UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒	Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the Quarterly Period Ended ~~September~~March 3031, ~~2017~~2018

☐	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the Transition Period from to

Commission File Number No. 333-183118

FIRST PRIORITY FINANCIAL CORP.

Pennsylvania		20-8420347
(State or other jurisdiction of incorporation)		(I.R.S. Employer Identification No.)

2 West Liberty Boulevard, Suite 104 Malvern, Pennsylvania		19355
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (877) 533-4420

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 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and 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 the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Title of Each Class		Number of Shares Outstanding as of ~~November~~May 107, ~~2017~~2018
Common Stock, $1.00 Par Value		6,~~577~~646,~~969~~369 Outstanding Shares

TABLE OF CONTENTS

		Page
PART I—FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	2
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	5048
Item 4.	Controls and Procedures	5048
PART II—OTHER INFORMATION		5149
Item 1.	Legal Proceedings	5149
Item 1A.	Risk Factors	5149
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	5149
Item 3.	Defaults Upon Senior Securities	5149
Item 4.	Mine Safety Disclosures	5149
Item 5.	Other Information	5149
Item 6.	Exhibits	5250

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements, and as such, statements containing the words “believes,” “expects,” “anticipates,” “estimates,” “plans,” “projects,” “predicts,” “intends,” “seeks,” “will,” “may,” “should,” “would,” “continues,” “hope” and similar expressions, or the negative of these terms, constitute forward-looking statements that involve risks and uncertainties. Such statements are based on current expectations and are subject to risks, uncertainties and changes in condition, significance, value, and effect. Such risks, uncertainties and changes in condition, significance, value and effect could cause First Priority Financial Corp.’s (“First Priority” or the “Company”) actual results to differ materially from those anticipated.

Although the Company believes its plans, intentions, and expectations as reflected in or suggested by these forward-looking statements are reasonable, it can give no assurance that its plans, intentions, or expectations will be achieved. Accordingly, you should not place undue reliance on them. Listed below, and discussed elsewhere, are some important risks, uncertainties, and contingencies that could cause actual results, performances, or achievements to be materially different from the forward-looking statements made in this document. These factors, risks, uncertainties, and contingencies include, but are not limited to, the following:

•	the strength of the United States economy in general and the strength of the regional and local economies in which First Priority conducts operations;

•	the effects of changing economic conditions in First Priority’s market areas and nationally;

•	the effects of, and changes in, trade, monetary, and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System;

•	changes in federal and state banking, insurance, and investment laws and regulations which could impact First Priority’s operations;

•	inflation, interest rate, market, and monetary fluctuations;

•	First Priority’s timely development of competitive new products and services in a changing environment and the acceptance of such products and services by customers;

•

the impact of changes in financial services policies, laws, and regulations, including laws, regulations, policies, and practices concerning taxes, banking, capital, liquidity, proper accounting treatment, securities, and insurance, and the application thereof by regulatory bodies and the impact of changes in and interpretations of generally accepted accounting principles;

•	the occurrence of adverse changes in the securities markets;

•	the effects of changes in technology or in consumer spending and savings habits;

•	terrorist attacks in the United States or upon United States interests abroad, or armed conflicts involving the United States military;

•	security breaches and other disruptions to our information and data processing systems or those of third party providers could disrupt our business or compromise our information and expose us to liability, which would cause our business and reputation to suffer;

•	regulatory or judicial proceedings;

• changes in asset quality; ~~and~~

•	the ability to obtain requisite approvals and satisfy other closing conditions to complete the Merger in a timely manner; and

•	First Priority’s success in managing the risks involved in the foregoing.

The effects of these factors are difficult to predict. New factors emerge from time to time, and we are not able to assess the impact of any such factor on the business or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statement. Any forward-looking statements speak only as of the date of this document.

Because these forward-looking statements are subject to assumptions and uncertainties, actual results may differ materially from those expressed or implied by these forward-looking statements. You are cautioned not to place undue reliance on these statements, which speak only as of the date of this ~~quarterly~~Quarterly ~~report~~Report or the date of any document incorporated by reference in this ~~quarterly~~Quarterly ~~report~~Report.

PART I

Item 1. Financial Statements.

First Priority Financial Corp.

Consolidated Balance Sheets

(Unaudited, in thousands, except share and per share data)

	September 30, 2017			December 31, 2016
	March 31, 2018			December 31, 2017
Assets
Cash and due from banks	$	5,~~422~~474		$	25,~~790~~591
Interest-bearing deposits in banks		2425,~~062~~021			12,~~971~~666
Total cash and cash equivalents		2930,~~484~~495			48,~~761~~257
Securities available for sale, at fair value (amortized cost: $53,397 and $70,635, respectively)		53,661			70,560
Securities available for sale, at fair value (amortized cost: $36,371 and $52,379, respectively)		35,798			52,373
Securities held to maturity, at amortized cost (fair value: $19,544 and $19,584, respectively)		18,705			19,043
Securities held to maturity, at amortized cost (fair value: $19,231 and $19,665, respectively)		18,548			18,665
Loans receivable		~~497~~518,~~918~~252			~~488~~518,~~243~~927
Less: allowance for loan losses		3,~~317~~405			3,~~330~~405
Net loans		~~494~~514,~~601~~847			~~484~~515,~~913~~522
Restricted investments in bank stocks		2,~~208~~032			31,~~257~~416
Premises and equipment, net		12,~~658~~025			1,~~755~~607
Bank owned life insurance		3,~~308~~342			3,~~256~~326
Accrued interest receivable		1,~~918~~896			12,~~817~~007
Other real estate owned		~~550~~440			~~1,486~~550
Deferred taxes		~~1,718~~937			~~2,697~~923
Goodwill		2,725			2,725
Intangible assets with finite lives, net		~~185~~154			~~235~~169
Other assets		1,~~312~~395			12,~~290~~402
Total Assets	$	~~612~~614,~~033~~634		$	~~597~~609,~~795~~942
Liabilities and Shareholders’ Equity
Liabilities
Liabilities:
Deposits:
Non-interest bearing	$	6869,~~034~~457		$	5465,~~817~~634
Interest-bearing		~~432~~442,~~499~~529			~~412~~457,~~871~~516
Total deposits		~~500~~511,~~533~~986			~~467~~523,~~688~~150
Federal Home Loan Bank of Pittsburgh advances		4440,~~439~~025			6824,~~164~~625
Subordinated debt		9,~~225~~238			9,~~207~~231
Accrued interest payable		~~698~~841			~~510~~844
Other liabilities		61,~~662~~321			41,~~180~~596
Total Liabilities		~~561~~563,~~557~~411			~~549~~559,~~749~~446
Shareholders’ Equity:
Preferred stock, Series C, 9%, $100 par value; authorized 10,000,000 shares:
liquidation value: $1,000 per share, 3,404 shares issued and outstanding;
liquidation value: $3,404 as of each date presented.		3,404			3,404
Common stock, $1 par value; authorized 20,000,000 shares
issued and outstanding: 2017: 6,577,969; 2016: 6,529,719		6,578			6,530
issued and outstanding: 2018: 6,646,469; 2017: 6,577,969		6,646			6,578
Surplus		4041,~~758~~267			40,~~629~~843
Accumulated deficit		(438	)		(2,475	)
Retained earnings (accumulated deficit)		362			(323	)
Accumulated other comprehensive income (loss)		174			(42	)
Accumulated other comprehensive loss		(456	)		(6	)
Total Shareholders’ Equity		5051,~~476~~223			4850,~~046~~496
Total Liabilities and Shareholders’ Equity	$	~~612~~614,~~033~~634		$	~~597~~609,~~795~~942

See notes to unaudited consolidated financial statements.

First Priority Financial Corp.

Consolidated Statements of Operations

(Unaudited, in thousands, except per share data)

	For the Three Months Ended September 30,					For the Nine Months Ended September 30,
	For the Three Months Ended March 31,
	2017			2016		2017		2016
	2018			2017
Interest and Dividend Income
Loans receivable, including fees	$	5,~~628~~885		$	45,~~944~~293	$	~~16,391~~	$	~~14,222~~
Securities—taxable		~~309~~328			~~283~~268		~~865~~		~~877~~
Securities—exempt from federal taxes		~~155~~97			87137		~~439~~		~~349~~
Interest bearing deposits and other		5344			2742		~~140~~		83
Total Interest and Dividend Income		6,~~145~~354			5,~~341~~740		~~17,835~~		~~15,531~~
Interest Expense
Deposits		1,~~254~~333			~~885~~1,000		~~3,331~~		~~2,593~~
Short-term borrowings		~~113~~125			4658		~~278~~		90
Long-term debt		3536			4035		~~105~~		~~123~~
Subordinated debt		~~172~~173			~~171~~172		~~517~~		~~515~~
Total Interest Expense		1,~~574~~667			1,~~142~~265		~~4,231~~		~~3,321~~
Net Interest Income		4,~~571~~687			4,~~199~~475		~~13,604~~		~~12,210~~
Provision for Loan Losses		3020			~~510~~10		~~165~~		~~710~~
Net Interest Income after Provision for Loan Losses		4,~~541~~667			34,~~689~~465		~~13,439~~		~~11,500~~
Non-Interest Income
Wealth management fee income		4641			7339		~~103~~		~~251~~
Gains on sales of investment securities		81—			~~456~~25		~~187~~		~~795~~
Bank owned life insurance income		1816			1918		53		58
Other		94107			9396		~~295~~		~~272~~
Total Non-Interest Income		~~239~~164			~~641~~178		~~638~~		~~1,376~~
Non-Interest Expenses
Salaries and employee benefits		2,~~167~~215			2,~~047~~026		~~6,217~~		~~6,061~~
Occupancy and equipment		~~469~~501			~~451~~455		~~1,377~~		~~1,462~~
Data processing equipment and operations		~~229~~258			~~225~~228		~~693~~		~~662~~
Professional fees		~~178~~211			~~208~~172		~~515~~		~~515~~
Marketing, advertising, and business development		~~122~~58			7040		~~232~~		~~168~~
FDIC insurance assessments		~~124~~142			97146		~~399~~		~~229~~
Pennsylvania bank shares tax expense		7798			7690		~~261~~		~~245~~
Other real estate owned		45			156		141		348
Other real estate owned (gains) expense, net		(45	)		32
Other		316			306		941		908
Merger related costs		92			—
Total Non-Interest Expenses		3,727			3,636		10,776		10,598
Other		329			309
Income before Income Tax Expense		1,053			694		3,301		2,278
Total Non-Interest Expenses		3,859			3,498
Income Tax Expense		334			218		1,034		715
Income before Income Tax Expense		972			1,145
Net Income	$	719		$	476	$	2,267	$	1,563
Income Tax Expense		210			363
Preferred dividends		77			76		230		330
Net Income	$	762		$	782
Income to Common Shareholders	$	642		$	400	$	2,037	$	1,233
Preferred dividends		77			77
Income per common share:
Income to Common Shareholders	$	685		$	705
Basic	$	0.10		$	0.06	$	0.31	$	0.19
Income per common share:
Diluted	$	0.09		$	0.06	$	0.30	$	0.19
Basic	$	0.10		$	0.11
Weighted average common shares outstanding:
Diluted	$	0.10		$	0.11
Basic		6,577			6,527		6,552		6,509
Weighted average common shares outstanding:
Diluted		6,816			6,570		6,769		6,556
Basic		6,636			6,534
Diluted		6,974			6,705

See notes to unaudited consolidated financial statements.

First Priority Financial Corp.

Consolidated Statements of Comprehensive Income

(Unaudited, in thousands)

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	For the Three Months Ended March 31,
	2017			2016			2017			2016
	2018			2017
Net income	$	~~719~~762		$	~~476~~782		$	~~2,267~~		$	~~1,563~~
Other comprehensive income:
Other comprehensive (loss) income:
Securities available for sale:
Change in unrealized gain (loss) on securities available for sale		24			(58	)		526			881
Change in unrealized (loss) gain on securities available for sale		(567	)		196
Reclassification adjustment for realized gains on sale of investment securities included in net income		~~(81~~-	)		(~~456~~25	)		~~(187~~	)		~~(795~~	)
Tax effect		19119			~~174~~(58	)		~~(115~~	)		~~(30~~	)
Net unrealized gain (loss) arising during the period		(38	)		(340	)		224			56
Net (losses) gains arising during the period		(448	)		113
Net unrealized holding losses on securities transferred between available for sale and held to maturity:
Amortization of net unrealized holding losses to interest and dividend income on taxable securities during the period		(13	)		(35	)		~~(12~~	)		~~(22~~	)
Tax effect		—1			12			4			8
Net unrealized holding losses on securities transferred during the period		(12	)		(23	)		(8	)		~~(14~~	)
Total other comprehensive income (loss)		(39	)		(342	)		216			42
Total other comprehensive (loss) income		(450	)		110
Total comprehensive income	$	~~680~~312		$	~~134~~892		$	~~2,483~~		$	~~1,605~~

See notes to unaudited consolidated financial statements.

