0000826154us-gaap:~~FairValueInputsLevel2Memberus-gaap:MortgageBackedSecuritiesIssuedByUSGovernmentSponsoredEnterprisesMemberus-gaap:FairValueMeasurementsRecurringMember2020-12-31~~FairValueInputsLevel1Memberus-gaap:EstimateOfFairValueFairValueDisclosureMember2022-03-31

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 30, 2021~~March 31, 2022


☐			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: 001-34292

ORRSTOWN FINANCIAL SERVICES, INC.

(Exact Name of Registrant as Specified in its Charter)

Pennsylvania

23-2530374

(State or Other Jurisdiction of Incorporation or Organization)

(I.R.S. Employer Identification No.)

77 East King Street

P. O. Box 250

Shippensburg

Pennsylvania

17257

(Address of Principal Executive Offices)

(Zip Code)

Registrant’s Telephone Number, Including Area Code:

(717)

532-6114

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading symbol(s)

Name of each exchange on which registered

Common Stock, no par value

ORRF

Nasdaq Stock Market

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

☒

Non-accelerated filer

Smaller reporting company

☒

Emerging growth company

☐

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

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

Number of shares outstanding of the registrant’s Common Stock as of ~~November 1, 2021: 11,206,452.~~May 2, 2022: 11,054,814.

Table of Contents

ORRSTOWN FINANCIAL SERVICES, INC.

INDEX


		Page
Part I – FINANCIAL INFORMATION

	Glossary	3

Item 1.	Financial Statements	4

	Consolidated Balance Sheets (Unaudited)	4

	Consolidated Statements of Income (Unaudited)	5

	Consolidated Statements of Comprehensive (Loss) Income (Unaudited)	7

	Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)	8

	Consolidated Statements of Cash Flows (Unaudited)	109

	Notes to Consolidated Financial Statements (Unaudited)	1210

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	4642

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	6860

Item 4.	Controls and Procedures	6961

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	7062

Item 1A.	Risk Factors	7062

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	7062

Item 3.	Defaults upon Senior Securities	7062

Item 4.	Mine Safety Disclosures	7062

Item 5.	Other Information	7062

Item 6.	Exhibits	7163

SIGNATURES		7264

Table of Contents

Glossary of Defined Terms

The following terms may be used throughout this Report, including the unaudited condensed consolidated financial statements and related notes.


Term			Definition

ALL			Allowance for loan losses
AFS			Available for sale
AOCI			Accumulated other comprehensive income
ASC			Accounting Standards Codification
ASU			Accounting Standards Update
Bank			Orrstown Bank, the commercial banking subsidiary of Orrstown Financial Services, Inc.
CDI			Core deposit intangible
~~CET1~~			~~Common Equity Tier 1~~
CMO			Collateralized mortgage obligation

~~CRE~~			~~Commercial real estate~~

~~EPS~~			~~Earnings per common share~~
ERM			Enterprise risk management
Exchange Act			Securities Exchange Act of 1934, as amended
FASB			Financial Accounting Standards Board
FDIC			Federal Deposit Insurance Corporation
FHLB			Federal Home Loan Bank
FRB			Board of Governors of the Federal Reserve System
GAAP			Accounting principles generally accepted in the United States of America
GDP			Gross Domestic Deposit
GSE			U.S. government-sponsored enterprise
~~Hamilton~~			~~Hamilton Bancorp, Inc., and its wholly-owned banking subsidiary, Hamilton Bank, acquired May 1, 2019~~
IRC			Internal Revenue Code of 1986, as amended
LHFS			Loans held for sale
LIBOR			London Interbank Offered Rate
MBS			Mortgage-backed securities
~~MPF Program~~			~~Mortgage Partnership Finance Program~~
MSR			Mortgage servicing right
NIM			Net interest margin
OCI			Other comprehensive income

OREO			Other real estate owned

OTTI			Other-than-temporary impairment

2011 Plan			2011 Orrstown Financial Services, Inc. Incentive Stock Plan
PCI loans			Purchased credit impaired loans
PACE			Property Assessed Clean Energy loans
PPP			Paycheck Protection Program

Repurchase Agreements			Securities sold under agreements to repurchase
ReRemic			Re-securitization of Real Estate Mortgage Investment Conduits
ROU			Right of use (leases)
SBA			U.S. Small Business Administration
SEC			Securities and Exchange Commission
Securities Act			Securities Act of 1933, as amended
SOFR			Secured Overnight Financing Rate
TDR			Troubled debt restructuring
Unless the context otherwise requires, the terms “Orrstown,” “we,” “us,” “our,” and “Company” refer to Orrstown Financial Services, Inc. and its subsidiaries.

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Consolidated Balance Sheets (Unaudited)

ORRSTOWN FINANCIAL SERVICES, INC.


(Dollars in thousands, except per share amounts)	(Dollars in thousands, except per share amounts)	September 30, 2021		December 31, 2020		(Dollars in thousands, except per share amounts)	March 31, 2022		December 31, 2021
Assets	Assets					Assets
Cash and due from banks	Cash and due from banks	$	36,920	$	26,203	Cash and due from banks	$	26,446	$	21,217
Interest-bearing deposits with banks	Interest-bearing deposits with banks	274,495		99,055		Interest-bearing deposits with banks	187,792		187,493

Cash and cash equivalents	Cash and cash equivalents	311,415		125,258		Cash and cash equivalents	214,238		208,710
Restricted investments in bank stocks	Restricted investments in bank stocks	7,051		10,563		Restricted investments in bank stocks	6,791		7,252
Securities available for sale (amortized cost of $437,852 and $460,999 at September 30, 2021 and December 31, 2020, respectively)		445,018		466,465
Securities available for sale (amortized cost of $548,305 and $466,806 at March 31, 2022 and December 31, 2021, respectively)						Securities available for sale (amortized cost of $548,305 and $466,806 at March 31, 2022 and December 31, 2021, respectively)	529,730		472,438
Loans held for sale, at fair value	Loans held for sale, at fair value	6,412		11,734		Loans held for sale, at fair value	7,403		8,868

Loans	Loans	1,939,764		1,979,690		Loans	1,978,307		1,979,986
Less: Allowance for loan losses	Less: Allowance for loan losses	(19,965)		(20,151)		Less: Allowance for loan losses	(21,508)		(21,180)
Net loans	Net loans	1,919,799		1,959,539		Net loans	1,956,799		1,958,806
Premises and equipment, net	Premises and equipment, net	34,279		35,149		Premises and equipment, net	33,704		34,045
Cash surrender value of life insurance	Cash surrender value of life insurance	69,792		68,554		Cash surrender value of life insurance	70,622		70,217
Goodwill	Goodwill	18,724		18,724		Goodwill	18,724		18,724
Other intangible assets, net	Other intangible assets, net	4,486		5,458		Other intangible assets, net	3,891		4,183
Accrued interest receivable	Accrued interest receivable	8,015		8,927		Accrued interest receivable	8,642		8,234
Other assets	Other assets	45,191		40,201		Other assets	49,993		43,088
Total assets	Total assets	$	2,870,182	$	2,750,572	Total assets	$	2,900,537	$	2,834,565
Liabilities	Liabilities					Liabilities
Deposits:	Deposits:					Deposits:
Noninterest-bearing	Noninterest-bearing	$	545,323	$	456,778	Noninterest-bearing	$	557,756	$	553,238
Interest-bearing	Interest-bearing	1,956,785		1,900,102		Interest-bearing	1,988,236		1,911,691
Total deposits	Total deposits	2,502,108		2,356,880		Total deposits	2,545,992		2,464,929
Securities sold under agreements to repurchase	Securities sold under agreements to repurchase	27,595		19,466		Securities sold under agreements to repurchase	24,624		23,301
FHLB advances and other borrowings	FHLB advances and other borrowings	2,003		58,045		FHLB advances and other borrowings	1,788		1,896
Subordinated notes	Subordinated notes	31,948		31,903		Subordinated notes	31,978		31,963
Other liabilities	Other liabilities	37,959		38,029		Other liabilities	41,351		40,820
Total liabilities	Total liabilities	2,601,613		2,504,323		Total liabilities	2,645,733		2,562,909

Commitments and contingencies	Commitments and contingencies					Commitments and contingencies

Shareholders’ Equity	Shareholders’ Equity					Shareholders’ Equity
Preferred stock, $1.25 par value per share; 500,000 shares authorized; no shares issued or outstanding	Preferred stock, $1.25 par value per share; 500,000 shares authorized; no shares issued or outstanding	—		—		Preferred stock, $1.25 par value per share; 500,000 shares authorized; no shares issued or outstanding	—		—
Common stock, no par value—$0.05205 stated value per share 50,000,000 shares authorized; 11,248,917 shares issued and 11,205,052 outstanding at September 30, 2021; 11,257,046 shares issued and 11,201,317 outstanding at December 31, 2020		586		586
Common stock, no par value—$0.05205 stated value per share 50,000,000 shares authorized; 11,247,545 shares issued and 11,078,990 outstanding at March 31, 2022; 11,258,167 shares issued and 11,183,050 outstanding at December 31, 2021						Common stock, no par value—$0.05205 stated value per share 50,000,000 shares authorized; 11,247,545 shares issued and 11,078,990 outstanding at March 31, 2022; 11,258,167 shares issued and 11,183,050 outstanding at December 31, 2021	585		586
Additional paid - in capital	Additional paid - in capital	189,168		189,066		Additional paid - in capital	188,033		189,689
Retained earnings	Retained earnings	74,122		54,099		Retained earnings	84,943		78,700
Accumulated other comprehensive income		5,661		3,346
Treasury stock— 43,865 and 55,729 shares, at cost at September 30, 2021 and December 31, 2020, respectively		(968)		(848)
Accumulated other comprehensive (loss) income						Accumulated other comprehensive (loss) income	(14,674)		4,449
Treasury stock—168,555 and 75,117 shares, at cost at March 31, 2022 and December 31, 2021, respectively						Treasury stock—168,555 and 75,117 shares, at cost at March 31, 2022 and December 31, 2021, respectively	(4,083)		(1,768)
Total shareholders’ equity	Total shareholders’ equity	268,569		246,249		Total shareholders’ equity	254,804		271,656
Total liabilities and shareholders’ equity	Total liabilities and shareholders’ equity	$	2,870,182	$	2,750,572	Total liabilities and shareholders’ equity	$	2,900,537	$	2,834,565

The Notes to Unaudited Condensed Consolidated Financial Statements are an integral part of these statements.

