		$	1,398,985

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,
	2016			2015			2016			2015
Interest income:
Loans, including fees	$	9,413		$	10,354		$	29,532		$	32,334
Interest and dividends on investment securities:
Taxable		2,163			1,053			5,769			2,815
Nontaxable		175			44			323			134
Other interest income		98			363			524			792
Total interest income		11,849			11,814			36,148			36,075

Interest expense:
Deposits		556			716			1,770			2,258
Borrowings		37			36			110			248
Junior subordinated debt		742			665			2,179			1,980
Total interest expense		1,335			1,417			4,059			4,486
Net interest income		10,514			10,397			32,089			31,589
Provision for loan losses		-			-			-			-
Net interest income after provision for loan losses		10,514			10,397			32,089			31,589

Noninterest income:
Mortgage loan servicing fees		456			569			1,546			1,740
Trust and investment services fees		654			632			1,900			1,980
Service charges on deposits		153			306			719			989
Net gain on sale of OREO		316			78			1,159			507
Net gain on sale of loans		630			552			1,853			2,089
Net gain on sale of securities		130			-			184			1
Other fees		733			523			1,289			1,685
Other noninterest income		(4	)		(72	)		197			81
Total noninterest income		3,068			2,588			8,847			9,072

Noninterest expenses:
Salaries and employee benefits		6,536			6,410			19,460			18,838
Occupancy		669			717			2,412			2,617
Data processing		872			758			2,232			2,169
Legal, professional and accounting fees		1,539			1,470			4,949			5,514
Amortization and valuation on MSR		(95	)		1,257			1,830			1,616
Other noninterest expense		3,270			2,499			8,046			7,082
Total noninterest expenses		12,791			13,111			38,929			37,836
Income (loss) before provision for income taxes		791			(126	)		2,007			2,825
Provision for income taxes		-			-			-			-
Net income (loss)		791			(126	)		2,007			2,825
Dividends and discount accretion on preferred shares		1,083			990			3,176			2,905
Net loss available to common stockholders	$	(292	)	$	(1,116	)	$	(1,169	)	$	(80	)
Basic loss per common share	$	(0.04	)	$	(0.17	)	$	(0.18	)	$	(0.01	)
Diluted loss per common share	$	(0.04	)	$	(0.17	)	$	(0.18	)	$	(0.01	)

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,
	2016			2015			2016			2015
	(In thousands)
Net income (loss)	$	791		$	(126	)	$	2,007		$	2,825
Other comprehensive (loss) income:
Unrealized (losses) gains on securities available for sale		(969	)		974			5,957			(181	)
Securities gains reclassified into earnings		(130	)		-			(184	)		(1	)
Related income tax benefit (expense)		-			-			-			-
Other comprehensive (loss) income		(1,099	)		974			5,773			(182	)
Total comprehensive (loss) income	$	(308	)	$	848		$	7,780		$	2,643

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
(In thousands, except per share data)	Issued		Held in treasury, at cost			Preferred stock		Additional paid-in capital			Retained earnings			Accumulated other comprehensive income (loss)			Total stockholders' equity
Balance, December 31, 2014	$	6,836	$	(10,888	)	$	36,563	$	1,963		$	47,084		$	(555	)	$	81,003
Net income												2,825						2,825
Other comprehensive income (loss)															(182	)		(182	)
Dividends declared on preferred shares												(2,905	)					(2,905	)
Amortization of preferred stock issuance costs							133					(133	)					-
Treasury shares issued for board compensation				1,008					(843	)								165
Net change in the fair value of stock owned by ESOP participants												(674	)					(674	)
Balance, September 30, 2015	$	6,836	$	(9,880	)	$	36,696	$	1,120		$	46,197		$	(737	)	$	80,232

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

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,
	2016			2015
Cash Flows From Operating Activities	(Dollars in thousands)
Net income	$	2,007			2,825
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,147			1,273
Provision for loan losses		-			-
Gain on sale of investment securities		(184	)		(1	)
Gain on sale of loans		(1,853	)		(2,089	)
Gain on sale of OREO		(1,059	)		(714	)
Loss on disposal of premises and equipment		1			2
Federal Home Loan Bank stock dividends received		1			2
Net amortization of MSRs		1,038			1,147
Change in mortgage servicing rights valuation allowance		783			468
Changes in operating assets and liabilities:
Other Assets		3,891			10,179
Other Liabilities		6,075			1,845
Net cash provided by operating activities before origination and gross sales of loans held for sale		11,847			14,937
Gross sales of loans held for sale		(51,737	)		(74,302	)
Origination of loans held for sale		55,770			61,791
Net cash provided by operating activities	$	15,880			2,426

Continued next page

TRINITY CAPITAL CORPORATION & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS CONTINUED

(Unaudited)

	Nine Months Ended September 30,
	2016			2015
Cash Flows From Investing Activities	(Dollars in thousands)
Proceeds from maturities and paydowns of investment securities, available for sale	$	46,694		$	51,143
Proceeds from sale of investment securities, available for sale		98,259			-
Purchase of investment securities, available for sale		(225,741	)		(102,890	)
Proceeds from maturities and paydowns of investment securities, held to maturity		104			141
Proceeds from maturities and paydowns of investment securities, other		-			1,055
Purchase bank owned life insurance		(10,098	)		-
Proceeds from sale of other real estate owned		3,724			7,511
Loans paid down (funded), net		39,598			87,515
Purchases of premises and equipment		(4,745	)		(193	)
Proceeds from sale of premises and equipment		-			21
Net cash provided by (used in) investing activities		(52,205	)		44,303
Cash Flows From Financing Activities
Net increase in demand deposits, NOW accounts and savings accounts		42,013			50,393
Net decrease in time deposits		(42,781	)		(46,305	)
Repayment of borrowings		-			(20,000	)
Issuance of common stock for board compensation		138			168
Net cash provided by financing activities		(630	)		(15,744	)
Net increase (decrease) in cash and cash equivalents		(36,955	)		30,985
Cash and cash equivalents:
Beginning of period		188,875			247,398
End of period	$	151,920		$	278,383
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest	$	1,987		$	869
Non-cash investing and financing activities:
Transfers from loans to other real estate owned		2,944			3,958
Sales of other real estate owned financed by loans		1,548			665
Transfer from loans to loans held for sale		-			11,860
Dividends declared on preferred stock, not yet paid		3,176			2,905
Change in unrealized gain on investment securities		5,957			(181	)

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

Basis of presentation: The 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, 2015. Operating results for the nine-month period ended September 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016 or any other period.

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, 2016 and 2015:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
	(In thousands, except share data)
Net income (loss)	$	791		$	(126	)	$	2,007		$	2,825
Dividends and discount accretion on preferred shares		1,083			990			3,176			2,905
Net loss available to common stockholders	$	(292	)	$	(1,116	)	$	(1,169	)	$	(80	)
Weighted average common shares issued		6,856,800			6,856,800			6,856,800			6,856,800
LESS: Weighted average treasury stock shares		(330,498	)		(367,253	)		(331,002	)		(375,914	)
Weighted average common shares outstanding, net		6,526,302			6,489,547			6,525,798			6,480,886
Basic loss per common share	$	(0.04	)	$	(0.17	)	$	(0.18	)	$	(0.01	)
Dilutive effect of stock-based compensation		-			-			-			-
Weighted average common shares outstanding including dilutive shares		6,526,302			6,489,547			6,525,798			6,480,886
Diluted loss per common share	$	(0.04	)	$	(0.17	)	$	(0.18	)	$	(0.01	)

Certain restricted stock units were not included in the above calculation, as they would have had an anti-dilutive effect as the exercise price was greater than current market prices. The total number of shares excluded was approximately 62,000 shares and 12,000 shares for three months ended September 30, 2016 and 2015, respectively.

Note 3. Recent Accounting Pronouncements

In August 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This ASU is effective for the fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. This ASU covers eight areas of reporting items in the cash flow statements. The Company is currently in the process of evaluating the effects of ASU 2016-15 on its financial statements and disclosures, if any.

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, 2016 there was no reserve requirement on deposit at FRB and at December 31, 2015 the reserve requirement on deposit at the FRB $4.3 million.

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.

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, 2016
U.S. Government sponsored agency	$	49,425	$	1,388	$	-		$	50,813
State and political subdivision		32,027		372		(3	)		32,396
Residential mortgage backed security		213,102		703		(1,411	)		212,394
Residential collateralized mortgage obligation		15,540		88		(12	)		15,616
Commercial mortgage backed security		85,621		1,875		-			87,496
SBA pools		714		-		(8	)		706
Totals	$	396,429	$	4,426	$	(1,434	)	$	399,421

December 31, 2015
U.S. Government sponsored agency	$	69,798	$	98	$	(312	)	$	69,584
State and political subdivision		3,429		147		-			3,576
Residential mortgage backed security		123,055		43		(1,501	)		121,597
Residential collateralized mortgage obligation		40,305		139		(523	)		39,921
Commercial mortgage backed security		41,341		15		(237	)		41,119
SBA pools		757		-		(7	)		750
Asset-backed security		40,136		-		(643	)		39,493
Totals	$	318,821	$	442	$	(3,223	)	$	316,040

Securities Held to Maturity	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In thousands)
September 30, 2016
SBA pools	$	8,866	$	-	$	(241	)	$	8,625
Totals	$	8,866	$	-	$	(241	)	$	8,625

December 31, 2015
SBA pools	$	8,986	$	2	$	-		$	8,988
Totals	$	8,986	$	2	$	-		$	8,988

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,
	2016				2015		2016			2015
	(In thousands)
Gross realized gains		$	620		$	-	$	674		$	1
Gross realized losses			(490	)		-		(490	)		-
Net gains (losses)		$	130		$	-	$	184		$	1

There was no tax benefit (provision) related to these net realized gains and losses for the three and nine months ended September 30, 2016 and for the three and nine months ended September 30, 2015.

As of September 30, 2016, the Company's security portfolio consisted of 133 securities, 41 of which were in an unrealized loss position. As of September 30, 2016, $155.9 million in investment securities had unrealized losses with aggregate depreciation of 0.91% of the Company's amortized cost basis. Of these securities, $54.0 million had a continuous unrealized loss position for twelve months or longer with an aggregate depreciation of 1.77%. 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.

A summary of unrealized loss information for investment securities, categorized by security type, as of September 30, 2016 and December 31, 2015 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, 2016
State and political subdivision	$	935	$	(3	)	$	-	$	-		$	935	$	(3	)
Residential mortgage backed security		96,469		(446	)		53,148		(965	)		149,617		(1,411	)
Residential collateralized mortgage obligation		4,497		(10	)		145		(2	)		4,642		(12	)
SBA pools		-		-			705		(8	)		705		(8	)
Totals	$	101,901	$	(459	)	$	53,998	$	(975	)	$	155,899	$	(1,434	)

December 31, 2015
U.S. Government sponsored agency	$	54,804	$	(312	)	$	-	$	-		$	54,804	$	(312	)
State and political subdivision		-		-			-		-			-		-
Residential mortgage backed security		54,760		(602	)		48,752		(899	)		103,512		(1,501	)
Residential collateralized mortgage obligation		17,237		(185	)		16,252		(338	)		33,489		(523	)
Commercial mortgage backed security		26,883		(237	)		-		-			26,883		(237	)
SBA pools		-		-			742		(7	)		742		(7	)
Asset-backed security		39,493		(643	)		-		-			39,493		(643	)
Totals	$	193,177	$	(1,979	)	$	65,746	$	(1,244	)	$	258,923	$	(3,223	)

Securities Held to Maturity:
September 30, 2016
SBA Pools	$	8,625	$	(241	)	$	-	$	-		$	8,625	$	(241	)
Totals	$	8,625	$	(241	)	$	-	$	-		$	8,625	$	(241	)

December 31, 2015
None	$	-	$	-		$	-	$	-		$	-	$	-
Totals	$	-	$	-		$	-	$	-		$	-	$	-

The amortized cost and fair value of investment securities, as of September 30, 2016, by contractual maturity are shown below. Maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties.