First Priority Financial Corp.

Consolidated Statements of Shareholders’ Equity

For the ~~Nine~~Three Months Ended ~~September~~March 3031, ~~2017~~2018 and ~~2016~~2017

(Unaudited, dollars in thousands)

	Preferred Stock			Common Stock		Surplus			Accumulated Deficit			Accumulated Other Comprehensive Income (loss)			Total
Balance – December 31, 2015	$	9,404		$	6,492	$	40,327		$	(4,368	)	$	236		$	52,091
Preferred stock dividends		—			—		—			(330	)		—			(330	)
Redemption of preferred stock		(6,000	)		—		—			—			—			(6,000	)
Issuance of 36,250 shares of restricted common stock, net of 200 forfeited shares		—			36		(36	)		—			—			—
Exercise of 2,000 shares of common stock options		—			2		10			—			—			12
Net income		—			—		—			1,563			—			1,563
Other comprehensive income		—			—		—			—			42			42
Stock based compensation expense		—			—		252			—			—			252
Balance—September 30, 2016	$	3,404		$	6,530	$	40,553		$	(3,135	)	$	278		$	47,630
Balance – December 31, 2016	$	3,404		$	6,530	$	40,629		$	(2,475	)	$	(42	)	$	48,046
Preferred stock dividends		—			—		—			(~~230~~77	)		—			(~~230~~77	)
Issuance of 52,700 shares of restricted common stock, net of forfeitures of 4,450 shares		—			48		(48	)		—			—			—
Issuance of 11,200 shares of restricted common stock, net of forfeitures		—			11		(11	)		—			—			—
Net income		—			—		—			~~2,267~~782			—			~~2,267~~782
Other comprehensive income		—			—		—			—			~~216~~110			~~216~~110
Stock based compensation expense		—			—		~~177~~55			—			—			~~177~~55
Balance—September 30, 2017	$	3,404		$	6,578	$	40,758		$	(438	)	$	174		$	50,476
Balance—March 31, 2017	$	3,404		$	6,541	$	40,673		$	(1,770	)	$	68		$	48,916
Balance – December 31, 2017	$	3,404		$	6,578	$	40,843		$	(323	)	$	(6	)	$	50,496
Preferred stock dividends		—			—		—			(77	)		—			(77	)
Issuance of 7,500 shares of restricted common stock, net of forfeitures		—			7		(7	)		—			—			—
Exercise of 61,000 shares of common stock options		—			61		296			—			—			357
Net income		—			—		—			762			—			762
Other comprehensive loss		—			—		—			—			(450	)		(450	)
Stock based compensation expense		—			—		135			—			—			135
Balance—March 31, 2018	$	3,404		$	6,646	$	41,267		$	362		$	(456	)	$	51,223

See notes to unaudited consolidated financial statements.

First Priority Financial Corp.

Consolidated Statements of Cash Flows

(Unaudited, dollars in thousands)

	For the Nine Months Ended September 30,
	For the Three Months Ended March 31,
	2017			2016
	2018			2017
Cash Flows from Operating Activities
Net income	$	~~2,267~~762		$	~~1,563~~782
Adjustments to reconcile net income to net cash provided by operating activities:
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Provision for loan losses		~~165~~20			~~710~~10
Write down of other real estate owned		449			~~140~~11
Depreciation and amortization of premises and equipment		~~197~~72			~~238~~69
Net amortization		~~267~~68			~~182~~97
Stock based compensation expense		~~177~~135			~~252~~55
Net amortization of investment securities premiums and discounts		~~108~~34			~~115~~34
Net gain on sale of investment securities		(187	)		(795	)
Net gains on sales of investment securities		—			(25	)
Net gain on sale of other real estate owned		(74105	)		(747	)
Net loss on disposal of premises and equipment		1—			251
Bank owned life insurance policy income		(5316	)		(5818	)
Deferred income tax expense		~~868~~105			~~611~~338
(Increase) decrease in accrued interest receivable		(100	)		28
Decrease in accrued interest receivable		111			57
Increase in other assets		(21	)		(279	)
Decrease (increase) in other assets		1,007			(404	)
Increase in accrued interest payable		188			63
(Increase) decrease in accrued interest payable		(3	)		84
Increase (decrease) in other liabilities		25			(128	)
Decrease in other liabilities		(275	)		(2,641	)
Net Cash Provided by Operating Activities		3,872			2,660
Net Cash Provided by (Used in) Operating Activities		1,924			(1,597	)
Cash Flows from Investing Activities
Net originations in loans		(3,060	)		(1,560	)
Net repayments in loans		610			376
Purchase of loans		(7,005	)		(77,326	)
Purchases of securities available for sale		—			(7,176	)
Purchases of securities available for sale		(39,650	)		(1,569	)
Purchases of restricted stock		(616	)		(248	)
Redemption of restricted stock		1,048			38
Proceeds from maturities or calls of securities available for sale		15,993			40,703
Proceeds from maturities or calls of securities available for sale		52,507			58,728
Proceeds from maturities or calls of securities held to maturity		95			95
Proceeds from maturities or calls of securities held to maturity		270			525
Proceeds from the sale of securities available for sale		—			436
Proceeds from the sale of securities available for sale		6,972			13,564
Proceeds from the sale of other real estate owned		206			860
Proceeds from the sale of other real estate owned		966			293
Purchases of premises and equipment		(490	)		(16	)
Purchases of premises and equipment		(101	)		(55	)
Net Cash Provided by Investing Activities		15,798			35,030
Net Cash Provided by (Used in) Investing Activities		11,947			(7,362	)
Cash Flows from Financing Activities
Net increase in deposits		32,859			34,093
Net (decrease) increase in deposits		(11,164	)		289
Net decrease in short-term borrowings		(20,725	)		(1,037	)
Net increase in short-term borrowings		15,400			6,200
Payments on long-term borrowings		(3,000	)		(3,000	)
Proceeds from the exercise of common stock options		357			—
Payments regarding Subordinated debt issuance costs		—			(16	)
Cash dividends paid on preferred stock		(77	)		(77	)
Redemption of preferred stock		—			(6,000	)
Net Cash Provided by Financing Activities		4,516			6,412
Proceeds from the exercise of common stock options		—			12
Net Increase in Cash and Cash Equivalents		22,238			39,845
Cash dividends paid on preferred stock		(230	)		(350	)
Cash and Cash Equivalents—Beginning		8,257			4,761
Net Cash Provided by Financing Activities		8,904			23,702
Cash and Cash Equivalents—Ending	$	30,495		$	44,606
Net Increase in Cash and Cash Equivalents		24,723			19,000
Cash and Cash Equivalents—Beginning		4,761			5,909
Cash and Cash Equivalents—Ending	$	29,484		$	24,909
Supplementary Disclosures of Cash Flows Information
Noncash activity:
Trade date accounting for investment securities purchased	$	~~5,155~~—		$	—321
Transfer of loans receivable to other real estate owned	$	—		$	342
Cash paid for interest on deposits and borrowings	$	1,670		$	1,187
Cash paid for interest on deposits and borrowings	$	4,058		$	3,346
Cash paid for income taxes	$	15		$	25
Cash paid for income taxes	$	151		$	104

See notes to unaudited consolidated financial statements.

First Priority Financial Corp.

Notes to Unaudited Consolidated Financial Statements

Note 1—Summary of Significant Accounting Policies

Organization and Nature of Operations

First Priority Financial Corp.

First Priority Financial Corp. (“First Priority,” or the “Company”) is a bank holding company incorporated under the laws of the Commonwealth of Pennsylvania on February 13, 2007. On May 11, 2007, as a result of a reorganization and merger, First Priority Bank (the “Bank”) became a wholly-owned subsidiary of First Priority. First Priority, primarily through the Bank, serves residents and businesses in the Delaware Valley with branches in Berks, Bucks, Chester and Montgomery counties in Pennsylvania. The Bank, headquartered in Malvern, PA, has ~~seven~~eight retail branch office locations and one loan production office and is a locally managed community bank providing commercial banking products, primarily loans and deposits. First Priority provides banking services through the Bank and does not engage in any activities other than banking and related activities.

First Priority Bank

The Bank is a state-chartered commercial banking institution which was incorporated under the laws of the Commonwealth of Pennsylvania on May 25, 2005. The Bank’s deposits are insured by the FDIC up to the maximum amount permitted for all banks.

The Bank engages in a full service commercial and consumer banking business with strong private banking and individual wealth management services. The Bank offers a variety of consumer, private banking and commercial loans, mortgage products and commercial real estate financing. The Company’s operations are significantly affected by prevailing economic conditions, competition, and the monetary, fiscal, and regulatory policies of governmental agencies. Lending activities are influenced by a number of factors, including the general credit needs of individuals and small and medium-sized businesses in the Company’s market area, competition, the current regulatory environment, the level of interest rates, and the availability of funds. Deposit flows and costs of funds are influenced by prevailing market rates of interest, competition, account maturities, and the level of personal income and savings in the market area.

The Bank also offers certain financial planning and investment management services. These investment services are provided by First Priority Financial Services, a Division of First Priority Bank, through third party providers. In addition, the Bank has entered into solicitation agreements with several investment advisors to provide portfolio management services to customers of the Bank.

The Bank currently seeks deposits and commercial and private banking relationships through its banking offices. The Bank provides deposit products that include checking, money market and savings accounts, and certificates of deposit as well as other deposit services, including cash management, electronic banking and mobile products as well as online account opening capabilities. The Bank obtains funding in the local community by providing excellent service and competitive rates to its customers and utilizes various advertising to attract current and potential deposit customers. The Bank also uses brokered certificates of deposit as a cost effective funding alternative.

Merger with Mid Penn Bancorp, Inc.

As previously announced on January 16, 2018, First Priority entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Mid Penn Bancorp, Inc. (“Mid Penn”) pursuant to which First Priority will merge with and into Mid Penn (the “Merger”), with Mid Penn being the surviving corporation in the Merger. On a pro forma basis, at December 31, 2017, the combined company would have approximately $2.2 billion in total assets, $1.6 billion in loans, $1.8 billion in deposits and $170 million in equity capital. Under the terms of the Merger Agreement, shareholders of First Priority will receive 0.3481 shares of Mid Penn common stock for each share of First Priority common stock they own. Subject to customary closing conditions including regulatory and shareholder approvals, it is expected that the Merger will be completed in the third quarter of 2018. The combination would, upon completion, establish a community bank with 37 retail locations serving 12 counties in Pennsylvania and would have a geographical presence in southeastern Pennsylvania in Berks, Bucks Chester and Montgomery counties, central Pennsylvania in Cumberland, Dauphin, Lancaster, Luzerne, Northumberland and Schuylkill counties and western Pennsylvania in Fayette and Westmoreland counties resulting from Mid Penn’s acquisition of Scottdale Bank & Trust on January 8, 2018.

Basis of Presentation

The accompanying unaudited consolidated financial statements consist of the Company and the Company’s wholly owned consolidated subsidiary, the Bank. All significant intercompany accounts and transactions have been eliminated in consolidation.

These statements are prepared in accordance with instructions to Form 10-Q, and therefore, do not include information or all footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States (“GAAP”). However, all normal recurring adjustments that, in the opinion of management, are necessary for a fair presentation of these financial statements have been included. These financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto for First Priority Financial Corp. for the year ended December 31, 2016, included in the Company’s Form 10-K filed with the Securities and Exchange Commission on March 23, 2017. The results of interim periods presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.

These statements are prepared in accordance with instructions to Form 10-Q, and therefore, do not include information or all footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States (“GAAP”). However, all normal recurring adjustments that, in the opinion of management, are necessary for a fair presentation of these financial statements have been included. These financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto for First Priority Financial Corp. for the year ended December 31, 2017, included in the Company’s Form 10-K filed with the Securities and Exchange Commission on March 23, 2018. The results of interim periods presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2018.

Subsequent Events

Management has evaluated events and transactions occurring subsequent to ~~September~~March 3031, ~~2017~~2018 for items that should potentially be recognized or disclosed in these Consolidated Financial Statements. The evaluation was conducted through the date these financial statements were issued.

Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the valuation of acquired loans, the determination of the allowance for loan losses, stock-based compensation, impairment of goodwill, impairment of investments, the valuation of deferred tax assets and the valuation of other real estate owned.

Allowance for Loan Losses

The allowance for credit losses consists of the allowance for loan losses and the reserve for unfunded lending commitments. The allowance for loan losses represents management’s estimate of losses inherent in the loan portfolio as of the balance sheet date and is recorded as a reduction to loans. The reserve for unfunded lending commitments, totaling $35 thousand as of both ~~September~~March 3031, ~~2017~~2018 and December 31, ~~2016~~2017, represents management’s estimate of potential losses inherent in its unfunded loan commitments and is recorded in other liabilities on the consolidated balance sheets. The allowance for loan losses is increased by the provision for loan losses, and decreased by charge-offs, net of recoveries. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. All, or part, of the principal balance of loans receivable are charged off to the allowance as soon as it is determined that the repayment of all, or part, of the principal balance is highly unlikely. Because all identified losses are immediately charged off, no portion of the allowance for loan losses is restricted to any individual loan or groups of loans, and the entire allowance is available to absorb any and all loan losses.