Table of Contents

Condensed Consolidated Statements of Income (Unaudited)

ORRSTOWN FINANCIAL SERVICES, INC.


		Three Months Ended				Nine Months Ended					Three Months Ended
(Dollars in thousands, except per share amounts)	(Dollars in thousands, except per share amounts)	September 30, 2021		September 30, 2020		September 30, 2021		September 30, 2020		(Dollars in thousands, except per share amounts)		March 31, 2022		March 31, 2021
Interest income	Interest income									Interest income
Loans	Loans	$	19,890	$	21,645	$	62,724	$	63,605	Loans		$	21,369	$	21,511
Investment securities - taxable	Investment securities - taxable	1,514		2,145		5,007		8,378		Investment securities - taxable		1,598		1,879
Investment securities - tax-exempt	Investment securities - tax-exempt	652		417		1,790		1,121		Investment securities - tax-exempt		722		500
Short-term investments	Short-term investments	135		9		255		101		Short-term investments		101		39
Total interest income	Total interest income	22,191		24,216		69,776		73,205		Total interest income		23,790		23,929
Interest expense	Interest expense									Interest expense
Deposits	Deposits	937		2,483		3,410		10,147		Deposits		685		1,392
Securities sold under agreements to repurchase	Securities sold under agreements to repurchase	8		20		25		72		Securities sold under agreements to repurchase		7		9
FHLB advances and other borrowings	FHLB advances and other borrowings	123		394		458		1,604		FHLB advances and other borrowings		22		171
Subordinated notes	Subordinated notes	503		501		1,507		1,504		Subordinated notes		503		502
Total interest expense	Total interest expense	1,571		3,398		5,400		13,327		Total interest expense		1,217		2,074
Net interest income	Net interest income	20,620		20,818		64,376		59,878		Net interest income		22,573		21,855
Provision for loan losses	Provision for loan losses	365		2,200		(10)		5,025		Provision for loan losses		300		(1,000)
Net interest income after provision for loan losses	Net interest income after provision for loan losses	20,255		18,618		64,386		54,853		Net interest income after provision for loan losses		22,273		22,855
Noninterest income	Noninterest income									Noninterest income
Service charges on deposit accounts	Service charges on deposit accounts	796		684		2,231		2,085		Service charges on deposit accounts		920		737
Interchange income	Interchange income	1,030		900		3,049		2,507		Interchange income		981		955
Other service charges and fees	Other service charges and fees	197		168		527		473		Other service charges and fees		153		148
Swap fee income	Swap fee income	67		95		135		527		Swap fee income		953		53
Trust and investment management income	Trust and investment management income	1,930		1,713		5,862		5,049		Trust and investment management income		1,941		1,912
Brokerage income	Brokerage income	987		751		2,708		2,069		Brokerage income		928		811
Mortgage banking activities	Mortgage banking activities	1,333		1,985		4,684		3,926		Mortgage banking activities		721		2,189
Gains on sale of portfolio loans		—		—		—		2,803

Income from life insurance	Income from life insurance	569		543		1,690		1,615		Income from life insurance		566		557
Investment securities gains (losses)		479		(13)		635		(44)
Investment securities (losses) gains										Investment securities (losses) gains		(146)		145
Other income	Other income	263		35		338		118		Other income		457		37
Total noninterest income	Total noninterest income	7,651		6,861		21,859		21,128		Total noninterest income		7,474		7,544
Noninterest expenses	Noninterest expenses									Noninterest expenses
Salaries and employee benefits	Salaries and employee benefits	11,498		10,695		31,907		32,352		Salaries and employee benefits		11,337		10,197
Occupancy	Occupancy	1,154		1,231		3,492		3,480		Occupancy		1,288		1,240
Furniture and equipment	Furniture and equipment	1,220		1,203		3,800		3,569		Furniture and equipment		1,279		1,278
Data processing	Data processing	990		958		3,041		2,620		Data processing		1,053		1,019

Automated teller and interchange fees	Automated teller and interchange fees	294		278		862		778		Automated teller and interchange fees		305		249
Advertising and bank promotions	Advertising and bank promotions	735		197		1,434		1,153		Advertising and bank promotions		355		425
FDIC insurance	FDIC insurance	218		230		570		491		FDIC insurance		283		194

Professional services	Professional services	562		603		1,862		2,340		Professional services		808		721
Directors' compensation	Directors' compensation	155		214		624		679		Directors' compensation		231		234

Taxes other than income	Taxes other than income	16		453		929		904		Taxes other than income		564		451
Intangible asset amortization	Intangible asset amortization	314		357		972		1,224		Intangible asset amortization		292		334

Branch consolidation expenses		—		1,310		—		1,310
Insurance claim receivable recovery		—		—		—		(486)

Other operating expenses	Other operating expenses	1,879		1,536		4,358		5,586		Other operating expenses		1,569		1,441
Total noninterest expenses	Total noninterest expenses	19,035		19,265		53,851		56,000		Total noninterest expenses		19,364		17,783
Income before income tax expense	Income before income tax expense	8,871		6,214		32,394		19,981		Income before income tax expense		10,383		12,616
Income tax expense	Income tax expense	1,679		1,237		6,219		3,577		Income tax expense		2,015		2,409
Net income	Net income	$	7,192	$	4,977	$	26,175	$	16,404	Net income		$	8,368	$	10,207

Table of Contents


Per share information:	Per share information:									Per share information:
Basic earnings per share	Basic earnings per share	$	0.66	$	0.45	$	2.38	$	1.50	Basic earnings per share	$	0.77	$	0.93
Diluted earnings per share	Diluted earnings per share	0.65		0.45		2.36		1.49		Diluted earnings per share	0.76		0.92
Dividends paid per share	Dividends paid per share	0.19		0.17		0.55		0.51		Dividends paid per share	0.19		0.18

The Notes to Unaudited Condensed Consolidated Financial Statements are an integral part of these statements.

Table of Contents

Condensed Consolidated Statements of Comprehensive (Loss) Income (Unaudited)

ORRSTOWN FINANCIAL SERVICES, INC.

Three Months Ended Nine Months Ended
(Dollars in thousands) September 30,
2021 September 30,
2020 September 30,
2021 September 30,
2020
Net income $ 7,192 $ 4,977 $ 26,175 $ 16,404
Other comprehensive income (loss), net of tax:
Unrealized (losses) gains on securities available for sale arising during the period (2,346) 4,296 2,335 375
Reclassification adjustment for (gains) losses realized in net income (479) 13 (635) 44
Net unrealized (losses) gains on securities available for sale (2,825) 4,309 1,700 419
Tax effect 593 (904) (357) (87)
Total other comprehensive (loss) income, net of tax and reclassification adjustments on securities available for sale (2,232) 3,405 1,343 332
Unrealized (losses) gains on interest rate swaps used in cash flow hedges (183) 208 473 (1,893)
Reclassification adjustment for losses realized in net income 581 114 757 239
Net unrealized gains (losses) on interest rate swaps used in cash flow hedges 398 322 1,230 (1,654)
Tax effect (83) (68) (258) 347
Total other comprehensive gains (losses), net of tax and reclassification adjustments on interest rate swaps used in cash flow hedges 315 254 972 (1,307)
Total other comprehensive (loss) income, net of tax and reclassification adjustments (1,917) 3,659 2,315 (975)
Total comprehensive income $ 5,275 $ 8,636 $ 28,490 $ 15,429


	Three Months Ended
(Dollars in thousands)		March 31, 2022		March 31, 2021
Net income		$	8,368	$	10,207
Other comprehensive (loss) income, net of tax:
Unrealized losses on securities available for sale arising during the period		(24,353)		(721)
Reclassification adjustment for losses (gains) realized in net income		146		(145)
Net unrealized losses on securities available for sale		(24,207)		(866)
Tax effect		5,084		182
Total other comprehensive loss, net of tax and reclassification adjustments on securities available for sale		(19,123)		(684)
Unrealized gains on interest rate swaps used in cash flow hedges		—		739
Reclassification adjustment for losses realized in net income		—		87
Net unrealized gains on interest rate swaps used in cash flow hedges		—		826
Tax effect		—		(173)
Total other comprehensive gains, net of tax and reclassification adjustments on interest rate swaps used in cash flow hedges		—		653
Total other comprehensive loss, net of tax and reclassification adjustments		(19,123)		(31)
Total comprehensive (loss) income		$	(10,755)	$	10,176

The Notes to Unaudited Condensed Consolidated Financial Statements are an integral part of these statements.