	Available for Sale				Held to Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(In thousands)
One year or less	$	5,204	$	5,207	$	-	$	-
One to five years		16,176		16,480		-		-
Five to ten years		31,265		32,536		-		-
Over ten years		29,521		29,692		8,866		8,625
Subtotal		82,166		83,915		8,866		8,625
Residential mortgage backed security		213,102		212,394		-		-
Residential collateralized mortgage obligation		15,540		15,616		-		-
Commercial mortgage backed security		85,621		87,496
Total	$	396,429	$	399,421	$	8,866	$	8,625

Securities with carrying amounts of $82.9 million and $91.7 million as of September 30, 2016 and December 31, 2015, 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, 2016 and December 31, 2015, loans consisted of:

	September 30, 2016			December 31, 2015
	(In thousands)
Commercial	$	85,247		$	92,995
Commercial real estate		383,203			371,599
Residential real estate		228,099			258,606
Construction real estate		79,629			89,341
Installment and other		24,387			28,730
Total loans		800,565			841,271
Unearned income		(1,369	)		(1,483	)
Gross loans		799,196			839,788
Allowance for loan losses		(17,801	)		(17,392	)
Net loans	$	781,395		$	822,396

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 Company's 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 its 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, 2016, 29.6% 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 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 class of loans as of September 30, 2016 and December 31, 2015, 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, 2016	(In thousands)
Commercial	$	82,801	$	1,253	$	77	$	1,116	$	2,446	$	85,247
Commercial real estate		378,823		-		194		4,186		4,380		383,203
Residential real estate		222,469		229		939		4,462		5,630		228,099
Construction real estate		71,813		64		83		7,669		7,816		79,629
Installment and other		24,115		169		69		34		272		24,387
Total loans	$	780,021	$	1,715	$	1,362	$	17,467	$	20,544	$	800,565

Nonaccrual loan classification	$	8,845	$	705	$	305	$	17,091	$	18,101	$	26,946

December 31, 2015
Commercial	$	90,839	$	167	$	131	$	1,858	$	2,156	$	92,995
Commercial real estate		363,495		1,526		704		5,874		8,104		371,599
Residential real estate		252,568		1,215		606		4,217		6,038		258,606
Construction real estate		80,629		291		85		8,336		8,712		89,341
Installment and other		28,534		110		12		74		196		28,730
Total loans	$	816,065	$	3,309	$	1,538	$	20,359	$	25,206	$	841,271

Nonaccrual loan classification	$	6,202	$	2,702	$	1,418	$	20,003	$	24,123	$	30,325

The following table presents the recorded investment in nonaccrual loans and loans past due 90 days or more and still accruing interest by class of loans as of September 30, 2016 and December 31, 2015:

	September 30, 2016				December 31, 2015
	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	$	1,905	$	-	$	2,268	$	-
Commercial real estate		9,659		-		10,737		-
Residential real estate		5,924		-		7,821		-
Construction real estate		9,445		-		9,353		-
Installment and other		13		21		146		-
Total	$	26,946	$	21	$	30,325	$	-

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

Loans not meeting the criteria above that are analyzed individually are considered to be pass-rated loans. The following table presents the risk category by class of loans based on the most recent analysis performed as of September 30, 2016 and December 31, 2015:

	Pass		Special Mention		Substandard		Doubtful		Total
September 30, 2016	(In thousands)
Commercial	$	67,274	$	2,104	$	15,869	$	-	$	85,247
Commercial real estate		342,906		10,516		29,781		-		383,203
Residential real estate		217,918		1,278		8,903		-		228,099
Construction real estate		61,715		5,282		12,632		-		79,629
Installment and other		24,285		5		97		-		24,387
Total	$	714,098	$	19,185	$	67,282	$	-	$	800,565

December 31, 2015
Commercial	$	69,221	$	3,129	$	20,645	$	-	$	92,995
Commercial real estate		307,700		19,512		44,387		-		371,599
Residential real estate		245,897		1,622		11,087		-		258,606
Construction real estate		71,864		6,667		10,810		-		89,341
Installment and other		28,378		2		350		-		28,730
Total	$	723,060	$	30,932	$	87,279	$	-	$	841,271

The following table shows all loans, including nonaccrual loans, by risk category and aging as of September 30, 2016 and December 31, 2015:

	Pass			Special Mention		Substandard		Doubtful		Total
September 30, 2016	(In thousands)
Current		$	712,438	$	19,168	$	48,415	$	-	$	780,021
Past due 30-59 days			729		-		986		-		1,715
Past due 60-89 days			846		17		499		-		1,362
Past due 90 days or more			85		-		17,382		-		17,467
Total		$	714,098	$	19,185	$	67,282	$	-	$	800,565

December 31, 2015
Current		$	719,752	$	30,674	$	65,639	$	-	$	816,065
Past due 30-59 days			349		258		2,702		-		3,309
Past due 60-89 days			109		-		1,429		-		1,538
Past due 90 days or more			2,850		-		17,509		-		20,359
Total		$	723,060	$	30,932	$	87,279	$	-	$	841,271

As of September 30, 2016 and December 31, 2015, nonaccrual loans totaling $26.9 million and $27.5 million, respectively, were classified as Substandard.

The following table presents loans individually evaluated for impairment by class of loans as of September 30, 2016 and December 31, 2015, 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, 2016							December 31, 2015
	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	$	11,812	$	9,704				$	13,611	$	10,137
Commercial real estate		11,055		10,576					15,872		14,198
Residential real estate		7,942		6,508					9,473		7,450
Construction real estate		6,775		5,293					9,816		8,137
Installment and other		339		339					433		416
With an allowance recorded:
Commercial		14,221		14,221		$	295		14,958		14,956		$	399
Commercial real estate		9,016		9,016			1,622		11,050		11,050			1,295
Residential real estate		8,965		8,965			1,978		10,759		10,755			2,132
Construction real estate		5,336		5,313			365		3,688		3,688			252
Installment and other		488		488			57		636		636			138
Total	$	75,949	$	70,423		$	4,317	$	90,296	$	81,423		$	4,216

The following table presents loans individually evaluated for impairment by class of loans for the three and nine months ended September 30, 2016 and 2015, showing the average recorded investment and the interest income recognized:

	Three Months Ended								Nine Months Ended
	September 30, 2016				September 30, 2015				September 30, 2016				September 30, 2015
	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	$	9,648	$	103	$	11,278	$	112	$	9,715	$	307	$	11,254	$	332
Commercial real estate		10,279		18		15,553		52		10,668		53		17,819		155
Residential real estate		5,955		10		7,827		9		6,541		31		8,101		26
Construction real estate		6,213		5		9,568		28		6,587		16		9,652		82
Installment and other		341		4		560		4		339		12		589		12
With an allowance recorded:
Commercial		14,338		196		14,777		203		14,451		584		14,927		604
Commercial real estate		9,003		92		11,917		120		9,056		273		12,543		357
Residential real estate		9,652		81		10,579		97		9,860		242		10,653		289
Construction real estate		4,443		45		3,319		44		4,178		134		3,344		131
Installment and other		529		4		558		5		554		13		541		15
Total	$	70,401	$	558	$	85,936	$	674	$	71,949	$	1,665	$	89,423	$	2,003

If nonaccrual loans outstanding had been current in accordance with their original terms, approximately $517.3 thousand and $393.3 million would have been recorded as loan interest income during the three months ended September 30, 2016 and 2015, respectively, and $1.2 million and $1.2 million during the nine months ended September 30, 2016 and 2015, respectively. Interest income recognized in the above table was primarily recognized on a cash basis.

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, 2016 and 2015, 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, 2016:
Beginning balance	$	2,220		$	7,919		$	5,629		$	1,039		$	758		$	27		$	17,592
Provision (benefit) for loan losses		(193	)		1			10			155			3			24			-

Charge-offs		(206	)		(46	)		(174	)		-			(98	)		-			(524	)
Recoveries		260			377			56			5			35			-			733
Net charge-offs		54			331			(118	)		5			(63	)		-			209
Ending balance	$	2,081		$	8,251		$	5,521		$	1,199		$	698		$	51		$	17,801

Three Months Ended September 30, 2015:
Beginning balance	$	3,219		$	8,870		$	7,696		$	2,588		$	876		$	31		$	23,280
Provision (benefit) for loan losses		(522	)		1,853			(1,094	)		(517	)		54			226			-

Charge-offs		(568	)		(3,775	)		(627	)		(410	)		(264	)		-			(5,644	)
Recoveries		192			124			334			93			163			-			906
Net charge-offs		(376	)		(3,651	)		(293	)		(317	)		(101	)		-			(4,738	)
Ending balance	$	2,321		$	7,072		$	6,309		$	1,754		$	829		$	257		$	18,542

Nine Months Ended September 30, 2016:
Beginning balance	$	2,442		$	6,751		$	6,082		$	1,143		$	940		$	34		$	17,392
Provision (benefit) for loan losses		(629	)		1,039			(300	)		(44	)		(83	)		17			-

Charge-offs		(481	)		(46	)		(576	)		(22	)		(333	)		-			(1,458	)
Recoveries		749			507			315			122			174			-			1,867
Net charge-offs		268			461			(261	)		100			(159	)		-			409
Ending balance	$	2,081		$	8,251		$	5,521		$	1,199		$	698		$	51		$	17,801

Nine Months Ended September 30, 2015:
Beginning balance	$	4,031		$	8,339		$	7,939		$	3,323		$	788		$	363		$	24,783
Provision (benefit) for loan losses		(1,708	)		2,309			(287	)		(536	)		328			(106	)		-

Charge-offs		(1,357	)		(4,039	)		(1,841	)		(1,442	)		(516	)		-			(9,195	)
Recoveries		1,355			463			498			409			229			-			2,954
Net charge-offs		(2	)		(3,576	)		(1,343	)		(1,033	)		(287	)		-			(6,241	)
Ending balance	$	2,321		$	7,072		$	6,309		$	1,754		$	829		$	257		$	18,542

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, 2016	(In thousands)
Allowance for loan losses allocated to:
Loans individually evaluated for impairment	$	295	$	1,622	$	1,978	$	365	$	57	$	-	$	4,317
Loans collectively evaluated for impairment		1,786		6,629		3,543		834		641		51		13,484
Ending balance	$	2,081	$	8,251	$	5,521	$	1,199	$	698	$	51	$	17,801
Loans:
Individually evaluated for impairment	$	23,925	$	19,592	$	15,473	$	10,606	$	827	$	-	$	70,423
Collectively evaluated for impairment		61,322		363,611		212,626		69,023		23,560		-		730,142
Total ending loans balance	$	85,247	$	383,203	$	228,099	$	79,629	$	24,387	$	-	$	800,565

December 31, 2015
Allowance for loan losses allocated to:
Loans individually evaluated for impairment	$	399	$	1,295	$	2,132	$	252	$	138	$	-	$	4,216
Loans collectively evaluated for impairment		2,043		5,456		3,950		891		802		34		13,176
Ending balance	$	2,442	$	6,751	$	6,082	$	1,143	$	940	$	34	$	17,392
Loans:
Individually evaluated for impairment	$	25,093	$	25,248	$	18,205	$	11,825	$	1,052	$	-	$	81,423
Collectively evaluated for impairment		67,902		346,351		240,401		77,516		27,678		-		759,848
Total ending loans balance	$	92,995	$	371,599	$	258,606	$	89,341	$	28,730	$	-	$	841,271

Troubled Debt Restructurings ("TDRs"):

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.

There were no loans restructured during the three months ended September 30, 2016 or 2015. The following tables present the loans restructured during the nine months ended September 30, 2016 and 2015.

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

	Nine Months Ended September 30, 2015
	Number of Contracts		Pre- Modification Outstanding Recorded Investment			Post-Modification Outstanding Recorded Investment		Specific reserves allocated
			(Dollars in thousands)
Installment and other		2		$	45	$	45		$	-
Total		2		$	45	$	45		$	-

There were no loans modified as TDRs for which there was a payment default within 12 months following the modification during the three months ended September 30, 2016 and 2015. The following table presents loans by class modified as TDRs for which there was a payment default within twelve months following the modification during the nine months ended September 30, 2016 and 2015:

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

	Nine Months Ended September 30, 2015
	Number of Contracts		Recorded Investment			Specific reserves allocated
			(Dollars in thousands)
Residential real estate		1		$	167	$	-
Construction real estate		2			407		-
Total		3		$	574	$	-

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

	September 30, 2016				December 31, 2015
	Number of contracts		Amount		Number of contracts		Amount
	(Dollars in thousands)
Accrual		150	$	45,971	$	165	$	53,862
Nonaccrual		26		9,158		32		10,641
Total		176	$	55,129	$	197	$	64,503

As of September 30, 2016, the Bank had a total of $680 thousand in commitments to lend additional funds to debtors who also had TDRs. As of December 31, 2015, the Bank had a total of $194 thousand in commitments to lend additional funds on six commercial loans classified as TDRs.