The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management performs a quarterly evaluation of the adequacy of the allowance. The allowance is based on the Company’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision as more information becomes available.

The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as impaired. For loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers pools of loans by loan class including commercial loans not considered impaired, as well as smaller balance homogeneous loans, such as residential real estate, home equity and other consumer loans. These pools of loans are evaluated for loss exposure based upon historical loss rates for each of these categories of loans, adjusted for qualitative factors. These qualitative risk factors include:

1.	Lending policies and procedures, including underwriting standards and collection, charge-off, and recovery practices.

2.	National, regional, and local economic and business conditions as well as the condition of various market segments, including the value of underlying collateral for collateral dependent loans.

3.	Nature and volume of the portfolio and terms of loans.

4.	Management team with experience, depth, and knowledge in banking and in many areas of lending. Each contributes to the sound credit culture and control within the Company.

5.	Volume and severity of past due, classified and nonaccrual loans as well as other loan modifications.

6.	The Company engages a third party to perform an independent review of the loan portfolio as a measure for quality and consistency in credit evaluation and credit decisions.

7.	Existence and effect of any concentrations of credit and changes in the level of such concentrations.

8.	Effect of external factors, such as competition and legal and regulatory requirements.

Each factor is assigned a value to reflect improving, stable or declining conditions based on management’s best judgment using relevant information available at the time of the evaluation. Adjustments to the factors are supported through documentation of changes in conditions in a narrative accompanying the allowance for loan loss calculation.

A majority of the Company’s loans are to business owners of many types. The Company makes commercial loans for real estate development and other business purposes required by our customers.

The Company’s credit policies determine advance rates against the different forms of collateral that can be pledged against commercial loans. Typically, the majority of loans will be limited to a percentage of their underlying collateral values such as real estate values, equipment, eligible accounts receivable and inventory. Individual loan advance rates may be higher or lower depending upon the financial strength of the borrower and/or term of the loan. The assets financed through commercial loans are used within the business for its ongoing operation. Repayment of these kinds of loans generally comes from the cash flow of the business or the ongoing conversions of assets.

The assets financed through commercial and industrial loans are used within the business for its ongoing operation. Repayment of these kinds of loans generally comes from the cash flow of the business or the ongoing conversions of assets.

Commercial real estate loans include long-term loans financing commercial properties. Repayment of this kind of loan is dependent upon either the ongoing cash flow of the borrowing entity or the resale of or lease of the subject property. Commercial real estate loans typically require a loan to value ratio of not greater than 80% and vary in terms.

Construction loans consists of acquisition, construction and development loans serving a diverse customer base in its primary market areas. The composition of this portfolio can change based on local economic conditions such as supply and demand, interest rates and real estate values. The Company typically lends to builders and developers with established relationships, successful operating histories and sound financial resources.

Construction loans include both commercial and residential related loans. The commercial portion consists of loans for the purpose of acquiring, developing and constructing a commercial-use structure and for the acquisition, development and/or construction of residential properties, such as single-family homes or smaller multi-family buildings, by residential developers and builders. This may also include the acquisition and development of land on a selective basis. The residential portion consists of loans for the acquisition of and/or construction on land where a residential dwelling is to be built and occupied by the home-owner.

Residential mortgages and home equity loans are secured by the borrower’s residential real estate in either a first or second lien position. Residential mortgages and home equity loans have varying loan rates depending on the loan terms. Residential mortgages have amortizations up to 30 years and home equity loans have amortizations up to 15 years. Residential mortgages and home equity loans typically require a loan to value ratio of not greater than 80%.

Other consumer loans include installment loans, car loans, and overdraft lines of credit. The majority of these loans are secured.

An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case by case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent. An allowance for loan losses is established for an impaired loan if its carrying value exceeds its estimated fair value. The estimated fair values of substantially all of the Company’s impaired loans are measured based on the estimated fair value of the loan’s collateral.

For commercial loans secured by real estate, estimated fair values are determined primarily through third-party appraisals. When a real estate secured loan becomes impaired, a decision is made regarding whether an updated certified appraisal of the real estate is necessary. This decision is based on various considerations, including the age of the most recent appraisal, the loan-to-value ratio based on the original appraisal and the condition of the property. Appraised values may be discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The discounts also include estimated costs to sell the property.

For commercial and industrial loans secured by non-real estate collateral, such as accounts receivable, inventory and equipment, estimated fair values are determined based on the borrower’s financial statements, inventory reports, accounts receivable aging or equipment appraisals or invoices. Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets.

based on the original appraisal and the condition of the property. Appraised values may be discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The discounts also include estimated costs to sell the property.

The allowance calculation methodology includes further segregation of loan classes into risk rating categories. The borrower’s overall financial condition, repayment sources, guarantors and value of collateral, if appropriate, are evaluated annually for commercial loans or when credit deficiencies arise, such as delinquent loan payments, for commercial and consumer loans. Credit quality risk ratings include regulatory classifications of special mention, substandard, doubtful and loss. Loans criticized special mention have potential weaknesses that deserve management’s close attention. If uncorrected, the potential weaknesses may result in deterioration of the repayment prospects. Loans classified substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They include loans that are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified doubtful have all the weaknesses inherent in loans classified substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable. Loans classified as a loss are considered uncollectible and are charged to the allowance for loan losses. Loans not classified are rated pass.

In addition, Federal regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses and may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination, which may not be currently available to management. Based on management’s comprehensive analysis of the loan portfolio, management believes the current level of the allowance for loan losses is adequate.

Comprehensive Income (Loss)

Accounting principles generally accepted in the United States of America require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities are reported as a separate component of the shareholders’ equity section of the balance sheet, such items, along with net income, are components of total comprehensive income.

Total reclassifications from accumulated other comprehensive income (loss) for the periods presented are as follows:

Details about Accumulated Other Comprehensive Income Components	Amounts Reclassified from Accumulated Other Comprehensive Income												Affected Line Item in the Statement where Net Income is Presented
Details about Accumulated Other Comprehensive Income (Loss) Components	Amounts Reclassified from Accumulated Other Comprehensive Income (Loss)						Affected Line Item in the Statement where Net Income is Presented
	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	For the Three Months Ended March 31,
	2017			2016			2017			2016
	2018			2017
	(Dollars in thousands)						~~(Dollars in thousands)~~
Sale of investment securities available for sale	$	~~(81~~—	)	$	(~~456~~25	)	$Gains on sales of investment securities	~~(187~~	)	$	~~(795~~	)	~~Gains on sale of investment securities~~
Amortization of unrealized holding gain (losses) on securities transferred from available for sale to held to maturity		(1	)		(3	)		(12	)		(22	)	Interest and dividend Income on taxable securities
Amortization of unrealized holding losses on securities transferred from available for sale to held to maturity		(3	)		(5	)	Interest and dividend Income on taxable securities
Tax effect		281			~~156~~10		Income Tax Expense	68			~~278~~		~~Income Tax Expense~~
Total reclassification	$	(542	)	$	(~~303~~20	)	$	~~(131~~	)	$	~~(539~~	)

Accumulated other comprehensive income (loss) as of ~~September~~March 3031, ~~2017~~2018 and December 31, ~~2016~~2017 consisted of the following:

	September 30,			December 31,
	March 31,			December 31,
	2017			2016
	2018			2017
	(Dollars in thousands)
Net unrealized gain on available for sale securities	$	174		$	(50	)
Net unrealized loss on available for sale securities	$	(453	)	$	(4	)
Net unrealized holding gains on securities transferred from available for sale to held to maturity		-			8
Net unrealized holding loss on securities transferred from available for sale to held to maturity		(3	)		(2	)
Total	$	~~174~~(456	)	$	(426	)

Note 2—Recently Issued Accounting Standards

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606).” ASU 2014-09 implements a common revenue standard that clarifies the principles for recognizing revenue. The core principle of this ASU ~~2014-09~~ is ~~that~~ an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract and (v) recognize revenue when (or as) the entity satisfies a performance obligation. First Priority’s revenue is comprised of net interest income on financial assets and liabilities, which is explicitly excluded from the scope of ASU 2014-09, and non-interest income. This accounting guidance can be implemented using either a full retrospective method or a modified retrospective approach and will be effective for interim and annual reporting periods beginning after December 15, 2017 (effective January 1, 2018 for First Priority). ~~Early~~adopted ~~adoption is permitted; however, First Priority will adopt~~ this new accounting guidance inat ~~2018,~~January ~~as required~~1, 2018 and ~~expects~~is ~~to adopt the new guidance~~ using the modified retrospective approach. The modified retrospective approach uses a cumulative-effect adjustment to retained earnings to reflect uncompleted contracts in the initial application of the guidance. The Company ishas ~~continuing~~assessed ~~to assess~~ its revenue streams and ~~reviewing~~has reviewed its contracts with customers that ~~are~~could ~~potentially~~be affected by the new guidance; including wealth management fees, fees on deposits, gains and losses on the sale of other real estate owned and debit card interchange fees; ~~but~~and there have ~~not~~been ~~identified~~no material changes to the timing or amount of revenue ~~recogintion~~recognition. ~~Based~~The ~~on our current implementation effort, First Priority does not expect the~~ adoption of this accounting guidance todoes not have a significant impact on the Company’s financial condition or results of operations. ~~The~~ ~~Company~~See ~~will~~Note ~~also~~10 beRevenue ~~subject~~Recognition, ~~to expanded disclosure requirements upon adoption~~ for ~~which~~more ~~the Company is still in the process of evaluating~~information.

In January 2016, the FASB issued Accounting Standards Update 2016-01, “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”). ASU 2016-01 changes current U.S. GAAP for public entities by requiring the following, among others: (1) equity securities, except those accounted for under the equity method of accounting, to be measured at fair value with changes in fair value recognized in net income; (2) the use of the exit price when measuring fair value of financial instruments for disclosure purposes; (3) an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value; and (4) separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or notes to the financial statements. ASU 2016-01 is effective for annual periods beginning after December 15, 2017, including interim periods. The ~~Early~~Company ~~application~~does isnot ~~permitted~~hold any equity investments (excluding restricted investments in bank stocks) that do not have a readily determinable market value. Fair ~~The~~values ~~Company~~on isloans ~~currently~~receivable ~~assessing~~are ~~the~~estimated ~~impact~~using a discounted cash flow analysis to achieve an exit price measurement. See Note 9 Fair Value Measurements and Fair Values of Financial Instruments, for more information. The Company has determined the ~~adoption~~implementation of ~~ASU~~this ~~2016-01~~standard ~~will~~does not have ona ~~future~~material impact to the financial statements and disclosures.

In February 2016, the FASB issued ~~Accounting Standards Update ("~~ASU") No. 2016-02, “Leases”. From the lessee's perspective, the new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement for a lessee. From the lessor's perspective, the new standard requires a lessor to classify leases as either sales-type, finance or operating. A lease will be treated as a sale if it transfers all of the risks and rewards, as well as control of the underlying asset, to the lessee. If risks and rewards are conveyed without the transfer of control, the lease is treated as a financing. If the lessor doesn’t convey risks and rewards or control, an operating lease results. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. A modified retrospective transition approach is required for lessors for sales-type, direct financing, and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company has ~~eight~~nine leases related to its current office locations, all of which are classified as operating leases, which upon implementation of the new standard in January 2019, will result in both a right-of-use asset and a corresponding lease liability in its consolidated balance sheets currently estimated at approximately $46.54 million. The Company does not expect the implementation of this standard to have a material impact on its consolidated statement of operations.

In September 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326).” The main objective of this ~~Update~~ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The amendments in this ~~Update~~ASU replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. For public business entities, this ASU is effective for financial statements issued for fiscal years beginning after December 15, 2019, and interim periods therein. Early adoption is permitted. The Company is reviewing our system and data collection to determine necessary changes to our current practice.

In August 2016, the FASB issued ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments.” This ASU clarifies how certain cash receipts and cash payments are presented in the statement of cash flows. This update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. ~~For~~The ~~public~~Company ~~business~~adopted ~~entities~~ this ASU ~~is effective for fiscal years, and interim periods within those fiscal years,~~ beginning ~~after~~January ~~December 15~~1, ~~2017. Early~~2018 ~~adoption~~and ishas ~~permitted.~~determined ~~The~~that ~~Company~~there is ~~evaluating~~no ~~the~~ impact ~~of this ASU~~ on its consolidated financial statements and disclosures. Historically the cash flows, addressed by this standard, have been infrequent and immaterial.