Table of Contents

Condensed Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

ORRSTOWN FINANCIAL SERVICES, INC.
Three Months Ended September 30, 2021
(Dollars in thousands, except per share amounts) Common
Stock Additional
Paid-In
Capital Retained
Earnings Accumulated
Other
Comprehensive
Income Treasury
Stock Total
Shareholders’
Equity
Balance, July 1, 2021 $ 586 $ 188,772 $ 69,052 $ 7,578 $ (50) $ 265,938
Net income — — 7,192 — — 7,192
Total other comprehensive loss, net of taxes — — — (1,917) — (1,917)
Cash dividends ($0.19 per share) — — (2,122) — — (2,122)
Share-based compensation plans:
16,593 net common shares acquired and 41,106 net treasury shares acquired, including compensation expense totaling $483 — 396 — — (918) (522)
Balance, September 30, 2021 $ 586 $ 189,168 $ 74,122 $ 5,661 $ (968) $ 268,569
Nine Months Ended September 30, 2021
(Dollars in thousands, except per share amounts) Common
Stock Additional
Paid-In
Capital Retained
Earnings Accumulated Other Comprehensive Income Treasury
Stock Total
Shareholders’
Equity
Balance, January 1, 2021 $ 586 $ 189,066 $ 54,099 $ 3,346 $ (848) $ 246,249
Net income — — 26,175 — — 26,175
Total other comprehensive income, net of taxes — — — 2,315 — 2,315
Cash dividends ($0.55 per share) — — (6,152) — — (6,152)
Share-based compensation plans:
8,129 net common shares acquired and 11,864 net treasury shares issued, including compensation expense totaling $1,428 — 102 — — (120) (18)
Balance, September 30, 2021 $ 586 $ 189,168 $ 74,122 $ 5,661 $ (968) $ 268,569

~~The Notes to Unaudited Condensed Consolidated Financial Statements are an integral part of these statements.~~

~~Table of Contents~~











































	Three Months Ended March 31, 2022
(Dollars in thousands, except per share amounts)	Common Stock		Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Treasury Stock		Total Shareholders’ Equity
Balance, January 1, 2022	$	586	$	189,689	$	78,700	$	4,449	$	(1,768)	$	271,656
Net income	—		—		8,368		—		—		8,368

Total other comprehensive loss, net of taxes	—		—		—		(19,123)		—		(19,123)
Cash dividends ($0.19 per share)	—		—		(2,125)		—		—		(2,125)

Share-based compensation plans:
10,622 net common shares acquired and 93,438 net treasury shares acquired, including compensation expense totaling $338	(1)		(1,656)		—		—		(2,315)		(3,972)

Balance, March 31, 2022	$	585	$	188,033	$	84,943	$	(14,674)	$	(4,083)	$	254,804

Three Months Ended September 30, 2020
(Dollars in thousands, except per share amounts) Common
Stock Additional
Paid-In
Capital Retained
Earnings Accumulated
Other
Comprehensive
Income (Loss) Treasury
Stock Total
Shareholders’
Equity
Balance, July 1, 2020 $ 586 $ 188,226 $ 42,862 $ (5,114) $ (922) $ 225,638
Net income — — 4,977 — — 4,977
Total other comprehensive income, net of taxes — — — 3,659 — 3,659
Cash dividends ($0.17 per share) — — (1,901) — — (1,901)
Share-based compensation plans:
11,383 net common shares forfeited and 5,634 net treasury shares issued, including compensation expense totaling $437 — 362 — — 112 474
Balance, September 30, 2020 $ 586 $ 188,588 $ 45,938 $ (1,455) $ (810) $ 232,847
Nine Months Ended September 30, 2020
(Dollars in thousands, except per share amounts) Common
Stock Additional
Paid-In
Capital Retained
Earnings Accumulated
Other
Comprehensive
Loss Treasury
Stock Total
Shareholders’
Equity
Balance, January 1, 2020 $ 584 $ 188,365 $ 35,246 $ (480) $ (466) $ 223,249
Net income — — 16,404 — — 16,404
Total other comprehensive loss, net of taxes — — — (975) — (975)
Cash dividends ($0.51 per share) — — (5,712) — — (5,712)
Share-based compensation plans:
36,442 net common shares issued and 32,804 net treasury shares acquired, including compensation expense totaling $1,613 2 223 — — (344) (119)
Balance, September 30, 2020 $ 586 $ 188,588 $ 45,938 $ (1,455) $ (810) $ 232,847
























































	Three Months Ended March 31, 2021
(Dollars in thousands, except per share amounts)	Common Stock		Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income		Treasury Stock		Total Shareholders’ Equity
Balance, January 1, 2021	$	586	$	189,066	$	54,099	$	3,346	$	(848)	$	246,249
Net income	—		—		10,207		—		—		10,207

Total other comprehensive loss, net of taxes	—		—		—		(31)		—		(31)
Cash dividends ($0.18 per share)	—		—		(2,004)		—		—		(2,004)

Share-based compensation plans:
8,671 net common shares issued and 40,970 net treasury shares issued, including compensation expense totaling $467	—		(555)		—		—		582		27

Balance, March 31, 2021	$	586	$	188,511	$	62,302	$	3,315	$	(266)	$	254,448

The Notes to Unaudited Condensed Consolidated Financial Statements are an integral part of these statements.

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Condensed Consolidated Statements of Cash Flows (Unaudited)

ORRSTOWN FINANCIAL SERVICES, INC.
Nine Months Ended
(Dollars in thousands) September 30, 2021 September 30, 2020
Cash flows from operating activities
Net income $ 26,175 $ 16,404
Adjustments to reconcile net income to net cash provided by operating activities:
Net discount accretion (690) (2,898)
Depreciation and amortization expense 4,014 4,980
Impairment of intangibles — 153
Provision for loan losses (10) 5,025
Share-based compensation 1,428 1,613
Gains on sales of loans originated for sale (3,980) (4,028)
Mortgage loans originated for sale (150,652) (147,647)
Proceeds from sales of loans originated for sale 159,425 146,890
Gains on sale of portfolio loans — (2,803)
Net gain on disposal of OREO — 164
Writedown of OREO — 544
Deferred income taxes (267) (672)
Investment securities (gains) losses (635) 44
Loss on derivative terminations 514 —
Income from life insurance (1,690) (1,615)
Decrease (increase) in accrued interest receivable 912 (2,772)
Increase in accrued interest payable and other liabilities (221) (504)
Other, net (4,108) 3,460
Net cash provided by operating activities 30,215 16,338
Cash flows from investing activities
Proceeds from sales of AFS securities 149,038 —
Maturities, repayments and calls of AFS securities 30,525 38,970
Purchases of AFS securities (156,912) (26,691)
Net redemptions of restricted investments in bank stocks 3,512 3,538
Net decrease in loans 41,504 65,605
Proceeds from sales of portfolio loans — 22,665
Purchases of bank premises and equipment (891) (914)
Proceeds from disposal of OREO — 3,734
Proceeds from disposal of bank premises and equipment — 59
Purchases of bank owned life insurance — (3,636)
Net cash provided by investing activities 66,776 103,330
Cash flows from financing activities
Net increase (decrease) in deposits 145,203 (63,761)
Net increase (decrease) in borrowings with original maturities less than 90 days 8,129 (137,424)
Proceeds from FHLB advances and other borrowings — 180,955
Payments on FHLB advances and other borrowings (56,042) (60,649)
Settlement of terminated derivatives (525) —
Dividends paid (6,152) (5,712)
Acquisition of treasury stock (1,069) (1,170)
Shares repurchased as treasury stock for employee taxes associated with restricted stock vesting (514) (679)
Proceeds from issuance of employee stock purchase plan shares 136 116
Net cash provided by (used in) financing activities 89,166 (88,324)
Net increase in cash and cash equivalents 186,157 31,344
Cash and cash equivalents at beginning of period 125,258 55,963
Cash and cash equivalents at end of period $ 311,415 $ 87,307

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Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 5,007 $ 13,387
Income taxes 4,100 —


	Three Months Ended
(Dollars in thousands)	March 31, 2022		March 31, 2021
Cash flows from operating activities
Net income	$	8,368	$	10,207
Adjustments to reconcile net income to net cash provided by operating activities:
Net premium amortization / (discount accretion)	68		(738)
Depreciation and amortization expense	1,210		1,353

Provision for loan losses	300		(1,000)
Share-based compensation	338		467
Gains on sales of loans originated for sale	(319)		(1,320)
Mortgage loans originated for sale	(32,903)		(55,720)
Proceeds from sales of loans originated for sale	32,749		56,959
Gains on sale of portfolio loans	(271)		—


Net loss on disposal of premises and equipment	12		—
Deferred income taxes	1,638		(1,600)
Investment securities (losses) gains	146		(145)

Income from life insurance	(566)		(557)
Increase in accrued interest receivable	(408)		(143)
Increase in accrued interest payable and other liabilities	531		12,095
Other, net	(4,251)		(3,225)
Net cash provided by operating activities	6,642		16,633
Cash flows from investing activities
Proceeds from sales of AFS securities	3,075		75,736
Maturities, repayments and calls of AFS securities	9,536		11,406
Purchases of AFS securities	(94,903)		(29,233)

Net redemptions of restricted investments in bank stocks	461		256
Distributions from investments in limited partnerships	1,146		—
Net decrease (increase) in loans	52		(64,634)
Proceeds from sales of portfolio loans	3,913		—

Purchases of bank premises and equipment	(235)		(156)







Net cash used in investing activities	(76,955)		(6,625)
Cash flows from financing activities
Net increase in deposits	81,060		190,198
Net increase in borrowings with original maturities less than 90 days	1,323		3,328

Payments on FHLB advances and other borrowings	(108)		(103)






Dividends paid	(2,125)		(2,004)

Acquisition of treasury stock	(4,166)		—
Shares repurchased as treasury stock for employee taxes associated with restricted stock vesting	(232)		(514)
Proceeds from issuance of employee stock purchase plan shares	89		74

Net cash provided by financing activities	75,841		190,979
Net increase in cash and cash equivalents	5,528		200,987
Cash and cash equivalents at beginning of period	208,710		125,258
Cash and cash equivalents at end of period	$	214,238	$	326,245



Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	710	$	1,629

Supplemental schedule of noncash activities:
Loans transferred from LHFS to portfolio loans	1,510		—



Securities purchases not yet settled	—		11,699

The Notes to Unaudited Condensed Consolidated Financial Statements are an integral part of these statements.

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Notes to Condensed Consolidated Financial Statements (Unaudited)

(All dollar amounts presented in the tables, except per share amounts, are in thousands)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

See the Glossary of Defined Terms at the beginning of this Report for terms used throughout the unaudited condensed consolidated financial statements and related notes of this Form 10-Q.

Nature of Operations – Orrstown Financial Services, Inc. is a financial holding company that operates Orrstown Bank, a commercial bank providing banking and financial advisory services in Berks, Cumberland, Dauphin, Franklin, Lancaster, Perry and York Counties, Pennsylvania, and in Anne Arundel, Baltimore, Howard and Washington Counties, ~~Maryland, as well as Baltimore City,~~ Maryland. The Company operates in the community banking segment and engages in lending activities, including commercial, residential, commercial mortgages, construction, municipal, and various forms of consumer lending, and deposit services, including checking, savings, time, and money market deposits. The Company also provides fiduciary, ~~services,~~ investment advisory, insurance and brokerage services. The Company and the Bank are subject to regulation by certain federal and state agencies and undergo periodic examinations by such regulatory authorities.