Impairment analyses are prepared on TDRs in conjunction with the normal allowance for loan loss process. TDRs did not require any specific reserves at the three months ended and nine months ended September 30, 2016 and 2015, respectively. TDRs resulted in charge-offs of $172.8 thousand and $2.1 million during the three months ended September 30, 2016 and 2015, respectively. For the nine months ended September 30, 2016 and 2015, TDRs resulted in charge-offs of $356.3 thousand and $3.9 million, respectively. The TDRs that subsequently defaulted required a provision of $10 thousand and $0 to the allowance for loan losses for the nine months ended September 30, 2016 and 2015, respectively.

Loans to Executive Officers and Directors:

Loan principal balances to executive officers and directors of the Company were $375 thousand and $1.9 million as of September 30, 2016 and December 31, 2015, respectively. Total credit available, including companies in which these individuals have management control or beneficial ownership, was $536 thousand and $2.3 million as of September 30, 2016 and December 31, 2015, respectively. An analysis of the activity related to these loans as of September 30, 2016 and December 31, 2015 is as follows:

	September 30, 2016			December 31, 2015
	(In thousands)
Balance, beginning	$	1,933		$	1,322
Additions		158			438
Changes in composition		(648	)		800
Principal payments and other reductions		(1,068	)		(627	)
Balance, ending	$	375		$	1,933

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

Mortgage loans serviced for others are not included in the accompanying unaudited consolidated balance sheets. The unpaid balance of these loans as of September 30, 2016 and December 31, 2015 is summarized as follows:

	September 30, 2016			December 31, 2015
	(In thousands)
Mortgage loan portfolios serviced for:
Federal National Mortgage Association ("Fannie Mae")		$	815,520		$	865,568
Other investors			2			16
Totals		$	815,522		$	865,584

During the nine months ended September 30, 2016 and 2015, substantially all of the loans serviced for others had a contractual servicing fee of 0.25% on the unpaid principal balance. These fees are recorded as "mortgage loan servicing fees" under "noninterest income" on the consolidated statements of operations.

Late fees on the loans serviced for others totaled $11 thousand and $33 thousand during the three months ended September 30, 2016 and 2015, respectively, and $42 thousand and $156 thousand for the nine months ended September 30, 2016 and 2015, respectively. These fees are included in "noninterest income" on the consolidated statements of operations.

Custodial balances on deposit at the Bank in connection with the foregoing loan servicing were approximately $6.8 million and $6.1 million as of September 30, 2016 and December 31, 2015, respectively. There were no custodial balances on deposit with other financial institutions as of September 30, 2016 and December 31, 2015.

An analysis of changes in the MSR asset for the three and nine months ended September 30, 2016 and 2015 is as follows:

	Three Months Ended September 30,							Nine Months Ended September 30,
	2016				2015			2016			2015
	(In thousands)
Balance at beginning of period		$	8,415		$	9,144		$	8,777		$	9,470
Servicing rights originated and capitalized			199			168			554			616
Amortization			(321	)		(373	)		(1,038	)		(1,147	)
Balance at end of period		$	8,293		$	8,939		$	8,293		$	8,939

Below is an analysis of changes in the MSR asset valuation allowance for the three and nine months ended September 30, 2016 and 2015:

	Three Months Ended September 30,							Nine Months Ended September 30,
	2016				2015			2016			2015
	(In thousands)
Balance at beginning of period		$	(3,104	)	$	(1,602	)	$	(1,895	)	$	(2,017	)
Aggregate reduction credited to operations			426			-			877			1,384
Aggregate additions credited to operations			-			(883	)		(1,660	)		(1,852	)
Balance at end of period		$	(2,678	)	$	(2,485	)	$	(2,678	)	$	(2,485	)

The fair values of the MSRs were $5.6 million and $6.5 million for the nine months ended September 30, 2016 and 2015, respectively.

A valuation allowance is used to recognize impairments of MSRs. An MSR is considered impaired when the fair value of the MSR is below the amortized book value of the MSR. MSRs are accounted for by risk tranche, with the interest rate and term of the underlying loan being the primary strata used in distinguishing the tranches. Each tranche is evaluated separately for impairment.

The following assumptions were used to calculate the fair value of the MSRs as of September 30, 2016 and December 31, 2015:

	September 30, 2016		December 31, 2015
Weighted Average Public Securities Association (PSA) speed		278.66%		213.25%
Weighted Average Discount rate		11.50		10.50
Weighted Average Earnings rate		1.18		1.73

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

OREO consists of property acquired due to foreclosure on real estate loans. As of September 30, 2016 and December 31, 2015, total OREO consisted of:

	September 30, 2016		December 31, 2015
	(In thousands)
Commercial real estate	$	1,375	$	781
Residential real estate		2,027		3,024
Construction real estate		3,652		4,541
Total	$	7,054	$	8,346

The following table presents a summary of OREO activity for the nine months ended September 30, 2016 and 2015:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
	(In thousands)
Balance at beginning of period	$	8,653		$	10,447		$	8,346		$	13,980
Transfers in at fair value		59			1,900			2,944			3,958
Write-down of value		(23	)		(228	)		(23	)		(306	)
Gain on disposal		308			311			1,059			714
Cash received upon disposition		(1,366	)		(1,892	)		(3,724	)		(7,511	)
Sales financed by loans		(577	)		(368	)		(1,548	)		(665	)
Balance at end of period	$	7,054		$	10,170		$	7,054		$	10,170

Note 9. Deposits

As of September 30, 2016 and December 31, 2015, deposits consisted of:

	September 30, 2016		December 31, 2015
	(In thousands )
Demand deposits, noninterest bearing	$	22,509	$	75,867
NOW and money market accounts		576,984		511,423
Savings deposits		409,856		380,045
Time certificates, $250,000 or more		28,214		39,148
Other time certificates		215,627		247,475
Total	$	1,253,190	$	1,253,958

Deposits from executive officers, directors and their affiliates as of September 30, 2016 were $1.1 million and $1.1 million as of December 31, 2015.

Note 10. Borrowings

Notes payable to the Federal Home Loan Bank ("FHLB") as of September 30, 2016 and December 31, 2015 were secured by a blanket assignment of mortgage loans or other collateral acceptable to FHLB, and generally had a fixed rate of interest, interest payable monthly and principal due at end of term, unless otherwise noted. As of September 30, 2016, there was $813 thousand in pledged loans under the blanket assignment. Investment securities are held in safekeeping at the FHLB with $2.3 million pledged as collateral for outstanding advances. An additional $77.7 million in advances is available based on the September 30, 2016 value of the remaining unpledged investment securities.

The following table details borrowings as of September 30, 2016 and December 31, 2015.

Maturity Date	Rate			Type	Principal due	September 30, 2016			December 31, 2015
						(In thousands)
April 27, 2021		6.343	%	Fixed	At maturity			2,300		2,300
					Total		$	2,300	$	2,300

Note 11. Junior Subordinated Debt

The following table presents details on the junior subordinated debt as of September 30, 2016:

	Trust I			Trust III		Trust IV			Trust V
	(Dollars in thousands)
Date of Issue	March 23, 2000			May 11, 2004		June 29, 2005			September 21, 2006
Amount of trust preferred securities issued	$	10,000		$	6,000	$	10,000		$	10,000
Rate on trust preferred securities		10.875	%	3.5421% (variable)			6.88	%	2.5039% (variable)
Maturity	March 8, 2030			September 8, 2034		November 23, 2035			December 15, 2036
Date of first redemption	March 8, 2010			September 8, 2009		August 23, 2010			September 15, 2011
Common equity securities issued	$	310		$	186	$	310		$	310
Junior subordinated deferrable interest debentures owed	$	10,310		$	6,186	$	10,310		$	10,310
Rate on junior subordinated deferrable interest debentures		10.875	%	3.5421% (variable)			6.88	%	2.5039% (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 amount and at the rate indicated above. These trust preferred securities represent preferred beneficial interests in the assets of the Trusts. The trust preferred securities will mature on the dates indicated, and are redeemable in whole or in part at the option of Trinity, with the approval of the FRB. The Trusts also issued common equity securities to Trinity in the amounts indicated above. The Trusts used the proceeds of the offering of the trust preferred securities to purchase junior subordinated deferrable interest debentures (the "debentures") issued by Trinity, which have terms substantially similar to the trust preferred securities.

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

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

In the second quarter of 2013, Trinity began to defer the interest payments on $37.1 million of junior subordinated debentures that are held by the Trusts that it controls. Interest accrued and unpaid to securities holders total $9.1 million and $6.9 million as of September 30, 2016 and December 31, 2015, respectively. As of December 31, 2016, the Company continued to defer the interest payments on the junior subordinated debentures, with interest accrued but unpaid totaling $9.9 million. In the first quarter of 2017, the Company began to pay all current and deferred interest payments in order to bring all junior subordinated debentures current. All junior subordinated debentures were brought current as of March 15, 2017.

As of September 30, 2016 and December 31, 2015, 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

There was no income tax expense or benefit recorded for the three and nine months ended September 30, 2016 and 2015.

A deferred tax asset ("DTA") or liability is recognized to reflect the net tax effects of temporary differences between the carrying amounts of existing assets and liabilities for financial reporting purposes and the amounts used for income tax reporting purposes. A valuation allowance is established when it is more likely than not that all or a portion of a net DTA will not be realized. The Company recorded a loss before income taxes for the years ended December 31, 2011 and 2010. Based on these losses, the Company determined that it was no longer more likely than not that its DTA of $14.6 million at December 31, 2011 would be utilized. Accordingly, a full valuation allowance was recorded as of December 31, 2011. As of September 30, 2016 and December 31, 2015, the DTA balances were $11.4 million and $11.8 million, respectively but management did not believe that it was more likely than not that the full amount of the DTA would be utilized in future periods. As of September 30, 2016 and December 31, 2015 the DTA balances continued to have a full valuation allowance.

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, 2016 and December 31, 2015, the following credit-related commitments were outstanding:

	Contract Amount
	September 30, 2016			December 31, 2015
	(In thousands)
Unfunded commitments under lines of credit		$	98,312	$	108,966
Commercial and standby letters of credit			5,960		7,608
Commitments to make loans			-		5,105

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.

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, 2016 was $80.0 million.

Commercial and standby letters of credit are conditional credit-related commitments issued by the Bank to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. Essentially all letters of credit issued have expiration dates within one year. The credit risk involved in issuing letters of credit is the same as that involved in extending loans to customers. The Bank generally holds collateral supporting those credit-related commitments, if deemed necessary. In the event the customer does not perform in accordance with the terms of the agreement with the third party, the Bank would be required to fund the credit-related commitment. The maximum potential amount of future payments the Bank could be required to make is represented by the contractual amount shown in the summary above. If the credit-related commitment is funded, the Bank would be entitled to seek recovery from the customer. As of both September 30, 2016 and December 31, 2015, $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 $13 thousand and $20 thousand as of September 30, 2016 and December 31, 2015, respectively, and are included in "other liabilities" on the consolidated balance sheets.

Note 14. Preferred Equity Issues

On March 27, 2009, the Company issued two series of preferred stock to the U.S. Treasury under the Capital Purchase Program ("CPP"). Below is a table disclosing the information on the two series:

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

The difference between the liquidation value of the preferred stock and the original cost is accreted (for the Series B Preferred Stock) or amortized (for the Series A Preferred Stock) over 10 years and is reflected, on a net basis, as an increase to the carrying value of preferred stock and decrease to retained earnings. For each of the nine months ended September 30, 2016 and 2015, a net amount of $134 thousand and $133 thousand, respectively, was recorded for amortization.

Dividends and discount accretion on the two series of preferred stock reduce the amount of net income available to common stockholders. For each of the three months ended September 30, 2016 and 2015 the total of these amounts was $1.1 million and $990.0 thousand, respectively. For each of the nine months ended September 30, 2016 and 2015 the total of these amounts was $3.2 million and $2.9 million, respectively.

On August 10, 2012, the Treasury sold its ownership of the Series A Preferred Stock and the Series B Preferred Stock to third parties. On May 7, 2013, the Company elected to exercise the option to defer the payment of dividends on the preferred stock, as provided by the agreements under which the stock was issued. The amounts of dividends accrued and unpaid as of September 30, 2016 and December 31, 2015 were $11.9 million and $8.7 million, respectively, and are included in "other liabilities" on the consolidated balance sheets. The Company redeemed all of its outstanding Series A Preferred Stock and Series B Preferred Stock effective January 25, 2017. Please see Note 18 - Subsequent Events of this Form 10-Q.