In January 2017, the FASB issued ASU 2017-04, “Intangibles ─ Goodwill and Other (Topic 350).” This update intends to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. The amendments in this Update modify the concept of impairment from the condition that exists when the carrying amount of goodwill exceeds its implied fair value to the condition that exists when the carrying amount of a reporting unit exceeds its fair value. For public business entities this ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, and interim periods therein. Early adoption is permitted. The Company does not expect the implementation of this standard to have a material impact on its consolidated statement of operations.

In March 2017, the FASB issued ASU 2017-08, “Premium Amortization on Purchased Callable Debt Securities”, which amends the amortization period for certain purchased callable debt securities held at a premium, shortening such period to the earliest call date. The ASU is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. For all other entities, the ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Earlier application is permitted for all entities, including adoption in an interim period. If an entity early adopts the ASU in an interim period, any adjustments must be reflected as of the beginning of the fiscal year that includes that interim period. The Company does not expect the implementation of this standard to have a material impact on its consolidated statement of operations.

In February 2018, the FASB issued ASU No. 2018-02, “Income Statement Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” (“ASU 2018-02”). ASU 2018-02 states that an entity may elect to reclassify the income tax effects of the Tax Cuts and Jobs Act on items within accumulated other comprehensive income to retained earnings. The amendments in this update are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted, and the Company adopted this accounting guidance effective December 31, 2017. The amount of this reclassification was immaterial.

Note 3—Earnings Per Common Share

Diluted earnings per common share take into account the potential dilution that could occur if securities or other contracts to issue common stock are exercised and converted into common stock. Proceeds assumed to have been received on such exercise or conversion, are assumed to be used to purchase shares of the Company’s common stock at the average market price during the period, as required by the “treasury stock method” of accounting for common stock equivalents. For purposes of calculating the basic and diluted earnings per share, the Company’s reported net income is adjusted for dividends on preferred stock to determine the net income to common shareholders. ~~Securities~~As ~~that~~of ~~could~~March ~~potentially~~31, ~~dilute~~2018, ~~basic~~all ~~earnings~~outstanding ~~per~~options ~~common~~to ~~share~~purchase incommon ~~future~~stock ~~periods~~are ~~that were not~~ included in the computation of diluted ~~earnings~~shares; ~~per~~however ~~common~~as ~~share~~of ~~because~~December to31, do2017, so54,029 ~~would~~options ~~have been anti-dilutive amounted~~ to ~~157,029~~purchase common shares aswere ofnot ~~September~~included ~~30,~~in ~~2017~~the ~~and~~computation ~~437,560~~because ~~shares~~to asdo ofso ~~September~~would ~~30,~~have ~~2016~~been anti-dilutive.

The calculations of basic and diluted earnings per common share are presented below for the three ~~and nine~~ months ended ~~September~~March 3031, ~~2017~~2018 and ~~2016~~2017:

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	For the Three Months Ended March 31,
	(In thousands, except per share information)
	2017			2016			2017			2016
	2018			2017
Net income	$	~~719~~762		$	~~476~~782		$	~~2,267~~		$	~~1,563~~
Less: preferred stock dividends		(77	)		(76	)		(230	)		(330	)
Less: preferred stock dividends, Series C		(77	)		(77	)
Income to common shareholders	$	~~642~~685		$	~~400~~705		$	~~2,037~~		$	~~1,233~~
Average basic common shares outstanding		6,~~577~~636			6,~~527~~534			~~6,552~~			~~6,509~~
Effect of dilutive stock options		~~239~~338			43171			~~217~~			47
Average number of common shares used to calculate diluted earnings per common share		6,~~816~~974			6,~~570~~705			~~6,769~~			~~6,556~~
Basic earnings per common share	$	0.10		$	0.0611		$	~~0.31~~		$	~~0.19~~
Diluted earnings per common share	$	0.0910		$	0.0611		$	~~0.30~~		$	~~0.19~~

The amount of preferred stock dividends related to each series of preferred stock are presented below for the three and nine months ended September 30, 2017 and 2016:

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2017		2016		2017		2016
	(Dollars in thousands)				(Dollars in thousands)
Preferred dividends:
Preferred Series A	$	—	$	—	$	—	$	77
Preferred Series B		—		—		—		4
Preferred Series C		77		76		230		249
Total preferred dividends	$	77	$	76	$	230	$	330

Note 4—Securities

The amortized cost, unrealized gains and losses, and the fair value of the Company’s investment securities available for sale and held to maturity are as follows for the periods presented:

	September 30, 2017
	March 31, 2018
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(Dollars in thousands)
Available For Sale:
Obligations of U.S. government agencies and corporations	$	135,~~990~~994	$	2—	$	(630	)	$	135,~~986~~964
Obligations of states and political subdivisions		114,~~209~~213		~~235~~60		(227	)		114,~~422~~266
Federal agency mortgage-backed securities		2624,~~540~~563		65—		(68671	)		2623,~~537~~892
Federal agency collateralized mortgage obligations		~~122~~101		—		(12	)		~~121~~99
Other debt securities		1,500		5977		—			1,~~559~~577
Money market mutual fund		36		—		—			36
Total investment securities available for sale	$	36,371	$	137	$	(710	)	$	35,798
Total investment securities available for sale	$	53,397	$	361	$	(97	)	$	53,661
Held To Maturity:
Obligations of states and political subdivisions	$	18,~~223~~065	$	~~795~~650	$	(911	)	$	1918,~~009~~704
Other debt securities		~~482~~483		5344		—			~~535~~527
Total investment securities held to maturity	$	18,~~705~~548	$	~~848~~694	$	(911	)	$	19,~~544~~231

	December 31, 2016
	December 31, 2017
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
	(Dollars in thousands)
Available For Sale:
Obligations of U.S. government agencies and corporations	$	4520,~~984~~991	$	8—	$	(520	)	$	4520,~~987~~971
Obligations of states and political subdivisions		64,~~103~~218		46168		~~(10~~—	)		64,~~139~~386
Federal agency mortgage-backed securities		1325,~~863~~524		3316		(~~176~~251	)		1325,~~720~~289
Federal agency collateralized mortgage obligations		~~190~~111		—		(12	)		~~189~~109
Other debt securities		1,500		3083		—			1,~~530~~583
Money market mutual fund		~~2,995~~35		—		—			~~2,995~~35
Total investment securities available for sale	$	7052,~~635~~379	$	~~117~~267	$	(~~192~~273	)	$	7052,~~560~~373
Held To Maturity:
Obligations of states and political subdivisions	$	18,~~561~~183	$	~~561~~953	$	(334	)	$	19,~~089~~132
Other debt securities		482		1351		—			~~495~~533
Total investment securities held to maturity	$	1918,~~043~~665	$	~~574~~1,004	$	(334	)	$	19,~~584~~665

The Company previously transferred investment securities from available for sale to held to maturity securities. Related to these transfers, there were net unrealized holding losses of $5 thousand and $3 thousand, before the impact of taxes, as of March 31, 2018 and December 31, 2017, respectively, which are being amortized over the remaining life of the related securities as an adjustment of yield in a manner consistent with the accretion of discount on the same transferred debt securities. This will have no impact on the Company’s net income because the amortization of the unrealized holding loss reported in equity will offset the effect on the interest income of the accretion of the discount on these securities.

~~The~~Included ~~Company~~in ~~previously~~unrealized ~~transferred~~losses ~~investment~~are ~~securities~~market ~~from~~losses ~~available~~on ~~for sale to held to maturity~~ securities~~. Related~~ tothat ~~these~~have ~~transfers,~~been ~~there~~in ~~were~~a nocontinuous ~~net~~ unrealized ~~holding~~loss ~~gains~~position orfor ~~losses~~twelve asmonths ofor ~~September~~more ~~30,~~and ~~2017,~~those ~~compared to $12 thousand as of December 31, 2016, which are being amortized over the remaining life of the related~~ securities asthat anhave ~~adjustment~~been ~~of yield~~ in a ~~manner~~continuous ~~consistent~~unrealized ~~with~~loss ~~the~~position ~~accretion~~for ofless ~~discount~~than ontwelve ~~the same transferred debt securities~~months. ~~This~~The ~~will~~table ~~have~~below nodetails ~~impact on~~ the ~~Company’s~~aggregate ~~net~~unrealized ~~income~~losses ~~because~~and ~~the~~aggregate ~~amortization~~fair value of the ~~unrealized~~underlying ~~holding~~securities ~~loss~~whose ~~reported~~fair invalues ~~equity~~are ~~will~~below ~~offset~~their ~~the~~amortized ~~effect~~cost onat ~~the~~March ~~interest~~31, ~~income~~2018 ofand ~~the~~December ~~accretion~~31, ~~of the discount on these securities~~2017.

Included in unrealized losses are market losses on securities that have been in a continuous unrealized loss position for twelve months or more and those securities that have been in a continuous unrealized loss position for less than twelve months. The table below details the aggregate unrealized losses and aggregate fair value of the underlying securities whose fair values are below their amortized cost at September 30, 2017 and December 31, 2016.

	As of March 31, 2018
	Less than 12 Months							12 Months or longer							Total
	Fair Value		Unrealized Losses			Count		Fair Value		Unrealized Losses			Count		Fair Value		Unrealized Losses			Count
	(Dollars in thousands)
Available for Sale:
Obligations of U.S. government agencies and corporations	$	3,966	$	(28	)		3	$	1,998	$	(2	)		2	$	5,964	$	(30	)		5
Obligations of states and political subdivisions		795		(7	)		1		—		—			—		795		(7	)		1
Federal agency mortgage-backed securities		20,696		(516	)		17		3,196		(155	)		4		23,892		(671	)		21
Federal agency collateralized mortgage obligations		—		—			—		99		(2	)		1		99		(2	)		1
Total Available for Sale	$	25,457	$	(551	)		21	$	5,293	$	(159	)		7	$	30,750	$	(710	)		28
Held to Maturity:
Obligations of states and political subdivisions	$	508	$	(8	)		1	$	315	$	(3	)		1	$	823	$	(11	)		2
Total Held to Maturity	$	508	$	(8	)		1	$	315	$	(3	)		1	$	823	$	(11	)		2

	As of September 30, 2017
	As of December 31, 2017
	Less than 12 Months							12 Months or longer							Total
	Fair Value		Unrealized Losses			Count		Fair Value		Unrealized Losses			Count		Fair Value		Unrealized Losses			Count
	(Dollars in thousands)
Available for Sale:
Obligations of U.S. government agencies and corporations	$	3,~~987~~975	$	(617	)		43	$	—1,996	$	—(3	)		—2	$	35,~~987~~971	$	(620	)		45
Obligations of states and political subdivisions		3,328		(22	)		7		—		—			—		3,328		(22	)		7
Federal agency mortgage-backed securities		20,099		(162	)		12		3,416		(89	)		4		23,515		(251	)		16
Federal agency mortgage-backed securities		5,997		(67	)		6		19		(1	)		1		6,016		(68	)		7
Federal agency collateralized mortgage obligations		-		-			-		109		(2	)		1		109		(2	)		1
Federal agency collateralized mortgage obligations		—		—			—		121		(1	)		1		121		(1	)		1
Total Available for Sale	$	24,074	$	(179	)		15	$	5,521	$	(94	)		7	$	29,595	$	(273	)		22
Total Available for Sale	$	13,312	$	(95	)		17	$	140	$	(2	)		2	$	13,452	$	(97	)		19
Held to Maturity:
Obligations of states and political subdivisions	$	~~836~~195	$	(91	)		21	$	—315	$	—(3	)		—1	$	~~836~~510	$	(94	)		2
Total Held to Maturity	$	~~836~~195	$	(91	)		21	$	—315	$	—(3	)		—1	$	~~836~~510	$	(94	)		2

	As of December 31, 2016
	Less than 12 Months							12 Months or longer							Total
	Fair Value		Unrealized Losses			Count		Fair Value		Unrealized Losses			Count		Fair Value		Unrealized Losses			Count
	(Dollars in thousands)
Available for Sale:
Obligations of U.S. government agencies and corporations	$	3,984	$	(5	)		4	$	—	$	—			—	$	3,984	$	(5	)		4
Obligations of states and political subdivisions		—		—			—		872		(10	)		1		872		(10	)		1
Federal agency mortgage-backed securities		10,667		(175	)		11		39		(1	)		1		10,706		(176	)		12
Federal agency collateralized mortgage obligations		159		(1	)		1		—		—			—		159		(1	)		1
Total Available for Sale	$	14,810	$	(181	)		16	$	911	$	(11	)		2	$	15,721	$	(192	)		18
Held to Maturity:
Obligations of states and political subdivisions	$	2,289	$	(33	)		7	$	—	$	—			—	$	2,289	$	(33	)		7
Total Held to Maturity	$	2,289	$	(33	)		7	$	—	$	—			—	$	2,289	$	(33	)		7

As of March 31, 2018, management believes that the estimated fair value of the securities disclosed above is primarily dependent upon the movement in market interest rates, particularly given the minimal inherent credit risk associated with the issuers of these securities and that the unrealized losses in these portfolios are not the result of deteriorating credit within any investment category.