Basis of Presentation – The accompanying unaudited condensed consolidated financial statements include the accounts of Orrstown Financial Services, Inc. and its wholly owned subsidiary, the Bank. The Company has prepared these unaudited condensed consolidated financial statements in accordance with GAAP for interim financial information, SEC rules that permit reduced disclosure for interim periods, and Article 10 of Regulation S-X. In the opinion of management, all adjustments (all of which are of a normal recurring nature) that are necessary for a fair statement are reflected in the unaudited condensed consolidated financial statements. The December 31, ~~2020~~2021 consolidated balance sheet information contained in this Quarterly Report on Form 10-Q was derived from the Company's ~~2020~~2021 audited consolidated financial statements. The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements, including the notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2020.~~2021. Operating results for the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2021.~~2022. All significant intercompany transactions and accounts have been eliminated.

The Company's management has evaluated all activity of the Company and concluded that subsequent events are properly reflected in the Company's unaudited condensed consolidated financial statements and notes as required by GAAP.

~~The preparation of~~To prepare financial statements in conformity with GAAP, ~~requires~~ management ~~to make~~makes estimates and assumptions ~~that~~based on available information. These estimates and assumptions affect the amounts reported ~~amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of~~in the financial statements and the ~~reported amounts of revenues~~disclosures provided, and ~~expenses during the reporting periods. Actual~~actual results could differ from those estimates. The effects of the COVID-19 pandemic may impact material estimates. Material estimates that are particularly susceptible to significant change include the determination of the ALL and those used in valuation methodologies in areas with no observable market, such as loans, deposits, borrowings, goodwill, core deposit and other intangible assets, mortgage servicing rights, other assets and liabilities obtained or assumed in business combinations. Certain prior-year amounts have been reclassified to conform to the current year presentation. These reclassifications did not have a material impact on the Company's consolidated financial condition or results of operations.differ.

Derivatives - FASB ASC 815, Derivatives and Hedging (“ASC 815”), provides the disclosure requirements for derivatives and hedging activities with the intent to provide users of financial statements with an enhanced understanding of: (a) how and why an entity uses derivative instruments, (b) how the entity accounts for derivative instruments and related hedged items, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. Further, qualitative disclosures are required that explain the Company’s objectives and strategies for using derivatives, as well as quantitative disclosures about the fair value of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments.

As required by ASC 815, the Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge.

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The Company may enter into derivative contracts that are intended to economically hedge certain of its risk, even though hedge accounting does not apply or the Company elects not to apply hedge accounting. The Company's objectives in using interest rate derivatives are to add stability to interest income and to manage its exposure to interest rate movements. To accomplish this objective, the Company uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of fixed amounts from a counterparty in exchange for the Company making variable-rate payments over the life of the agreements without exchange of the underlying notional amount.

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Changes to the fair value of derivatives designated and that qualify as cash flow hedges are recorded in ~~accumulated other comprehensive income~~AOCI and are subsequently reclassified into earnings in the period that the hedged transaction affects earnings. The Company discontinues cash flow hedge accounting if it is probable the forecasted hedged transactions will not occur in the initially identified time period due to circumstances, such as the impact of the COVID-19 pandemic. Upon discontinuance, the associated gains and losses deferred in ~~accumulated other comprehensive income (loss)~~AOCI are reclassified immediately into earnings and subsequent changes in the fair value of the cash flow hedge are recognized in earnings. S~~uch derivatives were used to hedge the variable cash flows associated with overnight borrowings. During the three~~At March 31, 2022 and ~~nine months ended September 30,~~December 31, 2021, the Company ~~terminated its~~had no interest rate derivative designated as a ~~cash flow hedge~~.hedging instrument.

Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain customers. The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting derivatives that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate derivatives associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer derivatives and the offsetting derivatives are recognized directly in earnings. At March 31, 2022 and December 31, 2021, the Company had interest rate swaps not designated as hedges with a total notional value of $120.6 million and $75.8 million, respectively.

Leases - The Company evaluates its contracts at inception to determine if an arrangement either is a lease or contains one. Operating lease ROU assets are included in other assets and operating lease liabilities in accrued interest payable and other liabilities in the unaudited condensed consolidated balance sheets. The Company had no finance leases at ~~September 30, 2021.~~March 31, 2022.

ROU assets represent the right to use an underlying asset for the lease term, and lease liabilities represent an obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The Company's leases do not provide an implicit rate, so the Company's incremental borrowing rate is used, which approximates its fully collateralized borrowing rate, based on the information available at commencement date in determining the present value of lease payments. The incremental borrowing rate is reevaluated upon lease modification. The operating lease ROU asset also includes any initial direct costs and prepaid lease payments made less any lease incentives. In calculating the present value of lease payments, the Company may include options to extend the lease when it is reasonably certain that it will exercise that option.

In accordance with ASU 2016-02, “Leases (Topic 842)” (“ASU 2016-02”), the Company keeps leases with an initial term of 12 months or less off of the balance sheet. The Company recognizes these lease payments in the unaudited condensed consolidated statements of income on a straight-line basis over the lease term. The Company has lease agreements with lease and non-lease components and has elected the practical expedient to account for them as a single lease component.

The Company's operating leases relate primarily to bank branches and office space. The difference between the lease asset and lease liabilities primarily consists of deferred rent liabilities reclassified upon adoption to reduce the measurement of the lease assets. The standard does not materially impact the Company's unaudited condensed consolidated statements of income.

Recent Accounting Pronouncements - ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). The amendments in this update require an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Organizations will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. Additionally, the amendments in this update amend the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. For certain public companies, this update was effective for interim and annual periods beginning after December 15, 2019. The ~~Company delayed the adoption~~implementation deadline of ASU 2016-13 ~~as noted below.~~was extended for smaller reporting and other companies until the fiscal year and interim periods beginning after December 15, 2022. The Company will implement ASU 2016-13 effective January 1, 2023.

ASU No. 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates ("ASU 2019-10"), extended the implementation deadline of ASU 2016-13 for smaller reporting and other companies until the fiscal year and interim periods beginning after December 15, 2022. The Company meets the requirements to be considered a smaller reporting company under SEC Regulation S-K and SEC Rule 405, and ~~did not~~will adopt ASU 2016-13 oneffective January 1, ~~2020.~~2023. The Company is evaluating the impact of the ~~delay for~~ adoption of ASU 2016-13, and is working with a third-party vendor solution to assist with the application of ASU 2016-13 and finalizing the loss estimation models to be used. Once management determines which methods will be utilized, aanother third party vendor will be contracted to perform a model validation prior to adoption. The Company expects to recognize a one-time cumulative-effect adjustment to the

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allowance for credit losses as of the date of adoption of the new standard. While the Company anticipates the allowance for loan losses will increase under its current

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assumptions, it expects the impact of adopting ASU 2016-13 will be influenced by the composition, characteristics and quality of its loan and investment securities portfolios, as well as general economic conditions and forecasts at the adoption date. The other provisions of ASU 2019-10 were not applicable to the Company.

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting ("ASU 2020-04"). ASU 2020-04 contains optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. The optional expedients apply consistently to all contracts or transactions within the scope of this topic, while the optional expedients for hedging relationships can be elected on an individual basis. The Company has formed a cross-functional working group to lead the transition from LIBOR to a planned adoption of an alternate index. The Company currently plans to replace LIBOR with the 30-Day Average SOFR or Term SOFR in its loan agreements. The Company ~~is in the process of implementing~~implemented fallback language for loans ~~that will mature~~with maturities after 2021. The Company expects to adopt the LIBOR transition relief allowed under this standard, and is currently evaluating the potential impact of this guidance on its financial statements.

In March 2022, the FASB issued ASU No. 2022-02, Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures (“ASU 2022-02”). ASU 2022-02 eliminates the troubled debt restructuring accounting model. This change will require all loan modifications to be accounted for under the general loan modification guidance in Subtopic 310-20, Receivables – Nonrefundable Fees and Other Costs, and subject entities to new disclosure requirements on loan modifications to borrowers experiencing financial difficulty. For entities that have adopted Topic 326, ASU 2022-02 is effective for periods beginning after December 15, 2022. For entities adopting Topic 326 in periods after December 15, 2022, ASU 2022-02 is effective when the company adopts Topic 326. The Company will implement ASU 2022-02 effective January 1, 2023, and is evaluating the impact.

NOTE 2. INVESTMENT SECURITIES

At ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, all investment securities were classified as AFS. The following table summarizes amortized cost and fair value of investment securities, and the corresponding amounts of gross unrealized gains and losses recognized in AOCI, at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020:~~2021:


		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value			Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
September 30, 2021
March 31, 2022										March 31, 2022
U.S. Treasury securities	U.S. Treasury securities	$	20,087	$	—	$	256	$	19,831	U.S. Treasury securities	$	20,081	$	—	$	1,543	$	18,538

States and political subdivisions	States and political subdivisions	174,239		8,072		790		181,521		States and political subdivisions	244,922		1,984		9,346		237,560
GSE residential MBSs	GSE residential MBSs	20,552		80		114		20,518		GSE residential MBSs	61,239		—		2,010		59,229
GSE residential CMOs	GSE residential CMOs	69,922		921		656		70,187		GSE residential CMOs	74,023		48		3,044		71,027
Non-agency CMOs	Non-agency CMOs	25,929		1		273		25,657		Non-agency CMOs	29,832		3		2,832		27,003

Asset-backed	Asset-backed	126,726		457		276		126,907		Asset-backed	117,805		—		1,835		115,970
Other	Other	397		—		—		397		Other	403		—		—		403
Totals	Totals	$	437,852	$	9,531	$	2,365	$	445,018	Totals	$	548,305	$	2,035	$	20,610	$	529,730
December 31, 2020

December 31, 2021										December 31, 2021
U.S. Treasury securities										U.S. Treasury securities	$	20,084	$	—	$	382	$	19,702

States and political subdivisions	States and political subdivisions	$	104,704	$	9,091	$	1,125	$	112,670	States and political subdivisions	185,437		8,606		673		193,370
GSE residential MBSs	GSE residential MBSs	4,197		96		—		4,293		GSE residential MBSs	41,260		44		578		40,726
GSE residential CMOs	GSE residential CMOs	56,856		2,226		1,071		58,011		GSE residential CMOs	66,430		436		944		65,922
Non-agency CMOs	Non-agency CMOs	16,505		413		—		16,918		Non-agency CMOs	30,676		—		978		29,698

Private label commercial CMOs		63,941		57		1,762		62,236

Asset-backed	Asset-backed	214,425		171		2,630		211,966		Asset-backed	122,520		401		300		122,621
Other	Other	371		—		—		371		Other	399		—		—		399
Totals	Totals	$	460,999	$	12,054	$	6,588	$	466,465	Totals	$	466,806	$	9,487	$	3,855	$	472,438

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The following table summarizes investment securities with unrealized losses at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, aggregated by major investment security type and the length of time in a continuous unrealized loss position.