Note 15. Derivative Financial Instruments

In the normal course of business, the Bank uses a variety of financial instruments to service the financial needs of customers and to reduce its exposure to fluctuations in interest rates. Derivative instruments that the Bank uses as part of its interest rate risk management strategy include mandatory forward delivery commitments and rate lock commitments.

As a result of using derivative instruments, the Bank has potential exposure to credit loss in the event of non-performance by the counterparties. The Bank manages this credit risk by spreading the credit risk among counterparties that the Company believes are well established and financially strong and by placing contractual limits on the amount of unsecured credit risk from any single counterparty. The Bank's exposure to credit risk in the event of default by a counterparty is the current cost of replacing the contracts net of any available margins retained by the Bank. However, if the borrower defaults on the commitment the Bank requires the borrower to cover these costs.

The Company's derivative instruments outstanding as of September 30, 2016 included commitments to fund loans held for sale. The interest rate lock commitment was valued at fair value at inception. The rate locks will be adjusted for changes in value resulting from changes in market interest rates.

The Bank originates single-family residential loans for sale pursuant to programs offered by Fannie Mae. At the time the interest rate is locked in by the borrower, the Bank concurrently enters into a forward loan sale agreement with respect to the sale of such loan at a set price in an effort to manage the interest rate risk inherent in the locked loan commitment. Any change in the fair value of the loan commitment after the borrower locks in the interest rate is substantially offset by the corresponding change in the fair value of the forward loan sale agreement related to such loan. This change is recorded to "other noninterest expenses" in the consolidated statements of operations. The period from the time the borrower locks in the interest rate to the time the Bank funds the loan and sells it to Fannie Mae is generally 60 days. The fair value of each instrument will rise or fall in response to changes in market interest rates subsequent to the dates the interest rate locks and forward loan sale agreements are entered into. In the event that interest rates rise after the Bank enters into an interest rate lock, the fair value of the loan commitment will decline. However, the fair value of the forward loan sale agreement related to such loan commitment generally increases by substantially the same amount, effectively eliminating the Company's interest rate and price risk.

As of September 30, 2016, the Company had no contracts with customers and no contracts with Fannie Mae for interest rate lock commitments outstanding related to loans being originated for sale. As of December 31, 2015, the Company had notional amounts of $5.1 million in contracts with customers and $8.1 million in contracts with Fannie Mae for interest rate lock commitments outstanding related to loans being originated for sale. The fair value of interest rate lock commitments was $225 thousand as of December 31, 2015.

The Company had outstanding loan commitments, excluding undisbursed portion of loans in process and equity lines of credit, of approximately $98.3 million as of September 30, 2016 and $116.6 million as of December 31, 2015. Of these commitments outstanding, the breakdown between fixed rate and adjustable rate loans is as follows:

	September 30, 2016			December 31, 2015
	(In thousands)
Fixed rate (ranging from 2.4% to 13.9%)		$	17,880	$	11,913
Adjustable rate			80,432		104,661
Total		$	98,312	$	116,574

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.

Derivatives. Derivative assets and liabilities represent interest rate contracts between the Company and loan customers, and between the Company and outside parties to whom it has made a commitment to sell residential mortgage loans at a set interest rate. These are valued based upon the differential between the interest rates upon the inception of the contract and the current market interest rates for similar products. Changes in fair value are recorded in current earnings.

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, 2016 and December 31, 2015, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

September 30, 2016	Total			Level 1			Level 2			Level 3
	(In thousands)
Financial Assets:
Investment securities available for sale:
U.S. Government sponsored agency		$	50,813		$	-		$	50,813		$	-
States and political subdivision			32,396			-			32,396			-
Mortgage backed security			212,394			-			212,394			-
Collateralized mortgage obligation			15,616			-			15,616			-
Commercial mortgage backed security			87,496			-			87,496			-
SBA Pools			706			-			706			-
Total		$	399,421		$	-		$	399,421		$	-

December 31, 2015

Financial Assets:
Investment securities available for sale:
U.S. Government sponsored agency	$	69,584	$	-	$	69,584	$	-
States and political subdivision		3,576		-		3,576		-
Mortgage backed security		121,597		-		121,597		-
Collateralized mortgage obligation		39,921		-		39,921		-
Commercial mortgage backed security		41,119		-		41,119		-
SBA Pools		750		-		750		-
Asset backed securities		39,493		-		39,493		-
Interest rate lock commitments, mandatory forward delivery commitments and pair offs		225		-		225		-
Total	$	316,265	$	-	$	316,265	$	-

There were no financial assets or financial liabilities measured at fair value on a recurring basis for which the Company used significant unobservable inputs (Level 3) during the periods presented in these financial statements. There were no transfers between the levels used on any asset classes during the three and nine months ended September 30, 2016 or the year ended December 31, 2015.

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.

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. The fair value of OREO was computed based on third party appraisals, which are level 3 valuation inputs.

As of September 30, 2016, impaired loans with a carrying value of $38.0 million had a valuation allowance of $4.3 million. As of December 31, 2015, impaired loans with a carrying value of $40.7 million had a valuation allowance of $4.2 million recorded during 2015.

OREO did not have any write-downs during the three and nine months ended September 30, 2016. In the table below, OREO had writedowns during the year ended December 31, 2015 of $361 thousand. The valuation adjustments on OREO have been recorded through earnings.

Assets measured at fair value on a nonrecurring basis as of September 30, 2016 and December 31, 2015 are included in the table below:

`	Total		Level 1		Level 2		Level 3
	(In thousands)
September 30, 2016
Financial Assets
Impaired loans	$	33,686	$	-	$	-	$	33,686
MSRs		5,615		-		-		5,615

December 31, 2015
Financial Assets
Impaired loans	$	36,870	$	-	$	-	$	36,870
MSRs		6,905		-		-		6,905
Non-Financial Assets
OREO		2,231		-		-		2,231

See Note 7 for assumptions used to determine the fair value of MSRs. Assumptions used to determine impaired loans and OREO are presented below by classification, measured at fair value and on a nonrecurring basis as of September 30, 2016 and December 31, 2015:

	Fair value		Valuation Technique(s)	Unobservable Input(s)	Adjustment Range, Weighted Average
September 30, 2016	(In thousands)
Impaired loans
Commercial	$	13,926	Sales comparison	Adjustments for differences of comparable sales	(5.70)% to (13.92)%, (5.82)%
Commercial real estate		7,394	Sales comparison	Adjustments for differences of comparable sales	(0.00) to (7.62), (5.60)
Residential real estate		6,987	Sales comparison	Adjustments for differences of comparable sales	(3.13) to (8.70), (5.32)
Construction real estate		4,948	Sales comparison	Adjustments for differences of comparable sales	(4.00) to (7.50), (5.78)
Installment and other		431	Sales comparison	Adjustments for differences of comparable sales	(4.13) to (8.00), (6.45)
Total impaired loans	$	33,686

December 31, 2015
Impaired loans
Commercial	$	14,557	Sales comparison	Adjustments for differences of comparable sales	(0.00)% to (13.92)%, (5.70)%
Commercial real estate		9,755	Sales comparison	Adjustments for differences of comparable sales	(4.25) to (7.62), (5.65)
Residential real estate		8,624	Sales comparison	Adjustments for differences of comparable sales	(0.00) to (8.70), (5.29)
Construction real estate		3,436	Sales comparison	Adjustments for differences of comparable sales	(4.00) to (7.25), (6.14)
Installment and other		498	Sales comparison	Adjustments for differences of comparable sales	(4.13) to (9.50), (6.52)
Total impaired loans	$	36,870
OREO
Commercial real estate	$	217	Sales comparison	Adjustments for differences of comparable sales	(14.55) to (14.55), (14.55)
Residential real estate		1,493	Sales comparison	Adjustments for differences of comparable sales	(8.47) to (91.19) (21.76)
Construction real estate		521	Sales comparison	Adjustments for differences of comparable sales	(10.70) to (67.45) (57.32)
Total OREO	$	2,231

Fair Value Assumptions

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

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

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

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

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

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

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

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

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

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

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

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

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

The carrying amount and estimated fair values of other financial instruments as of September 30, 2016 and December 31, 2015 are as follows:

	Carrying amount		Level 1		Level 2		Level 3		Total
	(In thousands)
September 30, 2016
Financial assets:
Cash and due from banks	$	15,549	$	15,549	$	-	$	-	$	15,549
Interest-bearing deposits with banks		137,778		137,778		-		-		137,778
Investments:
Available for sale		399,421		-		399,421		-		399,421
Held to maturity		8,866		-		8,625		-		8,625
Non-marketable equity securities		3,809		N/A		N/A		N/A		N/A
Loans held for sale		307		-		-		307		307
Loans, net		781,395		-		-		788,466		788,466
Accrued interest receivable on securities		1,384		-		1,384		-		1,384
Accrued interest receivable on loans		3,943		-		-		3,943		3,943
Accrued interest receivable other		273		-		-		273		273

Off-balance-sheet instruments:
Loan commitments and standby letters of credit	$	13	$	-	$	13	$	-	$	13

Financial liabilities:
Non-interest bearing deposits	$	22,509	$	22,509	$	-	$	-	$	22,509
Interest bearing deposits		1,230,681		-		1,181,204		-		1,181,204
Borrowings		2,300		-		2,802		-		2,802
Junior subordinated debt		37,116		-		-		20,722		20,722
Accrued interest payable		9,442		-		9,442		-		9,442

December 31, 2015
Financial assets:
Cash and due from banks	$	13,506	$	13,506	$	-	$	-	$	13,506
Interest-bearing deposits with banks		151,049		151,049		-		-		151,049
Securities purchased under resell agreements		24,320		24,320		-		-		24,320
Investments:
Available for sale		316,040		-		316,040		-		316,040
Held to maturity		8,986		-		8,988		-		8,988
Non-marketable equity securities		3,854		N/A		N/A		N/A		N/A
Loans held for sale		3,041		-		-		3,041		3,041
Loans, net		822,396		-		-		830,555		830,555
Accrued interest receivable on securities		1,028		-		1,028		-		1,028
Accrued interest receivable on loans		3,795		-		-		3,795		3,795
Accrued interest receivable other		208		-		-		208		208
Interest rate lock commitments, mandatory forward delivery commitments and pair offs		225		-		225		-		225

Off-balance-sheet instruments:
Loan commitments and standby letters of credit	$	20	$	-	$	20	$	-	$	20

Financial liabilities:
Non-interest bearing deposits	$	75,867	$	75,867	$	-	$	-	$	75,867
Interest bearing deposits		1,178,091		-		1,181,204		-		1,181,204
Long-term borrowings		2,300		-		2,642		-		2,642
Junior subordinated debt		37,116		-		-		20,461		20,461
Accrued interest payable		7,370		-		7,370		-		7,370

Note 17. Regulatory Matters

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

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

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

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

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). The Company and the Bank met all capital adequacy requirements to which they were subject as of September 30, 2016 and December 31, 2015.

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

	Actual					For Capital Adequacy Purposes					To be well capitalized under prompt corrective action provisions					Minimum Levels Under Order Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
September 30, 2016
Total capital (to risk-weighted assets):
Consolidated	$	127,248		14.2543	%	$	71,416		8.00	%		N/A		N/A			N/A		N/A
Bank only		146,117		16.4425	%		71,092		8.00	%	$	88,866		10.00	%	$	97,752		11.00	%
Tier 1 capital (to risk weighted assets):
Consolidated		100,002		11.2022	%		53,562		6.00	%		N/A		N/A			N/A		N/A
Bank only		134,919		15.1824	%		53,319		6.00	%		71,092		8.00	%		N/A		N/A
Common Equity Tier 1 Capital (to risk weighted assets):
Consolidated		43,128		4.8312	%		40,171		4.50	%		N/A		N/A			N/A		N/A
Bank only		134,919		15.1824	%		39,990		4.50	%		57,763		6.50	%		N/A		N/A
Tier 1 leverage (to average assets):
Consolidated		100,002		7.1248	%		56,143		4.00	%		N/A		N/A			N/A		N/A
Bank only		134,919		9.6644	%		55,842		4.00	%		69,802		5.00	%		111,683		8.00	%

N/A—not applicable

	Actual					For Capital Adequacy Purposes					To be well capitalized under prompt corrective action provisions					Minimum Levels Under Order Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
December 31, 2015
Total capital (to risk-weighted assets):
Consolidated	$	128,272		14.10	%	$	72,774		8.00	%		N/A		N/A			N/A		N/A
Bank only		141,486		15.62	%		72,452		8.00	%	$	90,565		10.00	%	$	99,621		11.00	%
Tier 1 capital (to risk weighted assets):
Consolidated		101,263		11.13	%		54,580		6.00	%		N/A		N/A			N/A		N/A
Bank only		130,084		14.36	%		54,339		6.00	%		72,452		8.00	%		N/A		N/A
Common Equity Tier 1 Capital (to risk weighted assets):
Consolidated		44,080		4.85	%		40,935		4.50	%		N/A		N/A			N/A		N/A
Bank only		130,084		14.36	%		40,754		4.50	%		58,867		6.50	%		N/A		N/A
Tier 1 leverage (to average assets):
Consolidated		101,263		7.11	%		56,943		4.00	%		N/A		N/A			N/A		N/A
Bank only		130,084		9.18	%		56,685		4.00	%		70,856		5.00	%		113,370		8.00	%

N/A - not applicable

While the Bank's capital ratios fall into the category of "well-capitalized," the Bank cannot be considered "well-capitalized" due to the requirement to meet and maintain a specific capital level in the Consent Order pursuant to the prompt corrective action rules. The Bank is required to maintain (i) a leverage ratio of Tier 1 Capital to total assets of at least 8%; and (ii) a ratio of Total Capital to total risk-weighted assets of at least 11%. As of September 30, 2016 and December 31, 2015 the Bank was in compliance with these requirements.