AsSecurities ofissued ~~September~~by ~~30,~~states ~~2017,~~and ~~management~~political ~~believes~~subdivisions ~~that~~are ~~the~~all ~~estimated~~rated ~~fair~~investment ~~value~~grade. ofEach ~~the~~holding ~~securities~~is ~~disclosed~~reviewed ~~above~~quarterly isfor ~~primarily~~impairment ~~dependent~~by ~~upon~~management ~~the~~and ~~movement~~our inthird ~~market~~party ~~interest~~investment ~~rates,~~advisor. ~~particularly~~All ~~given~~mortgage ~~the~~backed ~~minimal~~securities ~~inherent~~and ~~credit~~collateralized ~~risk~~mortgage ~~associated~~obligations ~~with~~are ~~the~~issued ~~issuers~~by ofU.S. ~~these~~government ~~securities~~sponsored ~~and~~agencies; ~~that~~there ~~the~~are ~~unrealized~~no ~~losses~~holdings inof ~~these~~private ~~portfolios~~label ~~are~~mortgage ~~not~~backed ~~the~~securities ~~result~~or ofsecurities ~~deteriorating~~backed ~~credit~~by ~~within~~loans ~~any~~classified ~~investment~~as ~~category~~“Alt-A” or “Subprime”.

~~Securities~~Although ~~issued~~the byfair ~~states~~value ~~and~~will ~~political~~fluctuate ~~subdivisions~~as ~~are~~market ~~all~~interest ~~rated~~rates ~~investment~~move, ~~grade~~management believes that these fair values will recover as the underlying portfolios mature. ~~Each~~The ~~holding~~Company isevaluates ~~reviewed~~a ~~quarterly~~variety ~~for~~of ~~impairment~~factors byin ~~management~~concluding whether securities are other-than-temporarily impaired. These factors include, but are not limited to, the type and ~~our~~purpose ~~third~~of ~~party~~the ~~investment~~bond, ~~advisor~~the underlying rating of the bond issuer, and the presence of credit enhancements (i.e. ~~All~~state ~~mortgage~~guarantees, ~~backed~~municipal bond insurance, collateral requirements, etc.). The Company does not intend to sell any of these securities and ~~collateralized~~it ~~mortgage~~is ~~obligations~~not ~~are~~likely to be required to sell any of these securities before recovery. Management does not believe any unrealized loss on individual securities, as of March 31, 2018 represents other than temporary impairment.

~~issued~~For bythe ~~U.S.~~three ~~government~~months ~~sponsored~~ended ~~agencies;~~March 31, 2018 there ~~are~~were no ~~holdings~~realized ofgains ~~private~~recorded ~~label~~compared ~~mortgage~~to ~~backed~~$25 ~~securities~~thousand orfor ~~securities~~the ~~backed~~three bymonths ~~loans~~ended ~~classified~~March as31, ~~“Alt-A” or “Subprime”~~2017.

~~Although~~Securities ~~the~~totaling ~~fair value will fluctuate as market interest rates move, management believes that these fair values will recover as the underlying portfolios mature~~$52.3 ~~The~~million ~~Company~~and ~~evaluates a variety of factors in concluding whether securities are other-than-temporarily impaired~~$69.0 ~~These~~million ~~factors~~were ~~include,~~pledged ~~but~~at ~~are~~March ~~not limited to~~31, ~~the~~2018 ~~type~~ and ~~purpose~~December of31, ~~the bond~~2017, ~~the underlying rating of the bond issuer~~respectively, ~~and~~to ~~the~~secure ~~presence~~public offund ~~credit enhancements (i~~deposits.e. ~~state~~In ~~guarantees~~addition, ~~municipal bond insurance, collateral requirements, etc.). The Company does not intend to sell any of these~~ securities ~~and~~pledged ~~it is unlikely that it will be required~~ to ~~sell~~secure ~~any~~borrowings ofby ~~these~~the ~~securities~~Bank ~~before~~totaled ~~recovery.~~$20 ~~Management~~thousand ~~does~~at ~~not~~both ~~believe~~March ~~any individual unrealized loss on individual securities~~31, as2018 ofand ~~September~~December 3031, 2017, ~~represents other than temporary impairment~~respectively.

~~For~~The ~~the~~amortized ~~three~~cost and ~~nine~~fair ~~months~~value ~~ended~~of ~~September~~securities 30as of March 31, ~~2017~~2018 ~~there~~by ~~were~~contractual ~~realized~~maturity ~~gains~~are ofshown ~~$81~~below. ~~thousand~~Certain ~~and~~of ~~$187~~these ~~thousand. For~~investment ~~the~~securities ~~three~~have ~~and~~call ~~nine~~features ~~months~~which ~~ended~~allow ~~September~~the ~~30,~~issuer ~~2016~~to ~~there~~call ~~were~~the ~~realized~~security ~~gains~~prior ofto ~~$456~~its ~~thousand~~maturity ~~and~~date ~~$795~~at ~~thousand~~the issuer’s discretion.

Securities totaling $57.2 million and $42.0 million were pledged at September 30, 2017 and December 31, 2016, respectively, to secure public fund deposits. In addition, securities pledged to secure borrowings by the Bank totaled $20 thousand and $40 thousand at September 30, 2017 and December 31, 2016, respectively.

	March 31, 2018
	Available for Sale Securities				Held to Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(Dollars in thousands)
Due within one year	$	3,999	$	3,995	$	97	$	99
Due after one year through five years		1,995		1,969		1,011		1,019
Due after five years through ten years		1,500		1,577		2,365		2,409
Due after ten years		4,213		4,266		15,075		15,704
		11,707		11,807		18,548		19,231
Federal agency collateralized mortgage obligations		101		99		—		—
Federal agency mortgage-backed securities		24,563		23,892		—		—
Total	$	36,371	$	35,798	$	18,548	$	19,231

The amortized cost and fair value of securities as of September 30, 2017 by contractual maturity are shown below. Certain of these investment securities have call features which allow the issuer to call the security prior to its maturity date at the issuer’s discretion.

	September 30, 2017
	Available for Sale Securities				Held to Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(Dollars in thousands)
Due within one year	$	11,996	$	11,995	$	—	$	—
Due after one year through five years		2,858		2,854		1,210		1,239
Due after five years through ten years		1,500		1,559		991		1,031
Due after ten years		10,345		10,559		16,504		17,274
		26,699		26,967		18,705		19,544
Federal agency collateralized mortgage obligations		122		121		—		—
Federal agency mortgage-backed securities		26,540		26,537		—		—
Money market mutual fund		36		36		—		—
Total	$	53,397	$	53,661	$	18,705	$	19,544

Note 5—Loans Receivable and Related Allowance for Loan Losses

Loans receivable consist of the following at ~~September~~March 3031, ~~2017~~2018 and December 31, ~~2016~~2017.

	September 30,			December 31,
	March 31,			December 31,
	2017			2016
	2018			2017
	(Dollars in thousands)
Commercial:
Commercial and industrial	$	8587,~~182~~375		$	8985,~~625~~395
Commercial mortgage		~~224~~235,~~838~~392			~~223~~235,~~315~~946
Commercial construction		2833,~~464~~517			2230,~~408~~866
Total commercial		~~338~~356,~~484~~284			~~335~~352,~~348~~207
Residential mortgage loans		~~123~~132,~~061~~092			~~110~~133,~~538~~727
Consumer:
Home equity lines of credit		2019,~~582~~236			2419,~~669~~295
Other consumer loans		1510,~~904~~823			1713,~~514~~780
Total consumer		3630,~~486~~059			4233,~~183~~075
Total		~~498~~518,~~031~~435			~~488~~519,~~069~~009
Allowance for loan losses		(3,~~317~~405	)		(3,~~330~~405	)
Net deferred loan costs (fees)		(113	)		174
Net deferred loan fees		(183	)		(82	)
Total net loans receivable	$	~~494~~514,~~601~~847		$	~~484~~515,~~913~~522

In June 2017, the Company purchased $7.0 million in performing residential real estate loans, at a slight acquisition discount totaling $35 thousand and in December 2017, purchased $9.0 million of performing residential real estate loans, including acquisition premiums of $117 thousand. All portfolios of purchased loans were underwritten using similar standards as the Bank uses for its organic portfolio.

InThe ~~June~~following ~~2017,~~tables summarize the ~~Company~~activity ~~purchased $7.0 million~~ in ~~performing residential real estate loans, at a slight acquisition discount totaling $35 thousand. Previously in August 2016,~~ the ~~Company~~allowance ~~increased~~for ~~its~~loan ~~loans~~losses ~~outstanding~~by ~~through~~loan ~~the~~class ~~acquisition~~for ~~of $64.6 million, including acquisition premiums of $197 thousand, of various types of performing commercial loans within~~ the ~~Bank’s~~three ~~market~~months ~~area. In~~ended ~~June~~March ~~2016~~31, ~~the~~2018 ~~Company~~and ~~purchased~~2017: $12.7 million, including acquisition premiums of $280 thousand, of performing residential real estate loans. All portfolios of purchased loans were underwritten using similar standards as the Bank uses for its organic portfolio.

The following tables summarize the activity in the allowance for loan losses by loan class for the three and nine months ended September 30, 2017 and 2016:

	For the Three Months Ended
	March 31, 2018
	Allowance for Loan Losses
	(Dollars in thousands)
	Beginning Balance		Charge-offs			Recoveries		Provision for loan losses			Ending Balance
Commercial and industrial	$	666	$	(47	)	$	1	$	29		$	649
Commercial mortgage		1,078		—			—		20			1,098
Commercial construction		147		—			—		9			156
Residential mortgage loans		624		—			25		(32	)		617
Home equity lines of credit		103		—			—		30			133
Other consumer loans		74		—			1		(11	)		64
Unallocated		713		—			—		(25	)		688
Total	$	3,405	$	(47	)	$	27	$	20		$	3,405

	For the Three Months Ended												~~For the Nine Months Ended~~
	September 30, 2017												September 30, 2017
	March 31, 2017
	Allowance for Loan Losses												~~Allowance for Loan Losses~~
	(Dollars in thousands)												~~(Dollars in thousands)~~
	Beginning Balance		Charge-offs			Recoveries		Provision for loan losses			Ending Balance		~~Beginning Balance~~		~~Charge-offs~~			~~Recoveries~~		~~Provision for loan losses~~			~~Ending Balance~~
Commercial and industrial	$	~~634~~647	$	—		$	1—	$	(611	)	$	~~629~~658	$	~~647~~	$	~~(146~~	)	$	3	$	~~125~~		$	~~629~~
Commercial mortgage		1,~~107~~051		—			—		~~(47~~57	)		1,~~060~~108		~~1,051~~		~~(30~~	)		—		39			~~1,060~~
Commercial construction		~~138~~113		—			—		112			~~139~~125		~~113~~		—			—		26			~~139~~
Residential mortgage loans		~~474~~452		—			—		70(2	)		~~544~~450		~~452~~		—			—		92			~~544~~
Home equity lines of credit		~~123~~188		—			—		(1323	)		~~110~~165		~~188~~		—			1		~~(79~~	)		~~110~~
Other consumer loans		8797		—(24	)		116		(5—	)		8389		97		~~(24~~	)		18		(8	)		83
Unallocated		~~722~~782		—			—		30(45	)		~~752~~737		~~782~~		—			—		~~(30~~	)		~~752~~
Total	$	3,~~285~~330	$	—(24	)	$	216	$	3010		$	3,~~317~~332	$	~~3,330~~	$	~~(200~~	)	$	22	$	~~165~~		$	~~3,317~~

	For the Three Months Ended										For the Nine Months Ended
	September 30, 2016										September 30, 2016
	Allowance for Loan Losses										Allowance for Loan Losses
	(Dollars in thousands)										(Dollars in thousands)
	Beginning Balance		Charge-offs		Recoveries		Provision for loan losses		Ending Balance		Beginning Balance		Charge-offs			Recoveries		Provision for loan losses			Ending Balance
Commercial and industrial	$	567	$	—	$	1	$	115	$	683	$	631	$	(75	)	$	20	$	107		$	683
Commercial mortgage		828		—		—		163		991		831		(72	)		—		232			991
Commercial construction		57		—		—		24		81		56		—			—		25			81
Residential mortgage loans		276		—		—		—		276		259		—			—		17			276
Home equity lines of credit		152		—		1		16		169		167		—			9		(7	)		169
Other consumer loans		47		—		4		26		77		84		(75	)		11		57			77
Unallocated		880		—		—		166		1,046		767		—			—		279			1,046
Total	$	2,807	$	—	$	6	$	510	$	3,323	$	2,795	$	(222	)	$	40	$	710		$	3,323