		Less Than 12 Months					12 Months or More					Total						Less Than 12 Months					12 Months or More					Total
		# of Securities	Fair Value		Unrealized Losses		# of Securities	Fair Value		Unrealized Losses		# of Securities	Fair Value		Unrealized Losses			# of Securities	Fair Value		Unrealized Losses		# of Securities	Fair Value		Unrealized Losses		# of Securities	Fair Value		Unrealized Losses
September 30, 2021
March 31, 2022																	March 31, 2022
U.S. Treasury securities	U.S. Treasury securities	3	$	19,831	$	256	—	$	—	$	—	3	$	19,831	$	256	U.S. Treasury securities	3	$	18,538	$	1,543	—	$	—	$	—	3	$	18,538	$	1,543

States and political subdivisions	States and political subdivisions	11	40,666		790		—	—		—		11	40,666		790		States and political subdivisions	30	166,305		9,346		—	—		—		30	166,305		9,346
GSE residential MBSs	GSE residential MBSs	5	17,354		114		—	—		—		5	17,354		114		GSE residential MBSs	14	59,229		2,010		—	—		—		14	59,229		2,010
GSE residential CMOs	GSE residential CMOs	7	43,267		656		—	—		—		7	43,267		656		GSE residential CMOs	12	66,516		2,782		1	3,501		262		13	70,017		3,044
Non-agency CMOs	Non-agency CMOs	1	13,257		273		—	—		—		1	13,257		273		Non-agency CMOs	3	22,303		2,832		—	—		—		3	22,303		2,832

Asset-backed	Asset-backed	2	19,084		14		3	36,067		262		5	55,151		276		Asset-backed	12	83,667		1,352		3	31,910		483		15	115,577		1,835
Totals	Totals	29	$	153,459	$	2,103	3	$	36,067	$	262	32	$	189,526	$	2,365	Totals	74	$	416,558	$	19,865	4	$	35,411	$	745	78	$	451,969	$	20,610
December 31, 2020
December 31, 2021																	December 31, 2021
U.S. Treasury securities																	U.S. Treasury securities	3	$	19,702	$	382	—	$	—	$	—	3	$	19,702	$	382

States and political subdivisions																	States and political subdivisions	12	45,522		673		—	—		—		12	45,522		673
GSE residential MBSs																	GSE residential MBSs	9	37,899		578		—	—		—		9	37,899		578
GSE residential CMOs																	GSE residential CMOs	7	41,163		944		—	—		—		7	41,163		944
Non-agency CMOs																	Non-agency CMOs	3	24,661		978		—	—		—		3	24,661		978

States and political subdivisions		1	$	9,079	$	1,125	—	$	—	$	—	1	$	9,079	$	1,125

GSE residential CMOs		3	23,954		1,071		—	—		—		3	23,954		1,071

Private label commercial CMOs		1	4,314		685		10	42,403		1,077		11	46,717		1,762
Asset-backed	Asset-backed	2	16,921		12		15	183,161		2,618		17	200,082		2,630		Asset-backed	3	21,245		138		3	34,180		162		6	55,425		300
Totals	Totals	7	$	54,268	$	2,893	25	$	225,564	$	3,695	32	$	279,832	$	6,588	Totals	37	$	190,192	$	3,693	3	$	34,180	$	162	40	$	224,372	$	3,855

The Company determines whether unrealized losses are temporary in nature in accordance with FASB ASC 320-10, Investments - Overall, (“FASB ASC 320-10”) and FASB ASC 325-40, Investments – Beneficial Interests in Securitized Financial Assets, when applicable. The evaluation is based upon factors such as the creditworthiness of the underlying borrowers, performance of the underlying collateral, if applicable, and the level of credit support in the security structure. Management also evaluates other factors and circumstances that may be indicative of an OTTI condition. This includes, but is not limited to, an evaluation of the type of security, length of time and extent to which the fair value has been less than cost and near-term prospects of the issuer.

FASB ASC 320-10 requires the Company to assess if an OTTI exists by considering whether the Company has the intent to sell the security or it is more likely than not that it will be required to sell the security before recovery. If either of these situations applies, the guidance requires the Company to record an OTTI charge to earnings on debt securities for the difference between the amortized cost basis of the security and the fair value of the security. If neither of these situations applies, the Company is required to assess whether it is expected to recover the entire amortized cost basis of the security. If the Company is not expected to recover the entire amortized cost basis of the security, the guidance requires the Company to bifurcate the identified OTTI into a credit loss component and a component representing loss related to other factors. A discount rate is applied which equals the effective yield of the security. The difference between the present value of the expected flows and the amortized book value is considered a credit loss, which would be recorded through earnings as an OTTI charge. When a market price is not readily available, the market value of the security is determined using the same expected cash flows; the discount rate is a rate the Company determines from the open market and other sources as appropriate for the security. The difference between the market value and the present value of cash flows expected to be collected is recognized in ~~accumulated other comprehensive loss~~AOCI on the unaudited condensed consolidated statements of financial condition.

As of September 30, 2021, the Company had no cumulative OTTI. There were no OTTI charges recognized in earnings as a result of credit losses on investments in the three and nine months ended September 30, 2021 and 2020. During 2020, unrealized losses were substantially higher due to market uncertainty brought about by the COVID-19 pandemic. The sudden and desperate need for liquidity from many institutional pools of capital, combined with the global economic implications of the COVID-19 pandemic, caused significant widening of spreads. Market conditions improved in the second half of 2020 and into 2021 as the uncertainty dissipated with economies re-opening and the distribution of vaccines.

U.S. Treasury Securities. The unrealized losses presented in the table above have been caused by an increase in rates from the time these securities were purchased. Management considers the full faith and credit of the U.S. government in determining whether a security is OTTI. Because the Company does not intend to sell these securities and it is not more likely than not that the Company will be required to sell them before recovery of their amortized cost basis, which may be maturity, the Company does not consider these securities to be OTTI at ~~September 30,~~March 31, 2022 or December 31, 2021.

States and Political Subdivisions. The unrealized losses presented in the table above have been caused by a ~~widening of spreads~~rise in interest rates from the time these securities were purchased. Management considers the investment rating, the state of the issuer of

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the security and other credit support in determining whether the security is OTTI. Because the Company does not intend to sell these securities and it is not more likely than not that the Company will be required to sell them before recovery of their amortized cost basis, which may be maturity, the Company does not consider these securities to be OTTI at ~~September 30, 2021~~March 31, 2022 or December 31, ~~2020.~~2021.

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GSE Residential CMOs and GSE Residential MBS. The unrealized losses presented in the table above have been caused by a widening of spreads and a rise in interest rates from the time these securities were purchased. The contractual terms of these securities do not permit the issuer to settle the securities at a price less than its par value basis. Because the Company does not intend to sell these securities and it is not more likely than not that the Company will be required to sell them before recovery of their amortized cost basis, which may be maturity, the Company does not consider these securities to be OTTI at ~~September 30, 2021~~March 31, 2022 or December 31, ~~2020.~~2021.

Non-Agency CMOs. The unrealized losses presented in the table above were caused by a widening of spreads ~~and/or~~and a rise in interest rates from the time the securities were purchased. Because the Company does not intend to sell these securities and it is not more likely than not that the Company will be required to sell them before recovery of their amortized cost basis, which may be maturity, the Company does not consider these securities to be OTTI at ~~September 30, 2021.~~March 31, 2022 or December 31, 2021, except for 1 $14.7 million par value non-agency CMO security. For the three months ended March 31, 2022, the Company had $171 thousand in cumulative OTTI on this non-agency CMO security, which was included in securities gains and losses in the unaudited condensed consolidated statements of income. This security is expected to be called by the issuer in the second quarter of 2022 due to an anticipated default caused by increased prepayment speeds on the underlying collateral.

Asset-backed. The unrealized losses presented in the table above were caused by a widening of spreads from the time the securities were purchased. Management considers the investment rating and other credit support in determining whether a security is OTTI. Because the Company does not intend to sell these securities and it is not more likely than not that the Company will be required to sell them before recovery of their amortized cost basis, which may be maturity, the Company does not consider these securities to be OTTI at ~~September 30, 2021~~March 31, 2022 or December 31, ~~2020.~~2021.

The following table summarizes amortized cost and fair value of investment securities by contractual maturity at ~~September 30, 2021.~~March 31, 2022. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately.