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, 2016 the Bank's capital conservation buffer was 8.4425% and the consolidated capital conservation buffer was 0.3312%.

Note 18. Subsequent Events

Private Placement to Certain Institutional and Accredited Investors

On December 19, 2016, the Company closed its previously announced $52 million private placement with Castle Creek Capital Partners VI, L.P. ("Castle Creek"), Patriot Financial Partners II, L.P., Patriot Financial Partners Parallel II, L.P. (collectively, "Patriot") and Strategic Value Bank Partners, L.P., through its fund Strategic Value Investors LP, pursuant to which the Company issued 2,661,239 shares of its common stock, no par value per share, at $4.75 per share, and 82,862 shares of a new series of convertible perpetual non-voting preferred stock, Series C, no par value per share, at $475.00 per share ("Series C Preferred Stock").

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

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

Repurchase of Series A Preferred Stock and Series B Preferred Stock

Using part of the proceeds from the private placement described above, the Company redeemed all of its outstanding Series A preferred stock and Series B preferred stock effective January 25, 2017.

Payment of Deferred Interest on Trust Preferred Securities

As of December 31, 2016, the Company had outstanding $37.1 million of trust preferred securities with a total of $9.9 million of accrued and unpaid interest. During the first quarter of 2017, the Company used part of the proceeds from the private placement, plus a portion of a $15 million dividend from the Bank, to pay all of the accrued and unpaid interest on the junior subordinated debentures.

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

At December 31, 2016, the Company had outstanding 82,862 shares of Series C Preferred Stock that were issued in connection with the private placement. Following shareholder approval of an amendment to the Company's articles of incorporation to authorize a class of non-voting common stock, and the subsequent filing of such amendment with the New Mexico Secretary of State, all outstanding shares of Series C Preferred Stock were automatically converted into shares of non-voting common stock. This conversion was effective February 2, 2017.

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

Management's Discussion and Analysis of Financial Condition and Results of Operations analyzes the major elements of the Company's balance sheets and statements of income. This section should be read in conjunction with the Company's unaudited consolidated financial statements and accompanying notes included elsewhere in this Quarterly Report on Form 10-Q ("Form 10-Q") and with the unaudited consolidated financial statements and accompanying notes and other detailed information appearing elsewhere in the Company's Annual Report on Form 10-K for the year ended December 31, 2015 ("2015Form 10-K").

Special Note Concerning Forward-Looking Statements

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

The Company's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. The factors, which could cause actual results to differ materially from those expressed in, or implied by, the forward-looking statements and could have a material adverse effect on the operations and future prospects of the Company and its subsidiaries are detailed in the "Risk Factors" section included under Item 1A of Part I of the 2015 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.

Overview

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

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

The Company's net loss available to common stockholders decreased $824 thousand from net loss of $1.1 million for the three months ended September 30, 2015 to a net loss of $292 thousand for the three months ended September 30, 2016. This decrease was primarily attributable to an increase in security interest income, a decrease in occupancy expenses, a decrease in legal, professional and accounting fees, and a decrease in amortization and valuation on MSRs, partially offset by decreases in loan interest income and a decrease in other fees.

The Company's net loss available to common stockholders increased $1.1 million from net loss of $80 thousand for the nine months ended September 30, 2015 to net loss of $1.2 million for the nine months ended September 30, 2016. This increase was primarily attributable to decreases in loan interest income, a decrease in other fees, an increase in MSR amortization, and a decrease in gain on sales of loans. Offsetting these factors was a decrease in interest expenses, an increase in security interest income, a decrease in occupancy expenses, and a decrease in legal, professional and accounting fees.

The Company continues to experience challenges in its loan portfolio, with high levels of non-performing loans and foreclosed properties. In response to these challenges and to proactively position the Company to meet these challenges, we continue to reduce our concentrations in the construction real estate portfolio and have taken other steps in compliance with the regulatory enforcement actions taken against the Company and the Bank.

Regulatory Actions against the Company and the Bank.

As discussed in the Part I, Item 1, of the 2015 Form 10-K, the Company is party to a Written Agreement with the FRB. The Written Agreement requires Trinity to serve as a source of strength to the Bank and restricts Trinity's ability to issue dividends and other capital distributions, to receive dividends from the Bank, and to repurchase or redeem any Trinity stock without the prior written approval of the FRB. The Written Agreement further requires that Trinity implement a capital plan, subject to approval by the FRB, and submit cash flow projections to the FRB. Finally, the Written Agreement requires Trinity to comply with all applicable laws and regulations and to provide quarterly progress reports to the FRB. Additionally, the Bank is a party to a Consent Order with the OCC. The Consent Order focuses on improving the Bank's credit administration, credit underwriting, internal controls, compliance and management supervision. Additionally, the Consent Order requires that the Bank maintain certain capital ratios and receive approval of the OCC prior to declaring dividends. The Consent Order requires the Bank to maintain the following minimum capital ratios: (i) a leverage ratio of Tier 1 Capital to total assets of at least 8%; and (ii) a ratio of Total Capital to total risk-weighted assets of at least 11%. The Company continues to take action to satisfy of the requirements under the Consent Order and the Written Agreement.

Critical Accounting Policies

Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. We believe that the most critical accounting policies upon which our financial condition and results of operation depend, and which involve the most complex subjective decisions or assessments, are included in the discussion entitled "Critical Accounting Policies" in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," in the 2015 Form 10-K, and all amendments thereto. There have been no material changes to the critical accounting policies disclosed in the 2015 Form 10-K.

Results of Operations

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

Net interest income is affected by changes in the volume and mix of interest-earning assets, the level of interest rates earned on those assets, the volume and mix of interest-bearing liabilities, and the level of interest rates paid on those interest-bearing liabilities. Provision for loan losses is dependent on changes in the loan portfolio and management's assessment of the collectability of the loan portfolio, as well as economic and market conditions. Noninterest income and noninterest expenses are impacted by growth of operations and growth in the number of accounts. Noninterest expenses are impacted by additional employees, branch facilities and promotional marketing expenses. A number of accounts affect noninterest income, including service fees as well as noninterest expenses such as computer services, supplies, postage, telecommunications and other miscellaneous expenses.

Net Income (Loss)

Net loss available to common stockholders for the three months ended September 30, 2016 was $292 thousand, or a diluted loss per common share of $0.04, compared to net loss available to common stockholders of $1.1 million for the three months ended September 30, 2015, or diluted loss per common share of $0.17, a decrease of $824 thousand in net losses and a decrease in diluted loss per common share of $0.13. This decrease in net loss available to common stockholders was primarily due to a decrease in amortization and valuation on MSRs of $1.4 million, an increase in security interest income of $1.2 million, and an increase in gains of sale of OREO of $238 thousand. These were partially offset by decreases in loan interest income of $941 thousand, increase in derivative fair value expense of $305 thousand, increases in supplies expense of $297 thousand, increases in repairs expense of $158 thousand, increases in salaries and benefits of $126 thousand, increases in OCC assessments of $138 thousand, increases in data processing expenses of $114 thousand, and increases in gross receipts tax and depreciation of $111 thousand each.

Net loss available to common stockholders for the nine months ended September 30, 2016 was $1.2 million, or a diluted loss per common share of $0.18, compared to net loss available to common stockholders of $80 thousand for the nine months ended September 30, 2015, or diluted loss per common share of $0.01, an increase of $1.1 million in net losses and an increase in diluted loss per common share of $0.17. This increase in net loss available to common stockholders was primarily due to a decrease in loan interest income of $2.8 million, an increase of $622 thousand in salaries and benefits, an increase of $277 thousand in derivative fair value expense, an increase of $271 thousand in preferred dividends, a decrease of $270 thousand in service charges on deposit accounts, an increase of $268 thousand in supplies expense, a $236 thousand decrease in gains on sales of loans, and a $194 thousand decrease in mortgage loan servicing fees. These were partially offset by an increase of $3.1 million in security interest income, a decrease of $565 thousand in legal, professional, and accounting fees, and a decrease of $205 thousand in occupancy expense.

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,
	2016							2015
	Average Balance		Interest		Yield /Rate			Average Balance		Interest		Yield /Rate
					(Dollars in thousands)
Interest-earning Assets:
Loans(1)	$	802,334	$	9,413		4.67	%	$	847,033	$	10,354		4.85	%
Taxable investment securities		417,801		2,163		2.06	%		283,322		1,053		1.47	%
Investment securities exempt from federal income taxes		32,131		175		2.17	%		6,442		44		2.71	%
Securities purchased under resell agreements		-		-		0.00	%		20,597		32		0.62	%
Other interest-bearing deposits		61,843		43		0.28	%		223,913		276		0.49	%
Non-marketable equity securities		4,001		55		5.47	%		3,993		55		5.46	%
Total interest-earning assets		1,318,110		11,849		3.58	%		1,385,300		11,814		3.38	%
Non-interest-earning assets		85,930							60,310
Total assets	$	1,404,040						$	1,445,610
Interest-bearing Liabilities:
Deposits:
NOW deposits	$	20,307	$	13		0.25	%	$	151,523	$	27		0.07	%
Money market deposits		553,889		53		0.04	%		297,061		49		0.07	%
Savings deposits		411,440		86		0.08	%		384,941		82		0.08	%
Time deposits over $100,000		136,780		251		0.73	%		166,748		352		0.84	%
Time deposits under $100,000		112,615		153		0.54	%		137,874		206		0.59	%
Long-term borrowings		2,300		37		6.40	%		2,300		36		6.21	%
Long-term capital lease obligation		2,211		-		0.00	%		2,211		-		0.00	%
Junior subordinated debt		37,116		742		7.95	%		37,116		665		7.11	%
Total interest-bearing liabilities		1,276,658		1,335		0.42	%		1,179,774		1,417		0.48	%
Demand deposits, noninterest-bearing		31,558							157,352
Other noninterest-bearing liabilities		10,807							24,770

Stockholders' equity, including stock owned by ESOP		85,017							83,714
Total liabilities and stockholders equity	$	1,404,040						$	1,445,610
Net interest income/interest rate spread (2)			$	10,514		3.16	%			$	10,397		2.91	%
Net interest margin (3)						2.98	%						2.85	%