The following tables present the balance in the allowance for loan losses at March 31, 2018 and December 31, 2017 disaggregated on the basis of the Company’s impairment method by class of loans receivable along with the balance of loans receivable by class disaggregated on the basis of the Company’s impairment methodology:

	March 31, 2018
	Allowance for Loan Losses						Loans Receivable
	(Dollars in thousands)
	Ending Balance		Ending Balance Individually Evaluated for Impairment		Ending Balance Collectively Evaluated for Impairment		Ending Balance		Ending Balance Individually Evaluated for Impairment		Ending Balance Collectively Evaluated for Impairment
Commercial and industrial	$	649	$	-	$	649	$	87,375	$	537	$	86,838
Commercial mortgage		1,098		—		1,098		235,392		340		235,052
Commercial construction		156		—		156		33,517		—		33,517
Residential mortgage loans		617		140		477		132,092		637		131,455
Home equity lines of credit		133		—		133		19,236		—		19,236
Other consumer loans		64		—		64		10,823		3		10,820
Unallocated		688		—		688		—		—		—
Total	$	3,405	$	140	$	3,265	$	518,435	$	1,517	$	516,918

The following tables present the balance in the allowance for loan losses at September 30, 2017 and December 31, 2016 disaggregated on the basis of the Company’s impairment method by class of loans receivable along with the balance of loans receivable by class disaggregated on the basis of the Company’s impairment methodology:

	December 31, 2017
	Allowance for Loan Losses						Loans Receivable
	(Dollars in thousands)
	Ending Balance		Ending Balance Individually Evaluated for Impairment		Ending Balance Collectively Evaluated for Impairment		Ending Balance		Ending Balance Individually Evaluated for Impairment		Ending Balance Collectively Evaluated for Impairment
Commercial and industrial	$	666	$	42	$	624	$	85,395	$	582	$	84,813
Commercial mortgage		1,078		—		1,078		235,946		346		235,600
Commercial construction		147		—		147		30,866		—		30,866
Residential mortgage loans		624		140		484		133,727		637		133,090
Home equity lines of credit		103		—		103		19,295		—		19,295
Other consumer loans		74		—		74		13,780		3		13,777
Unallocated		713		—		713		—		—		—
Total	$	3,405	$	182	$	3,223	$	519,009	$	1,568	$	517,441

	September 30, 2017
	Allowance for Loan Losses						Loans Receivable
	(Dollars in thousands)
	Ending Balance		Ending Balance Individually Evaluated for Impairment		Ending Balance Collectively Evaluated for Impairment		Ending Balance		Ending Balance Individually Evaluated for Impairment		Ending Balance Collectively Evaluated for Impairment
Commercial and industrial	$	629	$	42	$	587	$	85,182	$	722	$	84,460
Commercial mortgage		1,060		14		1,046		224,838		347		224,491
Commercial construction		139		—		139		28,464		—		28,464
Residential mortgage loans		544		99		445		123,061		637		122,424
Home equity lines of credit		110		—		110		20,582		—		20,582
Other consumer loans		83		—		83		15,904		3		15,901
Unallocated		752		—		752		—		—		—
Total	$	3,317	$	155	$	3,162	$	498,031	$	1,709	$	496,322

The following tables summarize information in regard to impaired loans by loan portfolio class as of March 31, 2018 and December 31, 2017 as well as for the three month periods ended March 31, 2018 and 2017, respectively:

	December 31, 2016
	March 31, 2018						December 31, 2017
	Allowance for Loan Losses						Loans Receivable
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
	(Dollars in thousands)
	Ending Balance		Ending Balance Individually Evaluated for Impairment		Ending Balance Collectively Evaluated for Impairment		Ending Balance		Ending Balance Individually Evaluated for Impairment		Ending Balance Collectively Evaluated for Impairment
With no related allowance recorded:
Commercial and industrial	$	~~647~~537	$	—1,236	$	~~647~~—	$	~~89,625~~251	$	~~705~~906	$	~~88,920~~—
Commercial mortgage		~~1,051~~340		—417		~~1,051~~—		~~223,315~~346		6418		~~223,309~~—
Commercial construction		~~113~~—		—		~~113~~—		~~22,408~~—		—		~~22,408~~—
Residential mortgage loans		~~452~~—		47—		~~405~~—		~~110,538~~—		~~637~~—		~~109,901~~—
Home equity lines of credit		~~188~~—		—		~~188~~—		~~24,669~~—		14—		~~24,655~~—
Other consumer loans		973		—3		97—		~~17,514~~3		513		~~17,463~~—
Unallocated		782		—		782		—		—		—
With an allowance recorded:
Total	$	3,330	$	47	$	3,283	$	488,069	$	1,413	$	486,656
Commercial and industrial	$	—	$	—	$	—	$	331	$	331	$	42
Commercial mortgage		—		—		—		—		—		—
Commercial construction		—		—		—		—		—		—
Residential mortgage loans		637		637		140		637		637		140
Home equity lines of credit		—		—		—		—		—		—
Other consumer loans		—		—		—		—		—		—
Total:
Commercial and industrial	$	537	$	1,236	$	—	$	582	$	1,237	$	42
Commercial mortgage		340		417		—		346		418		—
Commercial construction		—		—		—		—		—		—
Residential mortgage loans		637		637		140		637		637		140
Home equity lines of credit		—		—		—		—		—		—
Other consumer loans		3		3		—		3		3		—
Total	$	1,517	$	2,293	$	140	$	1,568	$	2,295	$	182

The following tables summarize information in regard to impaired loans by loan portfolio class as of September 30, 2017 and December 31, 2016 as well as for the three and nine month periods ended September 30, 2017 and 2016, respectively:

	Three Months Ended March 31,
	2018				2017
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(Dollars in thousands)
With no related allowance recorded:
Commercial and industrial	$	572	$	2	$	495	$	4
Commercial mortgage		345		2		88		4
Commercial construction		—		—		—		—
Residential mortgage loans		—		—		—		—
Home equity lines of credit		—		—		—		—
Other consumer loans		3		—		3		—
With an allowance recorded:
Commercial and industrial	$	—	$	—	$	196	$	—
Commercial mortgage		—		—		42		—
Commercial construction		—		—		—		—
Residential mortgage loans		637		6		637		23
Home equity lines of credit		—		—		—		—
Other consumer loans		—		—		—		—
Total:
Commercial and industrial	$	572	$	2	$	691	$	4
Commercial mortgage		345		2		130		4
Commercial construction		—		—		—		—
Residential mortgage loans		637		6		637		23
Home equity lines of credit		—		—		—		—
Other consumer loans		3		—		3		—
Total	$	1,557	$	10	$	1,461	$	31

	September 30, 2017						December 31, 2016
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
	(Dollars in thousands)
With no related allowance recorded:
Commercial and industrial	$	391	$	705	$	—	$	705	$	1,268	$	—
Commercial mortgage		153		191		—		6		57		—
Commercial construction		—		—		—		—		—		—
Residential mortgage loans		—		—		—		—		—		—
Home equity lines of credit		—		—		—		14		16		—
Other consumer loans		3		3		—		51		80		—
With an allowance recorded:
Commercial and industrial	$	331	$	331	$	42	$	—	$	—	$	—
Commercial mortgage		194		194		14		—		—		—
Commercial construction		—		—		—		—		—		—
Residential mortgage loans		637		637		99		637		637		47
Home equity lines of credit		—		—		—		—		—		—
Other consumer loans		—		—		—		—		—		—
Total:
Commercial and industrial	$	722	$	1,036	$	42	$	705	$	1,268	$	—
Commercial mortgage		347		385		14		6		57		—
Commercial construction		—		—		—		—		—		—
Residential mortgage loans		637		637		99		637		637		47
Home equity lines of credit		—		—		—		14		16		—
Other consumer loans		3		3		—		51		80		—
Total	$	1,709	$	2,061	$	155	$	1,413	$	2,058	$	47

The following table presents non-accrual loans by classes of the loan portfolio as of March 31, 2018 and December 31, 2017:

	March 31, 2018		December 31, 2017
	(Dollars in thousands)
Commercial and industrial	$	396	$	435
Commercial mortgage		200		200
Other consumer loans		3		3
Total	$	599	$	638

The Company’s policy for interest income recognition on non-accrual loans is to recognize income under the cash basis when the loans are both current and the collateral on the loan is sufficient to cover the outstanding obligation to the Company. The Company will not recognize income if these factors do not exist. Interest that would have been accrued on non-accruing loans under the original terms but was not recognized as interest income totaled $17 thousand and $19 thousand for the three months ended March 31, 2018 and 2017, respectively.

	Three Months Ended September 30,								Nine Months Ended September 30,
	2017				2016				2017				2016
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(Dollars in thousands)								(Dollars in thousands)
With no related allowance recorded:
Commercial and industrial	$	397	$	2	$	749	$	—	$	543	$	2	$	723	$	—
Commercial mortgage		151		2		1,187		13		56		2		1,323		42
Commercial construction		—		—		—		—		—		—		—		—
Residential mortgage loans		—		—		22		—		—		—		28		—
Home equity lines of credit		—		—		93		1		—		—		94		3
Other consumer loans		3		—		167		2		3		—		174		5
With an allowance recorded:
Commercial and industrial	$	332	$	—	$	718	$	5	$	150	$	—	$	671	$	19
Commercial mortgage		4		—		507		5		1		—		442		16
Commercial construction		—		—		—		—		—		—		—		—
Residential mortgage loans		637		5		638		6		638		17		638		18
Home equity lines of credit		—		—		—		—		—		—		—		—
Other consumer loans		—		—		—		—		—		—		—		—
Total:
Commercial and industrial	$	729	$	2	$	1,467	$	5	$	693	$	2	$	1,394	$	19
Commercial mortgage		155		2		1,694		18		57		2		1,765		58
Commercial construction		—		—		—		—		—		—		—		—
Residential mortgage loans		637		5		660		6		638		17		666		18
Home equity lines of credit		—		—		93		1		—		—		94		3
Other consumer loans		3		—		167		2		3		—		174		5
Total	$	1,524	$	9	$	4,081	$	32	$	1,391	$	21	$	4,093	$	103

The following tables present the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company’s internal risk rating system as of March 31, 2018 and December 31, 2017:

The following table presents non-accrual loans by classes of the loan portfolio as of September 30, 2017 and December 31, 2016:

	March 31, 2018
	Pass		Special Mention		Substandard		Doubtful		Total
	(Dollars in thousands)
Commercial:
Commercial and industrial	$	86,839	$	—	$	536	$	—	$	87,375
Commercial mortgage		234,563		—		829		—		235,392
Commercial construction		33,517		—		—		—		33,517
Residential mortgage loans		132,092		—		—		—		132,092
Consumer:
Home equity lines of credit		19,236		—		—		—		19,236
Other consumer loans		10,823		—		—		—		10,823
Total	$	517,070	$	—	$	1,365	$	—	$	518,435

	September 30, 2017		December 31, 2016
	December 31, 2017
	(Dollars in thousands)
	Pass		Special Mention		Substandard		Doubtful		Total
Commercial and industrial	$	572	$	705
	(Dollars in thousands)
Commercial mortgage		200		6
Commercial:
Residential mortgage loans		—		—
Commercial and industrial	$	84,811	$	—	$	584	$	—	$	85,395
Home equity lines of credit		—		14
Commercial mortgage		235,114		—		832		—		235,946
Other consumer loans		3		51
Commercial construction		30,866		—		—		—		30,866
Total	$	775	$	776
Residential mortgage loans		133,727		—		—		—		133,727
Consumer:
Home equity lines of credit		19,295		—		—		—		19,295
Other consumer loans		13,780		—		—		—		13,780
Total	$	517,593	$	-	$	1,416	$	—	$	519,009

The ~~Company’s~~performance ~~policy~~and ~~for~~credit ~~interest~~quality ~~income~~of ~~recognition~~the onloan ~~non-accrual~~portfolio ~~loans~~ is toalso ~~recognize~~monitored ~~income~~by ~~under~~analyzing the ~~cash~~age ~~basis~~of ~~when~~ the loans ~~are~~receivable ~~both~~as ~~current~~determined ~~and~~by the ~~collateral~~length onof ~~the~~time ~~loan~~a isrecorded ~~sufficient~~payment tois ~~cover~~past ~~the outstanding obligation to the Company~~due. The ~~Company~~following ~~will~~tables ~~not~~present ~~recognize~~the ~~income~~classes ifof ~~these~~the ~~factors~~loan doportfolio ~~not~~summarized ~~exist.~~by ~~Interest that would have been accrued on non-accruing loans under~~ the ~~original~~past ~~terms~~due ~~but~~status ~~was not recognized~~ as ~~interest~~of ~~income~~March ~~totaled~~31, ~~$16~~2018 ~~thousand~~ and ~~$53~~December ~~thousand for the three and nine months ended September 30~~31, 2017: ~~and $22 thousand and $72 thousand for the three and nine months ended September 30, 2016, respectively.~~