		Amortized Cost		Fair Value			Amortized Cost		Fair Value
Due in one year or less	Due in one year or less	$	—	$	—	Due in one year or less	$	—	$	—
Due after one year through five years	Due after one year through five years	249		249		Due after one year through five years	3,376		3,509
Due after five years through ten years	Due after five years through ten years	69,999		71,976		Due after five years through ten years	79,079		75,367
Due after ten years	Due after ten years	124,475		129,524		Due after ten years	182,951		177,625
CMOs and MBSs	CMOs and MBSs	116,403		116,362		CMOs and MBSs	165,094		157,259
Asset-backed	Asset-backed	126,726		126,907		Asset-backed	117,805		115,970
Totals	Totals	$	437,852	$	445,018	Totals	$	548,305	$	529,730

The following table summarizes proceeds from sales of investment securities and gross gains and gross losses for the three ~~and nine~~ months ended ~~September 30, 2021~~March 31, 2022 and ~~2020:~~2021:


		Three months ended September 30,				Nine months ended September 30,					Three months ended March 31,
		2021		2020		2021		2020				2022		2021
Proceeds from sale of investment securities	Proceeds from sale of investment securities	$	73,319	$	—	$	149,038	$	—	Proceeds from sale of investment securities		$	3,075	$	75,736
Gross gains	Gross gains	482		—		1,844		—		Gross gains		25		1,351
Gross losses	Gross losses	3		13		1,209		44		Gross losses		—		1,206

During the three ~~and nine~~ months ended ~~September 30, 2021,~~March 31, 2022, net investment security gains, excluding the OTTI charge noted above, of ~~$479 thousand and $635~~$25 thousand were recorded, ~~respectively,~~ compared to a net ~~loss~~gains of ~~$13~~$145 thousand ~~and $44 thousand recorded to adjust an equity security to market value~~ for the three ~~and nine~~ months ended ~~September 30, 2020, respectively.~~March 31, 2021. During the ~~nine~~three months ended ~~September 30, 2021, 18~~March 31, 2022, a partial sale of 1 security with a principal balance of $3.1 million was sold for proceeds of $3.1 million compared to 14 securities with a principal balance of ~~$148.4~~$75.6 million were sold for proceeds of ~~$149.0 million compared to none during the nine months ended September 30, 2020. There were 4 investment securities with a principal balance of $72.8 million sold for proceeds of $73.3~~$75.7 million during the three months ended ~~September 30, 2021, compared to none during the three months ended September 30, 2020.~~March 31, 2021. Investment securities with a fair value of ~~$316.0~~$291.0 million and ~~$398.7~~$295.6 million at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, respectively, were pledged to secure public funds and for other purposes as required or permitted by law.

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NOTE 3. LOANS AND ALLOWANCE FOR LOAN LOSSES

Consistent with ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Loan Losses, the Company’s loan portfolio is grouped into segments which are further broken down into classes to allow management to monitor the performance by the borrower and to monitor the yield on the portfolio.

The risks associated with lending activities differ among the various loan classes and are subject to the impact of changes in interest rates, market conditions of collateral securing the loans, and general economic conditions. All of these factors may adversely impact both the borrower’s ability to repay its loans and associated collateral.

The Company has various types of commercial real estate loans, which have differing levels of credit risk. Owner occupied commercial real estate loans are generally dependent upon the successful operation of the borrower’s business, with the cash flows generated from the business being the primary source of repayment of the loan. If the business suffers a downturn in sales or profitability, the borrower’s ability to repay the loan could be in jeopardy.

Non-owner occupied and multi-family commercial real estate loans and non-owner occupied residential loans present a different credit risk to the Company than owner occupied commercial real estate loans, as the repayment of the loan is dependent upon the borrower’s ability to generate a sufficient level of occupancy to produce rental income that exceeds debt service requirements and operating expenses. Lower occupancy or lease rates may result in a reduction in cash flows, which hinders the ability of the borrower to meet debt service requirements, and may result in lower collateral values. The Company generally recognizes that greater risk is inherent in these credit relationships compared to owner occupied loans mentioned above.

Acquisition and development loans consist of 1-4 family residential construction and commercial and land development loans. The risk of loss on these loans is largely dependent on the Company’s ability to assess the property’s value at the completion of the project, which should exceed the property’s construction costs. During the construction phase, a number of factors could potentially negatively impact the collateral value, including cost overruns, delays in completing the project, competition, and real estate market conditions, which may change based on the supply of similar properties in the area. In the event the collateral value at the completion of the project is not sufficient to cover the outstanding loan balance, the Company must rely upon other repayment sources, if any, including the guarantors of the project or other collateral securing the loan.

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was enacted. The CARES Act established the SBA PPP. The SBA PPP is intended to provide economic relief to small businesses nationwide adversely impacted under the COVID-19 Emergency Declaration issued on March 13, 2020. The SBA PPP, which began on April 3, 2020, provided small businesses with funds to cover up to 24 weeks of payroll costs and other expenses, including benefits. It also provides for forgiveness of up to the full principal amount of qualifying loans. In total, the Bank closed and funded almost 6,500 loans for a total gross loan amount of $699.4 million through December 31, 2021.

Commercial and industrial loans include advances to local and regional businesses for general commercial purposes and include permanent and short-term working capital, machinery and equipment financing, and may be either in the form of lines of credit or term loans. Although commercial and industrial loans may be unsecured to our highest-rated borrowers, the majority of these loans are secured by the borrower’s accounts receivable, inventory and machinery and equipment. In a significant number of these loans, the collateral also includes the business real estate or the business owner’s personal real estate or assets. Commercial and industrial loans present credit exposure to the Company, as they are more susceptible to risk of loss during a downturn in the economy as borrowers may have greater difficulty in meeting their debt service requirements and the value of the collateral may decline. The Company attempts to mitigate this risk through its underwriting standards, including evaluating the creditworthiness of the borrower and, to the extent available, credit ratings on the business. Additionally, monitoring of the loans through annual renewals and meetings with the borrowers are typical. However, these procedures cannot eliminate the risk of loss associated with commercial and industrial lending. At ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, commercial and industrial loans include ~~$259.9~~$122.5 million and ~~$403.3~~$189.9 million, respectively, of loans, net of deferred fees and costs, originated through the SBA PPP. At March 31, 2022, the Bank has $2.4 million of net deferred SBA PPP fees remaining to be recognized through net interest income over the life of the loans, which is between two and five years. The timing of the recognition of these fees is dependent upon the loan forgiveness process established by the SBA. As these loans are 100% guaranteed by the SBA, there is no associated ALL at March 31, 2022.

Municipal loans consist of extensions of credit to municipalities and school districts within the Company’s market area. These loans generally present a lower risk than commercial and industrial loans, as they are generally secured by the municipality’s full taxing authority, by revenue obligations, or by its ability to raise assessments on its ~~customers~~clients for a specific utility.

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The Company originates loans to its retail ~~customers,~~clients, including fixed-rate and adjustable first lien mortgage loans, with the underlying 1-4 family owner occupied residential property securing the loan. The Company’s risk exposure is minimized in these types of loans through the evaluation of the creditworthiness of the borrower, including credit scores and debt-to-income ratios, and underwriting standards, which limit the loan-to-value ratio to generally no more than 80% upon loan origination, unless the borrower obtains private mortgage insurance.

Home equity loans, including term loans and lines of credit, present a slightly higher risk to the Company than 1-4 family first liens, as these loans can be first or second liens on 1-4 family owner occupied residential property, but can have loan-to-value ratios of no greater than ~~90%~~85% of the value of the real estate taken as collateral. The creditworthiness of the borrower is also considered, including credit scores and debt-to-income ratios.

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Installment and other loans’ credit risk is mitigated through prudent underwriting standards, including evaluation of the creditworthiness of the borrower through credit scores and debt-to-income ratios and, if secured, the collateral value of the assets. These loans can be unsecured or secured by assets the value of which may depreciate quickly or may fluctuate, and may present a greater risk to the Company than 1-4 family residential loans.

~~On March 27, 2020,~~ the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was enacted. The CARES Act established the SBA PPP. The SBA PPP is intended to provide economic relief to small businesses nationwide adversely impacted under the COVID-19 Emergency Declaration issued on March 13, 2020. The SBA PPP, which began on April 3, 2020, provided small businesses with funds to cover up to 24 weeks of payroll costs and other expenses, including benefits. It also provides for forgiveness of up to the full principal amount of qualifying loans. Through December 31, 2020, the Bank closed and funded almost 3,200 loans for a total gross loan amount of $467.7 million. These loans resulted in net processing fees of $13.5 million to be recognized through net interest income over the life of the loans, which is between ~~two~~ ~~and~~ ~~five~~ years. For the nine months ended September 30, 2021, the Bank closed and funded almost 3,300 PPP loans for a total loan amount of $231.7 million. In total, the Bank closed and funded almost 6,500 PPP loans for a total gross loan amount of $699.4 million. The loans originated in 2021 resulted in net processing fees of $12.3 million. At September 30, 2021, the Bank has $8.6 million of net deferred SBA PPP fees remaining to be recognized through net interest income over the life of the loans. The timing of the recognition of these fees is dependent upon the loan forgiveness process established by the SBA. As these loans are 100% guaranteed by the SBA, there is no associated allowance for loan losses at September 30, 2021.

In an effort to assist clients that were negatively impacted by the COVID-19 pandemic, the Bank offered various mitigation options, including a loan payment deferral program. Under this program, most commercial deferrals were for a 90-day period, while most consumer deferrals were for a 180-day period. ~~Commercial and consumer deferrals totaled zero and $317 thousand, respectively, at~~ ~~September 30, 2021 and $15.7 million and $2.5 million, respectively, at December 31, 2020.~~ In accordance with the revised Interagency Statement on Loan Modifications by Financial Institutions Working with Customers Affected by the Coronavirus issued by the federal bank regulatory agencies on April 7, 2020, these deferrals are exempt from TDR status as they meet the specified requirements. At March 31, 2022 and December 31, 2021, the remaining loan deferral balances were inconsequential.

The following table presents the loan portfolio by segment and class, excluding residential mortgage LHFS, at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020:~~2021:
September 30, 2021 December 31, 2020
Commercial real estate:
Owner occupied $ 196,585 $ 174,908
Non-owner occupied 509,703 409,567
Multi-family 112,002 113,635
Non-owner occupied residential 100,088 114,505
Acquisition and development:
1-4 family residential construction 12,246 9,486
Commercial and land development 71,784 51,826
Commercial and industrial (1)
540,205 647,368
Municipal 13,631 20,523
Residential mortgage:
First lien 203,360 244,321
Home equity - term 7,079 10,169
Home equity - lines of credit 154,004 157,021
Installment and other loans 19,077 26,361
Total loans $ 1,939,764 $ 1,979,690


	March 31, 2022		December 31, 2021
Commercial real estate:
Owner occupied	$	256,526	$	238,668
Non-owner occupied	558,999		551,783
Multi-family	93,158		93,255
Non-owner occupied residential	102,269		106,112
Acquisition and development:
1-4 family residential construction	15,115		12,279
Commercial and land development	105,204		93,925
Commercial and industrial (1)	443,170		485,728
Municipal	14,626		14,989
Residential mortgage:
First lien	203,231		198,831
Home equity - term	5,820		6,081
Home equity - lines of credit	164,818		160,705
Installment and other loans	15,371		17,630
Total loans	$	1,978,307	$	1,979,986

(1) This balance includes ~~$259.9~~$122.5 million and ~~$403.3~~$189.9 million of SBA PPP loans, net of deferred fees and costs, at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, respectively.