(1)	Average loans include nonaccrual loans of $26.6 million and $30.4 million for the three months ended September 30, 2016 and 2015, respectively. Interest income includes loan origination fees of $175 thousand and $183 thousand for the three months ended September 30, 2016 and 2015, 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,
	2016							2015
	Average Balance		Interest		Yield /Rate			Average Balance		Interest		Yield /Rate
					(Dollars in thousands)
Interest-earning Assets:
Loans(1)	$	816,713	$	29,532		4.83	%	$	876,546	$	32,334		4.93	%
Taxable investment securities		402,553		5,769		1.91	%		264,052		2,815		1.43	%
Investment securities exempt from federal income taxes		21,444		323		2.01	%		7,110		134		2.52	%
Securities purchased under resell agreements		4,159		43		0.00	%		19,157		100		0.70	%
Other interest-bearing deposits		95,897		318		0.44	%		212,776		533		0.33	%
Non-marketable equity securities		4,000		163		5.44	%		4,380		159		4.85	%
Total interest-earning assets		1,344,766		36,148		3.59	%		1,384,021		36,075		3.48	%
Non-interest-earning assets		69,243							62,904
Total assets	$	1,414,009						$	1,446,925
Interest-bearing Liabilities:
Deposits:
NOW deposits	$	122,331	$	133		0.15	%	$	156,816	$	79		0.07	%
Money market deposits		357,553		70		0.03	%		293,890		154		0.07	%
Savings deposits		396,306		254		0.09	%		374,064		238		0.09	%
Time deposits over $100,000		144,905		813		0.75	%		174,864		1,127		0.86	%
Time deposits under $100,000		120,829		500		0.55	%		143,206		660		0.62	%
Short-term borrowings		-		-		0.00	%		6,004		139		0.00	%
Long-term borrowings		2,300		110		6.39	%		2,300		109		6.34	%
Long-term capital lease obligation		2,211		-		0.00	%		2,211		-		0.00	%
Junior subordinated debt		37,116		2,179		7.84	%		37,116		1,980		7.13	%
Total interest-bearing liabilities		1,183,551		4,059		0.46	%		1,190,471		4,486		0.50	%
Demand deposits, noninterest-bearing		117,528							148,466
Other noninterest-bearing liabilities		29,966							24,439

Stockholders' equity, including stock owned by ESOP		82,964							83,549
Total liabilities and stockholders equity	$	1,414,009						$	1,446,925
Net interest income/interest rate spread (2)			$	32,089		3.13	%			$	31,589		2.98	%
Net interest margin (3)						3.03	%						2.92	%

(1)	Average loans include nonaccrual loans of $24.2 million and $34.8 million for the nine months ended September 30, 2016 and 2015, respectively. Interest income includes loan origination fees of $915 thousand and $997 thousand for the nine months ended September 30, 2016 and 2015, 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 increased $117 thousand to $10.5 million for the three months ended September 30, 2016 from $10.4 million for the three months ended September 30, 2015 due to an increase in interest income of $35 thousand and a decrease in interest expense of $82 thousand. Net interest income increased primarily due to an increase in average taxable investment securities of $134.5 million partially offset by a decrease in average volume of loans of $44.7 million. The increase volume of securities partially offset by the lower volume of loans and earning assets in general resulted in the average yield on earning assets to increase 20 basis points to 3.58% from 3.38% for the three months ended September 30, 2015. The decrease in interest expense was primarily due to a decrease in the average volume of time deposits of $55.2 million, a decrease in average volume of $131.2 million in NOW deposits, partially offset by an increase in average money market deposits of $256.8 million and an increase in average savings deposits of $26.5 million. The reduction in volume and shift in deposit mix caused the cost of interest-bearing liabilities to decline six basis points to 0.42% for the three months ended September 30, 2016 from 0.48% for the three months ended September 30, 2015. The decrease in the cost of funds on interest-bearing liabilities is a result of an effort by management to decrease the cost of funds and increase the overall interest margin, causing existing deposits to reprice at lower interest rates, and causing new deposits to be priced at lower interest rates. Net interest margin increased 13 basis points to 2.98% for the three months ended September 30, 2016 from 2.85% for the three months ended September 30, 2015.

Net interest income increased $500 thousand to $32.1 million for the nine months ended September 30, 2016 from $31.6 million for the nine months ended September 30, 2015 due to an increase in interest income of $73 thousand and a decrease in interest expense of $427 thousand. Net interest income increased primarily due to an increase in average taxable investment securities of $138.5 million partially offset by a decrease in average volume of loans of $59.8 million. The increase volume of securities partially offset by the lower volume of loans and earning assets in general resulted in the average yield on earning assets to increase 11 basis points to 3.59% for the nine months ended September 30, 2016 from 3.48% for the nine months ended September 30, 2015. The decrease in interest expense was primarily due to a decrease in the average volume of time deposits of $52.3 million, a decrease in average volume of $34.5 million in NOW deposits, partially offset by an increase in average money market deposits of $63.7 million and an increase in average savings deposits of $22.2 million. The reduction in volume and shift in deposit mix caused the cost of interest-bearing liabilities to decline four basis points to 0.46% for the nine months ended September 30, 2016 from 0.50% for the nine months ended September 30, 2015. The decrease in the cost of funds on interest-bearing liabilities is a result of an effort by management to decrease the cost of funds and increase the overall interest margin, causing existing deposits to reprice at lower interest rates, and causing new deposits to be priced at lower interest rates. Net interest margin increased 11 basis points to 3.03% for the nine months ended September 30, 2016 from 2.92% for the nine months ended September 30, 2015.

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,
	2016 Compared to 2015
	Change Due to Volume			Change Due to Rate			Total Change
	(In thousands)
Interest-earning Assets:
Loans	$	(546	)	$	(395	)	$	(941	)
Taxable investment securities		500			610			1,110
Investment securities exempt from federal income taxes		175			(44	)		131
Securities purchased under resell agreements		(32	)		-			(32	)
Other interest bearing deposits		(194	)		(39	)		(233	)
Non-marketable equity securities		(3	)		3			-
Total (decrease) increase in interest income	$	(100	)	$	135		$	35
Interest-bearing Liabilities:
Now deposits	$	(23	)	$	82		$	59
Money market deposits		42			-			42
Savings deposits		6			(113	)		(107	)
Time deposits over $100,000		(63	)		(38	)		(101	)
Time deposits under $100,000		(38	)		(15	)		(53	)
Long-term borrowings		-			-			-
Capital long-term lease obligation		-			-			-
Junior subordinated debt		-			78			78
Total increase (decrease) in interest expense	$	(76	)	$	(6	)	$	(82	)
Increase (decrease) in net interest income	$	(24	)	$	141		$	117

	Nine Months Ended September 30,
	2016 Compared to 2015
	Change Due to Volume			Change Due to Rate			Total Change
	(In thousands)
Interest-earning Assets:
Loans	$	(2,207	)	$	(595	)	$	(2,802	)
Taxable investment securities		1,477			1,477			2,954
Investment securities exempt from federal income taxes		270			(81	)		189
Securities purchased under resell agreements		(78	)		21			(57	)
Other interest bearing deposits		(293	)		78			(215	)
Non-marketable equity securities		(14	)		18			4
Total (decrease) increase in interest income	$	(845	)	$	918		$	73
Interest-bearing Liabilities:
Now deposits	$	(17	)	$	71		$	54
Money market deposits		33			(117	)		(84	)
Savings deposits		14			2			16
Time deposits over $100,000		(193	)		(121	)		(314	)
Time deposits under $100,000		(103	)		(57	)		(160	)
Short-term borrowings		(139	)		-			(139	)
Long-term borrowings		-			1			1
Capital long-term lease obligation		-			-			-
Junior subordinated debt		-			199			199
Total increase (decrease) in interest expense	$	(405	)	$	(22	)	$	(427	)
Increase (decrease) in net interest income	$	(440	)	$	940		$	500

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

	Three Months Ended September 30,									Nine Months Ended September 30,
	2016			2015			Net difference			2016		2015		Net difference
	(In thousands)
Noninterest income:
Mortgage loan servicing fees	$	456		$	569		$	(113	)	$	1,546	$	1,740	$	(194	)
Trust and investment services fees		654			632			22			1,900		1,980		(80	)
Service charges on deposits		153			306			(153	)		719		989		(270	)
Net gain on sale of OREO		316			78			238			1,159		507		652
Net gain on sale of loans		630			552			78			1,853		2,089		(236	)
Net gain on sale of securities		130			-			130			184		1		183
Other fees		733			523			210			1,289		1,685		(396	)
Other noninterest income (loss)		(4	)		(72	)		68			197		81		116
Total noninterest income	$	3,068		$	2,588		$	480		$	8,847	$	9,072	$	(225	)

Noninterest income increased $480 thousand to $3.1 million for the three months ended September 30, 2016 from $2.6 million for the three months ended September 30, 2015, primarily attributable to the increase in gains on sale of OREO of $238 thousand, an increase in other fees of $210 thousand, and an increase in gains on sales of securities of $130 thousand, partially offset by a decrease in service charges of deposit accounts of $153 thousand.

Noninterest income decreased $225 thousand to $8.8 million for the nine months ended September 30, 2016 from $9.1 million for the nine months ended September 30, 2015, primarily attributable to decrease in other fees of $396 thousand, a decrease in service charges on deposits of $270 thousand, a decrease in gains on sales of loans of $236 thousand, and a decrease in mortgage loan servicing fees of $194 thousand.. These were partially offset by increases in gains on sale of OREO of $652 thousand and an increase in gains on sale of securities of $183 thousand.

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

	Three Months Ended September 30,								Nine Months Ended September 30,
	2016			2015		Net difference			2016		2015		Net difference
	(In thousands)
Noninterest expenses:
Salaries and employee benefits	$	6,536		$	6,410	$	126		$	19,460	$	18,838	$	622
Occupancy		669			717		(48	)		2,412		2,617		(205	)
Data processing		872			758		114			2,232		2,169		63
Legal, professional, and accounting fees		1,539			1,470		69			4,949		5,514		(565	)
Amortization and valuation of MSRs		(95	)		1,257		(1,352	)		1,830		1,616		214
Other noninterest expenses:
Marketing		172			330		(158	)		864		1,109		(245	)
Supplies		454			155		299			664		394		270
Postage		71			139		(68	)		416		489		(73	)
FDIC insurance premiums		780			774		6			2,259		2,319		(60	)
Collection expenses		151			170		(19	)		579		640		(61	)
Other		1,642			931		711			3,264		2,131		1,133
Total other noninterest expenses		3,270			2,499		771			8,046		7,082		964
Total noninterest expenses	$	12,791		$	13,111	$	(320	)	$	38,929	$	37,836	$	1,093

Noninterest expenses decreased $320 thousand to $12.8 million for the three months ended September 30, 2016 from $13.1 million for the three months ended September 30, 2015. This decrease was primarily attributable to the decrease decreases of $1.4 million in amortization and valuation of MSRs. These decreases were partially offset by increases in derivative fair value expenses of $305 thousand, an increase in supplies expense of $299 thousand, an increase in OCC assessments of $138 thousand, an increase of $111 thousand in gross receipts tax, an increase of $111 thousand in depreciation expense, an increase of $76 thousand in director fees, and an increase of $62 thousand in recruitment fees.

Noninterest expenses increased $1.1 million to $38.9 million for the nine months ended September 30, 2016 from $37.8 million for the nine months ended September 30, 2015. This increase was primarily attributable to the increases in salaries and benefits of $622 thousand, an increase in supplies expense of $268 thousand, an increase in amortization and valuation of MSRs of $214 thousand, an increase in derivative fair value expense of $174 thousand, and an increase in director fees of $113 thousand, partially offset by a decrease in legal, professional, and accounting fees of $565 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 no provision (benefit) for income taxes at September 30, 2016 or 2015.

Financial Condition

Balance Sheet-General. Total assets as of September 30, 2016 were $1.41 billion, increasing $13.2 million from $1.40 billion as of December 31, 2015. During 2016, investment securities available for sale increased $83.4 million, premises and equipment increased $2.8 million due to the purchase of the Albuquerque building, and other assets increased $10 million due to the purchase of bank owned life insurance (BOLI) but were partially offset by a decrease in net loans of $41.0 million and a decrease in cash and cash equivalents of $35.5 million. During the same period total liabilities increased to $1.33 billion, an increase of $8.5 million. Stockholders' equity (excluding stock owned by the ESOP) increased $4.7 million to $81.0 million as of September 30, 2016 compared to $76.3 million as of December 31, 2015 primarily due to an increase in accumulated other comprehensive income of $5.8 million.

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 Part II, Item 7 and "Asset Liability Management" included under Part II, Item 7A of the 2015 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, 2016				At December 31, 2015
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(In thousands)
Securities Available for Sale:
U.S. Government sponsored agency	$	49,425	$	50,813	$	69,798	$	69,584
State and political subdivision		32,027		32,396		3,429		3,576
Residential mortgage-backed security		213,102		212,394		123,055		121,597
Residential collateralized mortgage obligation		15,540		15,616		40,305		39,921
Commercial mortgage backed security		85,621		87,496		41,341		41,119
SBA pools		714		706		757		750
Asset-backed security		-		-		40,136		39,493
Totals	$	396,429	$	399,421	$	318,821	$	316,040

Securities Held to Maturity:
SBA pools	$	8,866	$	8,625	$	8,986	$	8,988
Totals	$	8,866	$	8,625	$	8,986	$	8,988

U.S. government sponsored agency securities generally consist of fixed rate securities with maturities from ten months to seven years. States and political subdivision investment securities consist of a local issue rated "Aa1" by Moody's Investment Services with maturities of eleven months to sixteen years.