	March 31, 2018
	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans Receivable
	(Dollars in thousands)
Commercial:
Commercial and industrial	$	319	$	—	$	343	$	662	$	86,713	$	87,375
Commercial mortgage		—		—		200		200		235,192		235,392
Commercial construction		—		—		—		—		33,517		33,517
Residential mortgage loans		637		—		—		637		131,455		132,092
Consumer:
Home equity lines of credit		—		—		—		—		19,236		19,236
Other consumer loans		—		—		3		3		10,820		10,823
Total	$	956	$	—	$	546	$	1,502	$	516,933	$	518,435

	December 31, 2017
	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans Receivable
	(Dollars in thousands)
Commercial:
Commercial and industrial	$	36	$	284	$	698	$	1,018	$	84,377	$	85,395
Commercial mortgage		2,206		—		200		2,406		233,540		235,946
Commercial construction		—		—		—		—		30,866		30,866
Residential mortgage loans		329		—		—		329		133,398		133,727
Consumer:
Home equity lines of credit		—		—		—		—		19,295		19,295
Other consumer loans		33		65		3		101		13,679		13,780
Total	$	2,604	$	349	$	901	$	3,854	$	515,155	$	519,009

	September 30, 2017
	Pass		Special Mention		Substandard		Doubtful		Total
	(Dollars in thousands)
Commercial:
Commercial and industrial	$	84,465	$	—	$	717	$	—	$	85,182
Commercial mortgage		223,166		—		1,672		—		224,838
Commercial construction		28,464		—		—		—		28,464
Residential mortgage loans		123,061		—		—		—		123,061
Consumer:
Home equity lines of credit		20,582		—		—		—		20,582
Other consumer loans		15,904		—		—		—		15,904
Total	$	495,642	$	—	$	2,389	$	—	$	498,031

As of March 31, 2018, there were no loans 90 days past due and still accruing interest. As of December 31, 2017 there was one loan totaling $263 thousand that was past due 90 days and still accruing interest which was a single loan relationship and was paid off in its entirety in January 2018, with no losses incurred.

	December 31, 2016
	Pass		Special Mention		Substandard		Doubtful		Total
	(Dollars in thousands)
Commercial:
Commercial and industrial	$	88,503	$	—	$	1,122	$	—	$	89,625
Commercial mortgage		221,544		—		1,771		—		223,315
Commercial construction		22,408		—		—		—		22,408
Residential mortgage loans		110,538		—		—		—		110,538
Consumer:
Home equity lines of credit		24,655		—		14		—		24,669
Other consumer loans		17,463		—		51		—		17,514
Total	$	485,111	$	-	$	2,958	$	—	$	488,069

The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due. The following tables present the classes of the loan portfolio summarized by the past due status as of September 30, 2017 and December 31, 2016:

	September 30, 2017
	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans Receivable
	(Dollars in thousands)
Commercial:
Commercial and industrial	$	385	$	9	$	563	$	957	$	84,225	$	85,182
Commercial mortgage		229		194		6		429		224,409		224,838
Commercial construction		—		—		—		—		28,464		28,464
Residential mortgage loans		—		—		—		—		123,061		123,061
Consumer:
Home equity lines of credit		—		—		—		—		20,582		20,582
Other consumer loans		19		65		3		87		15,817		15,904
Total	$	633	$	268	$	572	$	1,473	$	496,558	$	498,031

	December 31, 2016
	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans Receivable
	(Dollars in thousands)
Commercial:
Commercial and industrial	$	293	$	60	$	632	$	985	$	88,640	$	89,625
Commercial mortgage		—		—		6		6		223,309		223,315
Commercial construction		—		—		—		—		22,408		22,408
Residential mortgage loans		—		104		—		104		110,434		110,538
Consumer:
Home equity lines of credit		—		—		—		—		24,669		24,669
Other consumer loans		17		—		4		21		17,493		17,514
Total	$	310	$	164	$	642	$	1,116	$	486,953	$	488,069

As of September 30, 2017 and December 31, 2016, there were no loans 90 days past due and still accruing interest.

Troubled Debt Restructurings

The Company may grant a concession or modification for economic or legal reasons related to a borrower’s declining financial condition that it would not otherwise consider, resulting in a modified loan which is then identified as a troubled debt restructuring (“TDR”). The Company may modify loans through rate reductions, extensions of maturity, interest only payments, or payment modifications to better match the timing of cash flows due under the modified terms with the cash flows from the borrowers’ operations. Loan modifications are intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. TDRs are considered impaired loans for purposes of calculating the Company’s allowance for loan losses.

The Company identifies loans for potential restructure primarily through direct communication with the borrower and evaluation of the borrower’s financial statements, revenue projections, tax returns, and credit reports. Even if the borrower is not presently in default, management will consider the likelihood that cash flow shortages, adverse economic conditions, and negative trends may result in a payment default in the near future.

The following tables ~~reflect~~summarize ~~information~~the ~~regarding~~balance ~~TDR’s~~of ~~entered~~outstanding ~~into~~TDRs byat ~~the~~March ~~Company~~31, ~~for~~2018 ~~the~~and ~~period~~December ~~ended September 30~~31, 2017. :

	For the Three Months Ended						For the Nine Months Ended
	Number of Loans		Performing TDR's		Non-Performing TDR's		Total TDRs
	September 30, 2017						September 30, 2017
	(Dollars in thousands)
	Number of Contracts		Pre- Modification Outstanding Recorded Investments		Post- Modification Outstanding Recorded Investments		Number of Contracts		Pre- Modification Outstanding Recorded Investments		Post- Modification Outstanding Recorded Investments
March 31, 2018
(Dollars in thousands)
Commercial and Industrial		2	$	141	$	53	$	194
Troubled debt restructurings:
Commercial mortgage loans		1		140		-		140
Commercial and industrial		—	$	—	$	—		1	$	166	$	151
Residential mortgage loans		1		637		-		637
Commercial mortgage		—		—		—		1		164		149
Total		4	$	918	$	53	$	971
Total		—	$	—	$	—		2	$	330	$	300

For the nine months ended September 30, 2017, there were two loans, involving one borrower, modified into trouble debt restructurings related to a participation in a combined loan relationship whereby the Bank and all other banks involved entered into an agreement to accept a payment modification. For the year ended December 31, 2016 there were no new TDR’s entered into.

	Number of Loans		Performing TDR's		Non-Performing TDR's		Total TDRs
	(Dollars in thousands)
December 31, 2017
Commercial and Industrial		2	$	147	$	55	$	202
Commercial mortgage loans		1		146		-		146
Residential mortgage loans		1		637		-		637
Total		4	$	930	$	55	$	985

~~The~~As ~~following~~of ~~tables~~March ~~summarize~~31, ~~the~~2018, ~~balance~~there ofwere ~~outstanding~~no ~~TDR’s~~commitments atto ~~September~~lend 30additional funds to debtors whose terms have been modified in TDRs; however, ~~2017~~there was an interest only residential mortgage loan which was 30 days past due as to principal and interest and was re-financed in April 2018 as an amortizing loan and brought current. As of December 31, ~~2016:~~2017, there was one commercial loan TDR totaling $55 thousand which was in default and is classified as non-accrual.

	Number of Loans		Performing TDR's		Non-Performing TDR's		Total TDRs
	(Dollars in thousands)
September 30, 2017
Commercial and Industrial		1	$	149	$	-	$	149
Residential mortgage loans		1		637		-		637
Commercial mortgage loans		1		148		-		148
Total		3	$	934	$	—	$	934

For the three months ended March 31, 2018 and 2017, the Company did not enter into any new TDRs.

2120

	Number of Loans		Performing TDR's		Non-Performing TDR's		Total TDRs
	(Dollars in thousands)
December 31, 2016
Residential mortgage loans		1	$	637	$	-	$	637
Home equity lines of credit		1		-		14		14
Other consumer loans		1		-		20		20
Total		3	$	637	$	34	$	671

The carrying amount of foreclosed residential real estate properties held was $366 thousand as of March 31, 2018. There was one commercial mortgage loan totaling $294 thousand collateralized by residential real estate property that was in the process of foreclosure as of March 31, 2018.

As of September 30, 2017 and December 31, 2016 there were no TDR’s which were subsequently in default and there were no commitments to lend additional funds to debtors whose terms have been modified in TDR’s.

The carrying amount of foreclosed residential real estate properties held was $466 thousand as of September 30, 2017. There were no consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure as of September 30, 2017.

Note 6—Deposits

The components of deposits at ~~September~~March 3031, ~~2017~~2018 and December 31, ~~2016~~2017 are as follows:

	September 30,		December 31,
	March 31,		December 31,
	2017		2016
	2018		2017
	(Dollars in thousands)
Demand, non-interest bearing	$	6869,~~034~~457	$	5465,~~817~~634
Demand, interest-bearing		2830,~~218~~333		5729,~~168~~918
Money market and savings accounts		~~126~~144,~~438~~398		~~113~~145,~~655~~355
Time, $100 and over		8380,~~158~~848		4584,~~311~~358
Time, other		~~194~~186,~~685~~950		~~196~~197,~~737~~885
	$	~~500~~511,~~533~~986	$	~~467~~523,~~688~~150

Included in time, other at ~~September~~March 3031, ~~2017~~2018 and December 31, ~~2016~~2017 are brokered deposits of $~~116~~112.3 million and $~~138~~120.82 million, respectively.

As of ~~September~~March 3031, ~~2017~~2018 and December 31, ~~2016~~2017 aggregate time deposits which exceed the $250 thousand FDIC insurance limit were $2930.25 million and $832.01 million, respectively~~, an increase of $21~~.~~2 million due to retail time deposit promotions initiated in the nine months ended September 30, 2017.~~

At ~~September~~March 3031, ~~2017~~2018, the scheduled maturities of time deposits were as follows:

	(Dollars in thousands)
9/30/2018	$	156,687
3/31/2019	$	144,040
9/30/2019		64,766
3/31/2020		71,615
9/30/2020		29,565
3/31/2021		27,451
9/30/2021		17,571
3/31/2022		17,004
9/30/2022		9,239
3/31/2023		7,683
Thereafter		155
	$	~~277~~267,~~843~~798

Note 7—Stock Compensation Program

In 2005, the Company adopted the 2005 Stock Compensation Program, which was amended at the Company’s annual meeting on April 23, 2009 as the 2009 Stock Compensation Program (the “Program”) and further amended effective March 18, 2010. The Program allows equity benefits to be awarded in the form of Incentive Stock Options, Compensatory Stock Options or Restricted Stock. The Program authorizes the Board of Directors to grant options up to an aggregate maximum of 1,207,957 shares to officers, other employees and directors of the Company, including 382,957 shares which were authorized for grant under this plan as a result of the merger with Affinity Bancorp, Inc. Only employees of the Company will be eligible to receive Incentive Stock Options and such grants are subject to the limitations under Section 422 of the Internal Revenue Code.

All stock options granted under the Program fully vest in four years from the date of grant (or potentially earlier upon a change of control), excluding options issued in regards to the Company’s Severance Plan which vest only upon change in control, and options terminate ten years from the date of the grant. The exercise price of the options granted is the fair value of a share of common stock at the time of the grant.

~~A summary of stock option activity is presented below for the nine months ended September 30, 2017:~~ 21

	Options to Purchase Common Shares			WeightedAverageExercisePrice
Outstanding at beginning of period		955,060		$	6.35
Granted during the period		7,500			7.92
Forfeited during period		(12,500	)		6.74
Expired		(12,190	)		10.71
Outstanding at end of period (1)		937,870			6.30
Exercisable at end of period (1)		342,370		$	7.63

A summary of stock option activity is presented below for the three months ended March 31, 2018:

(1) Included in options outstanding and exercisable at September 30, 2017 are 100,000 organizer options, with an exercise price of $10.00 per share which expired unexercised on October 18, 2017.

	For the Three Months Ended March 31,
	2018
	Options to Purchase Common Shares			Weighted Average Exercise Price
Outstanding at beginning of period		807,870		$	5.84
Granted during period		-			-
Forfeited/cancelled during the period		-			-
Exercised		(61,000	)		5.59
Expired		(12,978	)		10.72
Outstanding at end of period		733,892		$	5.77
Exercisable at end of period		165,892		$	6.68

The weighted average remaining contractual lives of all outstanding stock options and exercisable options at ~~September~~March 3031, ~~2017~~2018 were 45.9247 years and 24.3311 years, respectively, and 5.8446 years and 23.9805 years, respectively, at December 31, ~~2016~~2017. The aggregate intrinsic value of all outstanding stock options based on the closing price was $13.96 million as of ~~September~~March 3031, ~~2017~~2018, including $~~428~~659 thousand related to currently exercisable options, and $~~705~~2.5 ~~thousand~~million as of December 31, ~~2016~~2017, including $~~150~~586 thousand related to exercisable options.