In order to monitor ongoing risk associated with its loan portfolio and specific loans within the segments, management uses an internal grading system. The first several rating categories, representing the lowest risk to the Bank, are combined and given a “Pass” rating. Management generally follows regulatory definitions in assigning criticized ratings to loans, including "Special Mention," "Substandard," "Doubtful" or "Loss." The Special Mention category includes loans that have potential

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weaknesses that may, if not monitored or corrected, weaken the asset or inadequately protect the Bank's position at some future date. These assets pose elevated risk, but their weakness does not yet justify a more severe, or classified rating. Substandard loans are classified as they have a well-defined weakness, or weaknesses that jeopardize liquidation of the debt. These loans are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Substandard loans include loans that management has determined not to be impaired, as well as loans considered to be impaired. A Doubtful loan has a high probability of total or substantial loss, but because of specific pending events that may strengthen the asset, its

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classification as Loss is deferred. Loss loans are considered uncollectible, as the borrowers are often in bankruptcy, have suspended debt repayments, or have ceased business operations. Once a loan is classified as Loss, there is little prospect of collecting the loan’s principal or interest and it is charged-off.

The Company has a loan review policy and program, which is designed to identify and monitor risk in the lending function. The Management ERM Committee, comprised of executive officers, senior officers and loan department personnel, is charged with the oversight of overall credit quality and risk exposure of the Company's loan portfolio. This includes the monitoring of the lending activities of all Company personnel with respect to underwriting and processing new loans and the timely follow-up and corrective action for loans showing signs of deterioration in quality. A loan review program provides the Company with an independent review of the commercial loan portfolio on an ongoing basis. Generally, consumer and residential mortgage loans are included in the Pass categories unless a specific action, such as extended delinquencies, bankruptcy, repossession or death of the borrower occurs, which heightens awareness as to a possible credit event.

Internal loan reviews are completed annually on all commercial relationships with a committed loan balance in excess of $1.0 million, which includes confirmation of risk rating by an independent credit officer. In addition, all commercial relationships greater than $500 thousand rated Substandard, Doubtful or Loss are reviewed quarterly and corresponding risk ratings are reaffirmed by the Company's Problem Loan Committee, with subsequent reporting to the Management ERM Committee and the Board of Directors.

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The following table summarizes the Company’s loan portfolio ratings based on its internal risk rating system at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020:~~2021:


		Pass		Special Mention		Non-Impaired Substandard		Impaired - Substandard		Doubtful		PCI Loans		Total			Pass		Special Mention		Non-Impaired Substandard		Impaired - Substandard		Doubtful		PCI Loans		Total
September 30, 2021
March 31, 2022																March 31, 2022
Commercial real estate:	Commercial real estate:															Commercial real estate:
Owner occupied	Owner occupied	$	176,029	$	8,219	$	6,147	$	3,832	$	—	$	2,358	$	196,585	Owner occupied	$	242,529	$	6,360	$	2,277	$	3,062	$	—	$	2,298	$	256,526
Non-owner occupied	Non-owner occupied	476,947		32,272		168		—		—		316		509,703		Non-owner occupied	537,505		18,771		2,419		—		—		304		558,999
Multi-family	Multi-family	91,726		19,662		614		—		—		—		112,002		Multi-family	84,541		8,158		459		—		—		—		93,158
Non-owner occupied residential	Non-owner occupied residential	95,338		2,028		1,344		171		—		1,207		100,088		Non-owner occupied residential	99,545		1,005		1,014		100		—		605		102,269
Acquisition and development:	Acquisition and development:															Acquisition and development:
1-4 family residential construction	1-4 family residential construction	12,246		—		—		—		—		—		12,246		1-4 family residential construction	15,115		—		—		—		—		—		15,115
Commercial and land development	Commercial and land development	70,648		636		500		—		—		—		71,784		Commercial and land development	103,486		1,236		482		—		—		—		105,204
Commercial and industrial	Commercial and industrial	521,530		7,939		5,505		2,941		—		2,290		540,205		Commercial and industrial	424,425		7,642		8,792		161		—		2,150		443,170
Municipal	Municipal	13,631		—		—		—		—		—		13,631		Municipal	14,626		—		—		—		—		—		14,626
Residential mortgage:	Residential mortgage:															Residential mortgage:
First lien	First lien	195,717		—		240		2,472		—		4,931		203,360		First lien	196,217		—		221		2,278		—		4,515		203,231
Home equity - term	Home equity - term	7,056		—		—		7		—		16		7,079		Home equity - term	5,798		—		—		6		—		16		5,820
Home equity - lines of credit	Home equity - lines of credit	153,436		21		52		495		—		—		154,004		Home equity - lines of credit	164,327		19		46		426		—		—		164,818
Installment and other loans	Installment and other loans	19,002		—		—		37		—		38		19,077		Installment and other loans	15,314		—		—		52		—		5		15,371
		$	1,833,306	$	70,777	$	14,570	$	9,955	$	—	$	11,156	$	1,939,764		$	1,903,428	$	43,191	$	15,710	$	6,085	$	—	$	9,893	$	1,978,307

December 31, 2020
December 31, 2021																December 31, 2021
Commercial real estate:	Commercial real estate:															Commercial real estate:
Owner occupied	Owner occupied	$	148,846	$	12,491	$	7,855	$	3,260	$	—	$	2,456	$	174,908	Owner occupied	$	219,250	$	7,239	$	6,087	$	3,763	$	—	$	2,329	$	238,668
Non-owner occupied	Non-owner occupied	351,860		57,378		—		—		—		329		409,567		Non-owner occupied	528,010		23,297		166		—		—		310		551,783
Multi-family	Multi-family	92,769		20,224		642		—		—		—		113,635		Multi-family	84,414		8,238		603		—		—		—		93,255
Non-owner occupied residential	Non-owner occupied residential	107,557		3,948		1,422		268		—		1,310		114,505		Non-owner occupied residential	102,588		1,065		1,153		122		—		1,184		106,112
Acquisition and development:	Acquisition and development:															Acquisition and development:
1-4 family residential construction	1-4 family residential construction	9,101		385		—		—		—		—		9,486		1-4 family residential construction	12,279		—		—		—		—		—		12,279
Commercial and land development	Commercial and land development	49,832		655		525		814		—		—		51,826		Commercial and land development	92,049		1,385		491		—		—		—		93,925
Commercial and industrial	Commercial and industrial	617,213		17,561		6,118		3,639		—		2,837		647,368		Commercial and industrial	470,579		7,917		4,720		250		—		2,262		485,728
Municipal	Municipal	20,523		—		—		—		—		—		20,523		Municipal	14,989		—		—		—		—		—		14,989
Residential mortgage:	Residential mortgage:															Residential mortgage:
First lien	First lien	236,381		—		—		2,628		—		5,312		244,321		First lien	191,386		—		225		2,635		—		4,585		198,831
Home equity - term	Home equity - term	10,076		—		64		10		—		19		10,169		Home equity - term	6,058		—		—		7		—		16		6,081
Home equity - lines of credit	Home equity - lines of credit	156,264		95		54		608		—		—		157,021		Home equity - lines of credit	160,203		20		46		436		—		—		160,705
Installment and other loans	Installment and other loans	26,283		—		—		17		—		61		26,361		Installment and other loans	17,584		—		—		40		—		6		17,630
		$	1,826,705	$	112,737	$	16,680	$	11,244	$	—	$	12,324	$	1,979,690		$	1,899,389	$	49,161	$	13,491	$	7,253	$	—	$	10,692	$	1,979,986

For commercial real estate, acquisition and development and commercial and industrial loans, 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

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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. Generally, loans that are more than 90 days past due are deemed 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 to determine if the loan should be placed on nonaccrual status. Nonaccrual loans in the commercial and commercial real estate portfolios and any TDRs are, by definition, deemed to be impaired. Impairment is measured on a loan-by-loan basis for commercial, construction and restructured loans by either the present value of the expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. A loan is collateral dependent if the repayment of the loan is expected to be provided solely by the underlying collateral. For loans that are deemed to be impaired for extended periods of time, periodic updates on fair values are obtained, which may include updated appraisals. Updated fair values are incorporated into the impairment analysis in the next reporting period.

Loan charge-offs, which may include partial charge-offs, are taken on an impaired loan that is collateral dependent if the loan’s carrying balance exceeds its collateral’s appraised value, the loan has been identified as uncollectible, and it is deemed to be a confirmed loss. Typically, impaired loans with a charge-off or partial charge-off will continue to be considered impaired, unless the note is split into 2, and management expects the performing note to continue to perform and is adequately secured. The second, or non-performing note, would be charged-off. Generally, an impaired loan with a partial charge-off may continue to have an impairment reserve on it after the partial charge-off, if factors warrant.

At ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, nearly all of the Company’s loan impairments were measured based on the estimated fair value of the collateral securing the loan, except for TDRs. By definition, TDRs are considered impaired. All TDR impairment analyses are initially based on discounted cash flows for those loans. For real estate loans, collateral generally consists of commercial real estate, but in the case of commercial and industrial loans, it could also consist of accounts receivable, inventory, equipment or other business assets. Commercial and industrial loans may also have real estate collateral.

Updated appraisals are generally required every 18 months for classified commercial loans in excess of $250 thousand. The “as is" value provided in the appraisal is often used as the fair value of the collateral in determining impairment, unless circumstances, such as subsequent improvements, approvals, or other circumstances, dictate that another value than that provided by the appraiser is more appropriate.