The Company had a total of $15.5 million in residential collateralized mortgage obligations as of September 30, 2016. 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, 2016, the ratings of these securities were Aaa, which are considered "Investment Grade" (rating of "BBB" or higher). At the time of purchase and on a monthly basis, the Company reviews these securities for impairment on an other than temporary basis. The Company utilizes several external sources to evaluate prepayments, delinquencies, loss severity, and other factors in determining if there is impairment. As of September 30, 2016, 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, 2016, 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, 2016	(Dollars in thousands)
Securities Available for Sale:
U.S. Government sponsored agency	$	5,005		0.55	%	$	15,142		1.30	%	$	30,666		2.20	%	$	-		0.00	%
States and political subdivision (1)		202		0.55	%		1,338		1.47	%		1,870		2.31	%		28,986		2.27	%
Mortgage backed		-		0.00	%		594		1.25	%		81,553		2.34	%		233,359		2.09	%
SBA pools		-		0.00	%		-		0.00	%		-		0.00	%		706		1.29	%
Totals	$	5,207		0.53	%	$	17,074		0.80	%	$	114,089		2.13	%	$	263,051		1.65	%
Securities Held to Maturity:
SBA pools	$	-		0.00	%	$	-		0.00	%	$	-		0.00	%	$	8,625		3.33	%
Totals	$	-		0.00	%	$	-		0.00	%	$	-		0.00	%	$	8,625		3.33	%

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

Loan Portfolio. As a result of the economic downturn, loan demand has slowed, and with management's focus on completing the restatement, levels of total loans decreased steadily from 2012 to 2016. While loan demand remains weak in our markets, management is working to increase its portfolio of performing loans. The total amounts in the residential real estate and construction real estate loan portfolios have steadily decreased primarily due to the Bank's strategy to diversify its portfolio.

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

	September 30, 2016						December 31, 2015
	Amount			Percent			Amount			Percent
	(Dollars in thousands)
Commercial	$	85,247			10.65	%	$	92,995			11.05	%
Commercial real estate		383,203			47.86	%		371,599			44.17	%
Residential real estate		228,099			28.49	%		258,606			30.74	%
Construction real estate		79,629			9.95	%		89,341			10.62	%
Installment and other		24,387			3.05	%		28,730			3.42	%
Total loans		800,565			100.00	%		841,271			100.00	%
Unearned income		(1,369	)					(1,483	)
Gross loans		799,196						839,788
Allowance for loan losses		(17,801	)					(17,392	)
Net loans	$	781,395					$	822,396

Net loans decreased $41.0 million from $822.4 million as of December 31, 2015 to $781.4 million as of September 30, 2016. The largest decreases were in gross residential real estate loans of $30.5 million, gross construction loans of $9.7 million, gross commercial loans of $7.7 million, and installment and other loans of $4.3 million. These were partially offset by increases in commercial real estate of $11.6 million.

Loan Maturities. The following table sets forth the maturity or repricing information for loans outstanding as of September 30, 2016:

	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	$	13,624	$	49,416	$	12,185	$	96	$	9,926	$	-	$	35,735	$	49,512
Commercial real estate		5,995		139,969		62,918		64,850		91,137		18,334		160,050		223,153
Residential real estate		294		113,061		5,143		18,353		89,621		1,627		95,058		133,041
Construction real estate		25,978		37,694		3,541		277		5,664		6,475		35,183		44,446
Installment and other		1,084		13,598		4,795		9		4,901		-		10,780		13,607
Total loans	$	46,975	$	353,738	$	88,582	$	83,585	$	201,249	$	26,436	$	336,806	$	463,759

Asset Quality. Over the past several years, the Bank experienced significant deterioration in asset quality due to the historic economic downturn. Non-performing assets peaked in 2010 at approximately $100.0 million.

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

	September 30, 2016			December 31, 2015
	(Dollars in thousands)
Non-accruing loans	$	26,946		$	30,325
Loans 90 days or more past due, still accruing interest		21			-
Total non-performing loans		26,967			30,325
OREO		7,054			8,346
Total non-performing assets	$	34,021		$	38,671
TDRs, still accruing interest	$	45,971		$	53,592
Total non-performing loans to total loans		3.37	%		3.60	%
Allowance for loan losses to non- performing loans		66.01	%		57.35	%
Total non-performing assets to total assets		2.41	%		2.76	%

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, 2016
$5.0 million or more		-	$	-			-	$	-			-	$	-
$3.0 million to $4.9 million		-		-			-		-			-		-
$1.5 million to $2.9 million		-		-			3		6,355			-		-
Under $1.5 million		11		1,905			12		3,304			50		5,924
Total		11	$	1,905			15	$	9,659			50	$	5,924

Percentage of individual loan category				2.23	%				2.52	%				2.60	%

December 31, 2015
$5.0 million or more		-	$	-			-	$	-			-	$	-
$3.0 million to $4.9 million		-		-			-		-			-		-
$1.5 million to $2.9 million		-		-			3		5,719			-		-
Under $1.5 million		17		2,268			16		5,018			51		7,821
Total		17	$	2,268			19	$	10,737			51	$	7,821

Percentage of individual loan category				2.44	%				2.89	%				3.02	%

Continued:

	Construction real estate					Installment & other loans					Total
Dollar Range	Number of Borrowers		Amount			Number of Borrowers		Amount			Number of Borrowers		Amount
	(Dollars in thousands)
September 30, 2016
$5.0 million or more		-	$	-			-	$	-			-	$	-
$3.0 million to $4.9 million		-		-			-		-			-		-
$1.5 million to $2.9 million		3		6,627			-		-			6		12,982
Under $1.5 million		13		2,818			2		13			88		13,964
Total		16	$	9,445			2	$	13			94	$	26,946

Percentage of individual loan category				11.86	%				0.05	%				3.37	%

December 31, 2015
$5.0 million or more		-	$	-			-	$	-			-	$	-
$3.0 million to $4.9 million		-		-			-		-			-		-
$1.5 million to $2.9 million		2		4,851			-		-			5		10,570
Under $1.5 million		19		4,502			4		146			107		19,755
Total		21	$	9,353			4	$	146			112	$	30,325

Percentage of individual loan category				10.47	%				0.51	%				3.60	%

Non-performing loans include (i) loans accounted for on a nonaccrual basis and (ii) accruing loans contractually past due 90 days or more as to interest and principal. Management reviews the loan portfolio for problem loans on a regular basis with additional resources dedicated to resolving the non-performing loans. Additional internal controls were implemented to ensure the timely identification of signs of weaknesses in credits, facilitating efforts to rehabilitate or exit the relationship in a timely manner. External loan reviews, which have been conducted on a regular basis, were also revised to provide a broad scope and reviewers have access to all elements of a relationship. In 2015, a significant portion of the loan portfolio was also examined by independent third party consultants.

As of September 30, 2016, total non-performing assets decreased $4.7 million to $34.0 million from $38.7 million as of December 31, 2015 primarily due to a decrease in non-accruing loans of $3.4 million. Residential real estate non-accruing loans decreased $1.9 million, commercial real estate nonaccrual loans decreased $1.1 million, and commercial loans decreased $363 thousand.

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,
	2016			2015		2016			2015
	(Dollars in thousands)
Balance at beginning of year	$	17,592		$	23,280	$	17,392		$	24,783
Provision for loan losses		-			-		-			-
Charge-offs:
Commercial		206			568		481			1,357
Commercial real estate		46			3,775		46			4,039
Residential real estate		174			627		576			1,841
Construction real estate		-			410		22			1,442
Installment and other		98			264		333			516
Total charge-offs		524			5,644		1,458			9,195
Recoveries :
Commercial		260			192		749			1,355
Commercial real estate		377			124		507			463
Residential real estate		56			334		315			498
Construction real estate		5			93		122			409
Installment and other		35			163		174			229
Total recoveries		733			906		1,867			2,954
Net (recoveries) charge-offs		(209	)		4,738		(409	)		6,241
Balance at end of year	$	17,801		$	18,542	$	17,801		$	18,542

Net recoveries for the three months ended September 30, 2016 totaled $209 thousand, an increase in net recoveries of $4.9 million from three months ended September 30, 2015 primarily due to increases in net recoveries for commercial real estate loans of $4.0 million, increases in net recoveries in commercial loans of $430 thousand, increases in net recoveries in construction real estate loans of $322 thousand, increases in net recoveries in residential real estate loans of $175 thousand, and increases in net recoveries in installment and other loans of $38 thousand.

Net recoveries for the nine months ended September 30, 2016 totaled $409 thousand, an increase in net recoveries of $6.7 million from nine months ended September 30, 2015 primarily due to increases in net recoveries for commercial real estate loans of $4.0 million, increases in net recoveries for construction loans of $1.1 million, increases in net recoveries for residential real estate loans of $1.1 million, increases in net recoveries for commercial loans of $270 thousand, and increases in net recoveries in installment and other loans of $128 thousand.

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

	September 30, 2016					December 31, 2015
	Amount		Percent			Amount		Percent
	(Dollars in thousands)
Commercial	$	2,081		11.69	%	$	2,442		14.04	%
Commercial real estate		8,251		46.34	%		6,751		38.82	%
Residential real estate		5,521		31.02	%		6,082		34.97	%
Construction real estate		1,199		6.74	%		1,143		6.57	%
Installment and other		698		3.92	%		940		5.40	%
Unallocated		51		0.29	%		34		0.20	%
Total	$	17,801		100.00	%	$	17,392		100.00	%

The allowance for loan losses increased $409 thousand from $17.4 million as of December 31, 2015 to $17.8 million as of September 30, 2016. This increase was largely due to an increased allowance balance in the commercial real estate loan category, partially offset by decreases in commercial loans, residential real estate loans, and installment and other loans. No provision for loan loss was required for the nine months ended September 30, 2016. A $500 thousand provision for loan loss was required as of December 31, 2015.

A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due according to the original contractual terms of the loan agreement, including both principal and interest. As discussed in Part I, Item 1 "Explanatory Note" and Part II, Item 9A "Controls and Procedures" in the 2015 Form 10-K, while the Bank undertook efforts to assist borrowers experiencing financial difficulties, at times, these actions preempted compliance with lending policies and internal controls. Concessions were granted but troubled debt restructure ("TDR") status was not always recognized when appropriate. This resulted in certain loans not timely moving to non-accrual status or not being subject to an impairment analysis. This resulted in a misstatement of the Company's allowance for loan losses.

The allocation of the allowance for impaired credits is equal to the recorded investment in the loan using one of three methods to measure impairment: the fair value of the collateral less disposition costs, the present value of expected future cash flows method, or the observable market price of the loan. An impairment reserve that exceeds collateral value is charged to the allowance for loan losses in the period it is identified. Total loans which were deemed to have been impaired, including both performing and non-performing loans, as of September 30, 2016 and December 31, 2015 were $70.4 million and $81.4 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 $4.3 million and $4.2 million allocated in the allowance for loan losses as of September 30, 2016 and December 31, 2015, 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, 2016 and December 31, 2015 were $55.1 million and $64.5 million, respectively. Of these, $46.0 million and $53.9 million were still performing in accordance with modified terms as of September 30, 2016 and December 31, 2015, respectively.

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

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

See Item 1 "Explanatory Note" and Item 9A "Controls and Procedures" in the 2015 Form 10-K for a discussion of the restatement of previously issued financial statements as the result of correcting misstatements related to the Company's allowance for loan losses, carrying value of OREO and loan credit quality disclosures.

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

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

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

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

	September 30, 2016			December 31, 2015
	(In thousands)
Performing loans classified as:
Substandard		$	40,045		$	59,860
Total performing adversely classified loans		$	40,045		$	59,860
Special mention loans		$	19,185		$	30,932

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, 2016 were $40.0 million, a decrease of $19.8 million from $59.9 million as of December 31, 2015. The declines were primarily in the commercial real estate, commercial loans, and construction real estate loan categories. In addition, Special Mention loans decreased $11.7 million. These declines were primarily in commercial loans, construction real estate loans, and commercial real estate loans.

Sources of Funds

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

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

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

	September 30, 2016 (In thousands)
Maturing within three months	$	6,986
After three but within six months		5,055
After six but within twelve months		5,546
After twelve but within three years		4,469
After three years		6,158
Total time deposits $250,000 and over	$	28,214

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

There was $2.3 million outstanding in FHLB long-term borrowings at September 30, 2016 and 2015.