The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted average assumptions:

	2017
Dividend yield..................................	0.00%
Expected life.....................................	7 years
Expected volatility...........................	23%
Risk-free interest rate......................	2.04%
Weighted average fair value..........	$ 2.34

For option grants to individual employees, the Company assumes no forfeitures. For option grants made to a group of employees, a 10% forfeiture rate is typically assumed at the date of the grant, and compared to actual forfeitures on an annual basis.

Under the terms of the merger agreement with Affinity dated February 28, 2013, each Affinity option became fully vested and was exchanged for a grant of 0.9813 First Priority options, with an adjusted exercise price to reflect the exchange ratio and maintains the same expiration date as the original option. As of September 30, 2017, 38,270 of these options remain outstanding with an average exercise price of $9.08 and a remaining contractual term of 2.54 years.

The dividend yield assumption is based on the Company’s history and expectation of dividend payouts. Due to the Company’s lack of sufficient historical exercise data and the limited period of time for which shares have been issued, the “simplified” method is used to determine the expected life of options, calculated as the average of the sum of the vesting term and original contractual term for all periods presented. The expected volatility percentage is based on the average expected volatility of similar public financial institutions in the Company’s market area. The risk-free interest rates for periods within the contractual life of the awards are based on the U.S. Treasury yield curve in effect at the time of grant.

As of ~~September~~March 3031, ~~2017~~2018, there was $~~137~~118 thousand of unrecognized compensation cost related to non-vested stock options granted after January 1, 2007, excluding those stock options issued in conjunction with the Company’s severance plan. That cost is expected to be recognized over a weighted average period of 21.0050 years. There was no tax benefit recognized related to this stock-based compensation. There are 355,000 stock options issued in connection with the termination of the previously executed change in control agreements and the adoption of the severance plan with $576 thousand of unrecognized compensation cost which will only be recognized if a change in control occurs, based on the options which remain outstanding and are probable to vest at that time. During 2015, included in the options granted, there were 99,000 performance options issued to various employees. Certain performance criteria must be achieved over the performance period in order for the option to vest. Performance is analyzed on a quarterly basis to determine if the specific required performance is more likely than not to be achieved. Based on this evaluation, 5582,~~000~~500 performance options ~~have~~were ~~been~~ cancelled to date, leaving 4416,~~000~~500 ~~which remain~~ outstanding as of ~~September~~March 3031, ~~2017~~2018. OfThese ~~this~~non-vested ~~outstanding~~options ~~amount,~~may be further adjusted in the future if the performance measures are not met.

2322

Restricted Stock grants fully vest after a minimum of three years from the ~~Company~~date ~~has~~of ~~made~~grant (or potentially earlier upon a change of control or retirement after the ~~determination~~age of 66), subject to the recipient remaining an employee of the Company. Directors are also granted restricted stock as part of ~~September~~their 30compensation for their services on the Board of Directors, ~~2017~~or related Committees, ~~that~~as itapproved by the Compensation Committee of the Board. Upon issuance of the shares, resale of the shares is ~~not~~restricted ~~probable~~during ~~that~~the anvesting ~~additional~~period, 27during which the shares may not be sold,~~500~~ ~~will~~pledged, ~~achieve~~or otherwise disposed of. Prior to the vesting ~~requirements~~date and ~~therefore~~in the event the recipient terminates association with Company for any reasons other than death, ~~reversed~~disability or change of control, the recipient forfeits all rights to the shares that would otherwise be issued under the grant. Compensation expense related to ~~these~~restricted ~~options~~stock awards granted under the Program is determined at the date of the award based on the estimated fair value of the shares and is amortized over the vesting period. As of March 31, 2018, there was $479 thousand of unrecognized compensation cost related to restricted stock, which will be amortized through July 31, 2021.

~~Restricted~~A ~~Stock~~summary ~~grants fully vest after a minimum~~ of three years from the date of grant (or potentially earlier upon a change of control or retirement after the age of 66), subject to the recipient remaining an employee of the Company. Directors are also granted restricted stock asaward ~~part~~activity ~~of their compensation for their services on the Board of Directors, or related Committees, as approved by the Compensation Committee of the Board. Upon issuance of the shares, resale of the shares~~ is ~~restricted~~presented ~~during~~below ~~the vesting period, during which the shares may not be sold, pledged, or otherwise disposed of. Prior to the vesting date and in the event the recipient terminates association with Company~~ for ~~any reasons other than death, disability or change of control,~~ the ~~recipient~~three ~~forfeits~~months ~~all~~ended ~~rights~~March to the shares that would otherwise be issued under the grant. Compensation expense related to restricted stock awards granted under the Plan is determined at the date of the award based on the estimated fair value of the shares and is amortized over the vesting period. As of September 30, 2017, there was $581 thousand of unrecognized compensation cost related to restricted stock, which will be amortized through July 31, ~~2021.~~2018:

A summary of restricted stock award activity is presented below for the nine months ended September 30, 2017:

	Shares
Outstanding unvested shares at beginning of period		124,150
Shares Granted during period		7,500
Shares Forfeited during the period		─
Shares Vested during period		(5,000	)
Outstanding unvested shares at end of period		126,650

	Shares
Outstanding unvested shares at beginning of period		89,450
Shares Granted during period		52,700
Shares Forfeited during the period		(4,450	)
Shares Vested during period		(13,550	)
Outstanding unvested shares at end of period		124,150

Note 8—Regulatory Matters

The Bank’s capital amounts (dollars in thousands) and ratios at ~~September~~March 3031, ~~2017~~2018 and December 31, ~~2016~~2017 are presented below:

Actual

Minimum Capital Requirement

To be Well Capitalized under Prompt Corrective Action Provisions

Amount

Ratio

Amount

Ratio

Amount

Ratio

September 30, 2017

March 31, 2018

Total capital (to risk-weighted assets)

5960,~~370~~745

12.4749

38,~~083~~912

>8.0

>4748,~~603~~639

>10.0

Tier 1 capital (to risk-weighted assets)

4648,~~793~~067

9.8388

>2829,~~562~~184

>6.0

>38,~~083~~912

>8.0

Tier 1 common equity capital (to risk-weighted assets)

4648,~~793~~067

9.8388

>21,~~421~~888

>4.5

>3031,~~942~~616

>6.5

Tier 1 capital (to total assets)

4648,~~793~~067

8.1009

>23,~~110~~758

>4.0

>2829,~~888~~698

>5.0

December 31, 2016

December 31, 2017

Total capital (to risk-weighted assets)

5559,~~900~~886

12.0715

>3739,~~064~~434

>8.0

>4649,~~330~~292

>10.0

Tier 1 capital (to risk-weighted assets)

4347,~~328~~215

9.3558

>2729,~~798~~575

>6.0

>3739,~~064~~434

>8.0

Tier 1 common equity capital (to risk-weighted assets)

4347,~~328~~215

9.3558

>2022,~~848~~182

>4.5

>3032,~~114~~040

>6.5

Tier 1 capital (to total assets)

4347,~~328~~215

78.8708

>2223,~~023~~384

>4.0

>2729,~~528~~230

>5.0

The federal banking agencies approved rules that implemented the Dodd-Frank requirements and certain other regulatory capital reforms which were designed to enhance such requirements and implement the revised standards of the Basel Committee on Banking Supervision, commonly referred to as Basel III.

Under these rules, in order to avoid limitations on capital distributions (including dividend payments and certain discretionary bonus payments to executive officers), a banking organization must hold a capital conservation buffer comprised of common equity tier 1 capital above its minimum risk-based capital requirements in an amount greater than 2.5% of total risk-weighted assets. The capital contribution buffer requirements is being phased in over a three-year period beginning January 1, 2016 and was 01.~~625~~25% in ~~2016~~2017, and is 1.25875% ~~during~~in ~~2017~~2018. The capital buffer requirement, on a fully phased-in basis as of January 1, 2019, effectively raises the minimum required common equity Tier 1 capital ratio to 7.0% (5.~~125~~75% in ~~2016~~2017 and 56.75375% in ~~2017~~2018), the Tier 1 capital ratio to 8.5% (67.~~625~~25% in ~~2016~~2017 and 7.25875% in ~~2017~~2018), and the total capital ratio to 10.5% (89.~~625~~25% in ~~2016~~2017 and 9.25875% in ~~2017~~2018).

2423

Note 9—Fair Value Measurements and Fair Values of Financial Instruments

Management uses its best judgment in estimating the fair value of the Bank’s financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction on the dates indicated. The estimated fair value amounts have been measured as of ~~September~~March 3031, ~~2017~~2018 and December 31, ~~2016~~2017 and have not been re-evaluated or updated for purposes of these financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each period-end.

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with FASB ASC Topic 820—Fair Value Measurements, the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in some instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

The fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.

FASB ASC Topic 820 establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under FASB ASC Topic 820 are as follows:

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2: Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported with little or no market activity). Management utilizes inputs that it believes a market participant would use.

An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

During the ~~nine~~three months ended ~~September~~March 3031, ~~2017~~2018 there were no ~~changes in methodologies for determining fair value measurements and there were no~~ transfers between fair value hierarchy levels.

For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at March 31, 2018 and December 31, 2017 are as follows:

Description	Fair Value		(Level 1) Quoted Prices in Active Markets for Identical Assets		(Level 2) Significant Other Observable Inputs		(Level 3) Significant Unobservable Inputs
	(Dollars in thousands)
As of March 31, 2018:
Investment securities available for sale:
Obligations of U.S. government agencies and corporations	$	5,964	$	—	$	5,964	$	—
Obligations of states and political subdivisions		4,266		—		4,266		—
Federal agency mortgage-backed securities		23,892		—		23,892		—
Federal agency collateralized mortgage obligations		99		—		99		—
Other debt securities		1,577		—		1,577		—
Total assets measured at fair value on a recurring basis	$	35,798	$	—	$	35,798	$	—
As of December 31, 2017:
Investment securities available for sale:
Obligations of U.S. government agencies and corporations	$	20,971	$	—	$	20,971	$	—
Obligations of states and political subdivisions		4,386		—		4,386		—
Federal agency mortgage-backed securities		25,289		—		25,289		—
Federal agency collateralized mortgage obligations		109		—		109		—
Other debt securities		1,583		—		1,583		—
Money market mutual fund		35		35		—		—
Total assets measured at fair value on a recurring basis	$	52,373	$	35	$	52,338	$	—

For financial assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at March 31, 2018 and December 31, 2017 are as follows:

Description	Fair Value		(Level 1) Quoted Prices in Active Markets for Identical Assets		(Level 2) Significant Other Observable Inputs		(Level 3) Significant Unobservable Inputs
	(Dollars in thousands)
As of March 31, 2018:
Impaired loans	$	1,072	$	—	$	—	$	1,072
Other real estate owned		74		—		—		74
Total assets measured at fair value on a nonrecurring basis	$	1,146	$	—	$	—	$	1,146
As of December 31, 2017:
Impaired loans	$	1,119	$	—	$	—	$	1,119
Other real estate owned		69		—		—		69
Total assets measured at fair value on a nonrecurring basis	$	1,188	$	—	$	—	$	1,188

For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at September 30, 2017 and December 31, 2016 are as follows:

Description	Fair Value		(Level 1) Quoted Prices in Active Markets for Identical Assets		(Level 2) Significant Other Observable Inputs		(Level 3) Significant Unobservable Inputs
	(Dollars in thousands)
As of September 30, 2017:
Investment securities available for sale:
Obligations of U.S. government agencies and corporations	$	13,986	$	—	$	13,986	$	—
Obligations of states and political subdivisions		11,422		—		11,422		—
Federal agency mortgage-backed securities		26,537		—		26,537		—
Federal agency collateralized mortgage obligations		121		—		121		—
Other debt securities		1,559		—		1,559		—
Money market mutual fund		36		36		—		—
Total assets measured at fair value on a recurring basis	$	53,661	$	36	$	53,625	$	—
As of December 31, 2016:
Investment securities available for sale:
Obligations of U.S. government agencies and corporations	$	45,987	$	—	$	45,987	$	—
Obligations of states and political subdivisions		6,139		—		6,139		—
Federal agency mortgage-backed securities		13,720		—		13,720		—
Federal agency collateralized mortgage obligations		189		—		189		—
Other debt securities		1,530		—		1,530		—
Money market mutual fund		2,995		2,995		—		—
Total assets measured at fair value on a recurring basis	$	70,560	$	2,995	$	67,565	$	—

For financial assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at September 30, 2017 and December 31, 2016 are as follows:

Description

Fair Value

(Level 1) Quoted Prices in Active Markets for Identical Assets

(Level 2) Significant Other Observable Inputs

(Level 3) Significant Unobservable Inputs

(Dollars in thousands)

As of September 30, 2017:

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

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