Liquidity

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

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

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

●

Fed Funds Purchased are limited to 60% of the total Available 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 (total assets).

●

Total Borrowings are limited to no more than 25% of Total Funding (which is defined as equal to Total Assets).

●

Wholesale Funds, as that term is defined above, is limited to no more than 25% of the Bank's Total Funding (total assets)

●

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 (total assets).

●

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 (% of cumulative net cash outflow over a six month period under a worst case scenario) at least 100%

As of September 30, 2016 and December 31, 2015, we were in compliance with the foregoing policy.

As of September 30, 2016, we had outstanding loan origination commitments and unused commercial and retail lines of credit of $98.3 million and standby letters of credit of $6.0 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 $191.4 million as of September 30, 2016. As of September 30, 2016, total certificates of deposits declined $42.8 million or 14.9% from the prior year end.

In the event that additional short-term liquidity is needed, we have established relationships with several large regional banks to provide short-term borrowings in the form of federal funds purchases. We have the ability to borrow up to $20.0 million for a short period (15 to 60 days) from these banks on a collective basis. Management believes that we will be able to continue to borrow federal funds from our correspondent banks in the future. Additionally, we are a member of the FHLB and, as of September 30, 2016, we had the ability to borrow from the FHLB up to $77.7 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, as well as the restrictions imposed by the Consent Order, which affect its ability to pay dividends to Trinity. See "Business—Supervision and Regulation—Trinity—Dividends Payments" and "Business—Supervision and Regulation—The Bank—Dividend Payments" in Part I, Item 1 of the Company's annual report on 2015 Form 10-K. Failure to meet minimum capital requirements can initiate certain mandatory and discretionary actions by regulators that, if undertaken, could have a direct material effect on our financial statements. The Consent Order also requires that the Bank maintain (i) a leverage ratio of Tier 1 Capital to total assets of at least 8%; and (ii) a ratio of Total Capital to total risk-weighted assets of at least 11%. As of September 30, 2016, the Bank was in compliance with these requirements.

The Bank has an internal Capital Plan which identifies potential sources for additional capital should it be deemed necessary. For more information, see "Capital Resources" included in Item 7 and Note 17 "Regulatory Matters" in Item 8, "Financial Statements and Supplementary Data" of the 2015 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, 2016. 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 2015 Form 10-K.

Commitments. There have been no material changes to the commitments as of September 30, 2016. 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 2015 Form 10-K.

Capital Resources

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

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

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

As previously discussed, on December 17, 2013, the Bank entered into the Consent Order with the OCC, which replaced the Formal Agreement. The focus of the Consent Order is on improving the Bank's credit administration, credit underwriting, internal controls, compliance and management supervision. Additionally, the Consent Order requires that the Bank maintain certain capital ratios and receive approval of the OCC prior to declaring dividends. The Consent Order requires the Bank to maintain the following minimum capital ratios: (i) a leverage ratio of Tier 1 Capital to total assets of at least 8%; and (ii) a ratio of Total Capital to total risk-weighted assets of at least 11%. While the Bank's capital ratios fall into the category of "well-capitalized," the Bank cannot be considered "well-capitalized" due to the requirement to meet and maintain a specific capital level in the Consent Order pursuant to the prompt corrective action rules. As of September 30, 2016, the Bank was in compliance with these requirements. The required and actual amounts and ratios for Trinity and the Bank as of September 30, 2016 are presented below:

	Actual					For Capital Adequacy Purposes					To be well capitalized under prompt corrective action provisions					Minimum Levels Under Order Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in thousands )
September 30, 2016
Total capital (to risk-weighted assets):
Consolidated	$	127,248		14.2543	%	$	71,416		8.00	%		N/A		N/A			N/A		N/A
Bank only		146,117		16.4425	%		71,092		8.00	%	$	88,866		10.00	%	$	97,752		11.00	%
Tier 1 capital (to risk weighted assets):
Consolidated		100,002		11.2022	%		53,562		6.00	%		N/A		N/A			N/A		N/A
Bank only		134,919		15.1824	%		53,319		6.00	%		71,092		8.00	%		N/A		N/A
Common Equity Tier 1 Capital (to risk weighted assets):
Consolidated		43,128		4.8312	%		40,171		4.50	%		N/A		N/A			N/A		N/A
Bank only		134,919		15.1824	%		39,990		4.50	%		57,763		6.50	%		N/A		N/A
Tier 1 leverage (to average assets):
Consolidated		100,002		7.1248	%		56,143		4.00	%		N/A		N/A			N/A		N/A
Bank only		134,919		9.6644	%		55,842		4.00	%		69,802		5.00	%		111,683		8.00	%

N/A—not applicable

At September 30, 2016 the Bank's capital conservation buffer was 8.4425 % and the consolidated Company's capital conservation buffer was 0.3312 %.

Interest Rate Risk

Our net interest income is subject to "interest rate risk" to the extent that it can vary based on changes in the general level of interest rates. It is our policy to maintain an acceptable level of interest rate risk over a range of possible changes in interest rates while remaining responsive to market demand for loan and deposit products. The strategy we employ to manage our interest rate risk involves measuring our risk using an asset/liability simulation model and adjusting the maturity of securities in our investment portfolio to manage that risk.

Based on simulation modeling as of September 30, 2016 and December 31, 2015, our net interest income would likely change over a two year time period due to changes in interest rates as follows:

Change in Net Interest Income Over Two Year Horizon

			September 30, 2016							December 31, 2015
Changes in Levels of Interest Rates			Dollar Change				Percent Change			Dollar Change			Percent Change
			(Dollars in thousands)
	+2.00	%		$	2,443			2.89	%	$	3,421			3.86	%
	+1.00	%			1,675			1.98	%		2,589			2.92	%
	(1.00	)%			(2,729	)		(3.23	)%		(3,522	)		(3.98	)%
	(2.00	)%		NA			NA			NA			NA

Our simulation modeling assumed that changes in interest rates are immediate.

Changes in net interest income between the periods above reflect changes in the composition of interest-earning assets and interest-bearing liabilities, related interest rates, repricing frequencies, and the fixed or variable characteristics of the interest-earning assets and interest-bearing liabilities. Projections of income given by the model are not actual predictions, but rather show our relative interest rate risk. Actual interest income may vary from model projections.

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

As discussed in the 2015 Form 10-K, filed on October 31, 2016, subsequent to the issuance of the Company's consolidated financial statements as of and for the quarterly period ended June 30, 2012, the Company's management determined that the Bank had not properly recognized certain losses and risks inherit in its loan portfolio on a timely basis as disclosed in the Company's Current Report on Form 8-K filed on November 13, 2012, April 26, 2013 and October 27, 2014 with the Securities and Exchange Commission ("SEC"). This failure was caused by the override of controls by certain former members of management and material weaknesses in internal control over financial reporting.

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

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

Controls and Procedures

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

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

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

Based on that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were not effective as of September 30, 2016, as a result of the material weakness in internal control over financial reporting as discussed below.

Internal Control over Financial Reporting

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

All internal control systems, no matter how well designed, have inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements will not be prevented or detected on a timely basis by internal control over financial reporting. Further, because of changes in conditions, the effectiveness of internal control may vary over time. A material weakness is a deficiency (within the meaning of the Public Company Accounting Oversight Board (United States) Auditing Standard No. 5), or a combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis.

Material weaknesses in the Company's internal control over financial reporting were disclosed in Part II, Item 9A, Controls and Procedures, of the 2015 Form 10-K. In connection with the preparation of our financial statements for inclusion in this Form 10-Q, the Company's management evaluated the effectiveness of the Company's internal control over financial reporting as of September 30, 2016. Based on this evaluation, management has concluded that many of the control deficiencies identified in the Company's internal control over financial reporting report in the 2015 Form 10-K as being present at December 31, 2015, were still present, which individually or in combination were considered material weaknesses as of September 30, 2016. Management has identified the following material weaknesses in the Company's internal control over financial reporting as of September 30, 2016. Many of these weaknesses continue to be present as of the filing of this Form 10-Q.

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

●

Sufficient importance and attention was not given to developing, re-assessing and updating policies and procedures for financially significant areas.

●

Training historically focused on the performance of procedures without sufficient attention to the reason or importance of the procedures and controls.

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

●

For the third party application used to calculate trust fee income, management relied on the application without performing a review of the SOC/SSAE 16 report as well as the associated Complementary User Entity Controls.

●

A review of user access to financially significant applications had been initiated but not completed in its entirety in calendar year 2015. In addition, security events were not being tracked through available application logs for several of these applications.

●

The core system for loans and deposits did not provide the tools or reports necessary for management to implement an effective set of controls over account-level file maintenance changes.

(3)	Internal Audit and Risk Management. The Company's Internal Audit function did not provide adequate oversight and the Company's Risk Management function lacked formality and structure as follows:

●

Progress occurred in 2015 after the reorganization of the Internal Audit function, but for the majority of the year the Company's Internal Audit function did not provide adequate oversight due to an improper risk assessment process, inaccurate or outdated process and control documentation, untimely testing procedures, and insufficient monitoring over training of Internal Audit personnel. Risk assessment and audit procedures designed did not sufficiently address risks in financial reporting, although improvement occurred after this function was outsourced to a third party during the year.

·	Process and control documentation did not accurately reflect the actual processes and controls in place. In various cases, process and control flow charts include controls that were no longer applicable and do not reflect newly implemented controls.

●

Testing of Internal Controls over Financial Reporting was not completed in a timely manner.

(4)	Financial Reporting. The Company lacked sufficient staffing over the financial reporting function, resulting in reporting issues, errors and untimely financial reporting, as follows:

·	For the majority of the year the Company lacked sufficient qualified individuals within the financial reporting function. Prior to the arrival of these individuals, undue reliance was placed on results from regulatory and external examinations to identify financial reporting issues and errors.

·	Management reviews of control procedures designed to validate and detect errors at period end were informal in various cases and in most cases lacked the precision necessary to identify material errors.

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

·	Period-end financial reporting procedures were informal and inconsistent for the majority of the year. Similarly, for the majority of the year management did not utilize checklists to:

Track completion of month-end key reconciliations

ii.

Complete and review calculations affecting significant accounting estimates

iii.

Track compliance with GAAP and SEC reporting requirements.

iv.

Document the review of regulatory reporting requirements including call reports.

·	Subsequent event identification procedures were incomplete, resulting in untimely identifications and adjustments.

·	Controls over certain reconciliations were either not in place or not properly designed, resulting in one case where unidentified reconciling items and classification errors were not detected..

·	A control is not in place to validate the completeness of related party loan and deposit disclosures within both regulatory and financial reporting.

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

●

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

●

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

●

Review of the allowance for loan loss calculation was informal and insufficiently precise, and the quality of documentation surrounding management's analysis was low.

These material weaknesses impacted the Company's ability to complete its financial statements in a timely manner.

No changes in the Company's internal control over financial reporting occurred during the fiscal quarter ended September 30, 2016 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 2015 Form 10-K. There are no material developments in the legal actions described in the 2015 Form 10-K. The Company may become a party to legal proceedings. Except as described above, we are not presently involved in any litigation, nor to our knowledge is any litigation threatened against us, that in management's opinion would result in any material adverse effect on our financial position or results of operations or that is not expected to be covered by insurance.

Item 1A. Risk Factors

We do not believe that there have been any material changes to the risk factors previously disclosed in our 2015 Form 10-K.

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

During the third quarter of 2016, 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

10.1	Securities Purchase Agreement, dated September 8, 2016, by and among the Company and the Investors (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on September 9, 2016 (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, 2016 and December 31, 2015; (ii) Consolidated Statements of Operations for the three and nine months ended September 30, 2016 and 2015; (iii) Consolidated Statements of Changes in Stockholders' Equity for the nine months ended September 30, 2016 and 2015; (iv) Consolidated Statements of Cash Flows for the nine months ended September 30, 2016 and 2015; and (v) Notes to Consolidated Financial Statements, tagged as blocks of text

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: March 22, 2017
	By:	/s/ John S. Gulas
		John S. Gulas Chief Executive Officer and President

	By:	/s/ Daniel W. Thompson
		Daniel W. Thompson
		Executive Vice President and Chief Financial Officer

TRINITY CAPITAL CORP - FORM 10-Q - March 22, 2017

Attached files

TRINITY CAPITAL CORP Reports