Generally, impaired commercial loans secured by real estate, other than performing TDRs, are measured at fair value using certified real estate appraisals that had been completed within the last 18 months. Appraised values are discounted for estimated costs to sell the property and other selling considerations to arrive at the property’s fair value. In those situations in which it is determined an updated appraisal is not required for loans individually evaluated for impairment, fair values are based on either an existing appraisal or a discounted cash flow analysis as determined by management. The approaches are discussed below:

•Existing appraisal – if the existing appraisal provides a strong loan-to-value ratio (generally 70% or lower) and, after consideration of market conditions and knowledge of the property and area, it is determined by the Credit Administration staff that there has not been a significant deterioration in the collateral value, the existing certified appraised value may be used. Discounts to the appraised value, as deemed appropriate for selling costs, are factored into the fair value.

•Discounted cash flows – in limited cases, discounted cash flows may be used on projects in which the collateral is liquidated to reduce the borrowings outstanding, and is used to validate collateral values derived from other approaches.

Collateral on certain impaired loans is not limited to real estate, and may consist of accounts receivable, inventory, equipment or other business assets. Estimated fair values are determined based on borrowers’ financial statements, inventory ledgers, accounts receivable aging or appraisals from individuals with knowledge in the business. Stated balances are generally discounted for the age of the financial information or the quality of the assets. In determining fair value, liquidation discounts are applied to this collateral based on existing loan evaluation policies.

The Company distinguishes substandard loans on both an impaired and non-impaired basis, as it places less emphasis on a loan’s classification, and increased reliance on whether the loan was performing in accordance with the contractual terms. A substandard classification does not automatically meet the definition of impaired. Loss potential, while existing in the aggregate amount of substandard loans, does not have to exist in individual extensions of credit classified as substandard. As a result, the Company’s methodology includes an evaluation of certain accruing commercial real estate, acquisition and development, and commercial and industrial loans rated substandard to be collectively evaluated for impairment. Although the Company believes

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these loans meet the definition of substandard, they are generally performing and management has concluded that it is likely the Company will be able to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement.

Larger groups of smaller balance homogeneous loans are collectively evaluated for impairment. Generally, the Company does not separately identify individual consumer and residential loans for impairment disclosures, unless such loans are the subject of a restructuring agreement due to financial difficulties of the borrower.

The following table, which excludes accruing PCI loans, summarizes impaired loans by segment and class, segregated by those for which a specific allowance was required and those for which a specific allowance was not required at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020.~~2021. The recorded investment in loans excludes accrued interest receivable due to insignificance. Related allowances established generally pertain to those loans in which loan forbearance agreements were in the process of being negotiated or updated appraisals were pending, and any partial charge-off will be recorded when final information is received.


		Impaired Loans with a Specific Allowance						Impaired Loans with No Specific Allowance					Impaired Loans with a Specific Allowance						Impaired Loans with No Specific Allowance
		Recorded Investment (Book Balance)		Unpaid Principal Balance (Legal Balance)		Related Allowance		Recorded Investment (Book Balance)		Unpaid Principal Balance (Legal Balance)			Recorded Investment (Book Balance)		Unpaid Principal Balance (Legal Balance)		Related Allowance		Recorded Investment (Book Balance)		Unpaid Principal Balance (Legal Balance)
September 30, 2021
March 31, 2022												March 31, 2022
Commercial real estate:	Commercial real estate:											Commercial real estate:
Owner-occupied	Owner-occupied	$	—	$	—	$	—	$	3,832	$	4,923	Owner-occupied	$	—	$	—	$	—	$	3,062	$	4,840

Non-owner occupied residential	Non-owner occupied residential	—		—		—		171		383		Non-owner occupied residential	—		—		—		100		214

Commercial and industrial	Commercial and industrial	—		—		—		2,941		3,592		Commercial and industrial	—		—		—		161		447
Residential mortgage:	Residential mortgage:											Residential mortgage:
First lien	First lien	469		469		29		2,003		3,161		First lien	338		338		29		1,940		2,938
Home equity—term	Home equity—term	—		—		—		7		10		Home equity—term	—		—		—		6		9
Home equity—lines of credit	Home equity—lines of credit	—		—		—		495		733		Home equity—lines of credit	—		—		—		426		651
Installment and other loans	Installment and other loans	—		—		—		37		37		Installment and other loans	—		—		—		52		52
		$	469	$	469	$	29	$	9,486	$	12,839		$	338	$	338	$	29	$	5,747	$	9,151
December 31, 2020
December 31, 2021												December 31, 2021
Commercial real estate:	Commercial real estate:											Commercial real estate:
Owner-occupied	Owner-occupied	$	—	$	—	$	—	$	3,260	$	4,091	Owner-occupied	$	—	$	—	$	—	$	3,763	$	4,902

Non-owner occupied residential	Non-owner occupied residential	—		—		—		268		393		Non-owner occupied residential	—		—		—		122		259
Acquisition and development:

Commercial and land development		—		—		—		814		875

Commercial and industrial	Commercial and industrial	—		—		—		3,639		4,269		Commercial and industrial	—		—		—		250		547
Residential mortgage:	Residential mortgage:											Residential mortgage:
First lien	First lien	424		508		33		2,204		3,264		First lien	341		341		28		2,294		3,337
Home equity—term	Home equity—term	—		—		—		10		13		Home equity—term	—		—		—		7		10
Home equity—lines of credit	Home equity—lines of credit	—		—		—		608		832		Home equity—lines of credit	—		—		—		436		653
Installment and other loans	Installment and other loans	—		—		—		17		18		Installment and other loans	—		—		—		40		40
		$	424	$	508	$	33	$	10,820	$	13,755		$	341	$	341	$	28	$	6,912	$	9,748

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The following table, which excludes accruing PCI loans, summarizes the average recorded investment in impaired loans and related recognized interest income for the three ~~and nine~~ months ended ~~September 30, 2021~~March 31, 2022 and ~~2020:~~2021:


		2021				2020					2022				2021
		Average Impaired Balance		Interest Income Recognized		Average Impaired Balance		Interest Income Recognized			Average Impaired Balance		Interest Income Recognized		Average Impaired Balance		Interest Income Recognized
Three Months Ended September 30,
Commercial real estate:
Owner-occupied		$	4,179	$	—	$	4,424	$	—
Non-owner occupied		—		—		102		—
Multi-family		—		—		141		—
Non-owner occupied residential		232		—		433		—
Acquisition and development:

Commercial and land development		—		—		837		—
Commercial and industrial		3,073		—		1,044		—
Residential mortgage:
First lien		2,541		11		3,209		12
Home equity – term		10		—		12		—
Home equity - lines of credit		463		—		645		—
Installment and other loans		24		—		17		—
		$	10,522	$	11	$	10,864	$	12
Nine Months Ended September 30,

Three Months Ended March 31,										Three Months Ended March 31,
Commercial real estate:	Commercial real estate:									Commercial real estate:
Owner occupied	Owner occupied	$	3,848	$	1	$	5,033	$	1	Owner occupied	$	3,422	$	—	$	3,448	$	1
Non-owner occupied		—		—		108		—

Multi-family	Multi-family	7		—		259		—		Multi-family	—		—		19		—
Non-owner occupied residential	Non-owner occupied residential	252		—		422		—		Non-owner occupied residential	107		—		267		—
Acquisition and development:	Acquisition and development:									Acquisition and development:

Commercial and land development	Commercial and land development	246		—		586		—		Commercial and land development	—		—		614		—
Commercial and industrial	Commercial and industrial	3,046		—		1,316		—		Commercial and industrial	218		—		2,878		—
Residential mortgage:	Residential mortgage:									Residential mortgage:
First lien	First lien	2,575		32		3,050		36		First lien	2,406		7		2,636		11
Home equity - term	Home equity - term	12		—		12		—		Home equity - term	7		—		12		—
Home equity - lines of credit	Home equity - lines of credit	547		—		699		1		Home equity - lines of credit	432		—		616		—
Installment and other loans	Installment and other loans	17		—		29		—		Installment and other loans	45		—		15		—
		$	10,550	$	33	$	11,514	$	38		$	6,637	$	7	$	10,505	$	12

~~Table of Contents~~

The following table presents impaired loans that are TDRs, with the recorded investment at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020:~~2021:


		September 30, 2021			December 31, 2020				March 31, 2022			December 31, 2021
		Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment			Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
Accruing:	Accruing:							Accruing:
Commercial real estate:
Owner occupied		1	$	26	1	$	28

Residential mortgage:	Residential mortgage:							Residential mortgage:
First lien	First lien	8	813		9	898		First lien	7	$	575	8	$	804
Home equity - lines of credit		—	—		1	8

		9	839		11	934
Nonaccruing:	Nonaccruing:							Nonaccruing:

Residential mortgage:	Residential mortgage:							Residential mortgage:
First lien	First lien	5	291		5	320		First lien	6	276		5	285

		5	291		5	320
		14	$	1,130	16	$	1,254		13	$	851	13	$	1,089

There was 1 new first lien residential mortgage TDR on non-accrual status for the three months ended March 31, 2022 of $4 thousand. There were no new ~~TDR's for the three and nine months ended September 30, 2021 or 2020.~~

TDRs in 2021.

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Management further monitors the performance and credit quality of the loan portfolio by analyzing the length of time a portfolio is past due, by aggregating loans based on its delinquencies. The following table presents the classes of loan portfolio summarized by aging categories of performing loans and nonaccrual loans at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020:~~2021:


				Days Past Due															Days Past Due
		Current		30-59		60-89		90+ (still accruing)		Total Past Due		Non- Accrual		Total Loans			Current		30-59		60-89		90+ (still accruing)		Total Past Due		Non- Accrual		Total Loans
September 30, 2021
March 31, 2022																March 31, 2022
Commercial real estate:	Commercial real estate:															Commercial real estate:
Owner occupied	Owner occupied	$	190,183	$	238	$	—	$	—	$	238	$	3,806	$	194,227	Owner occupied	$	250,844	$	322	$	—	$	—	$	322	$	3,062	$	254,228
Non-owner occupied	Non-owner occupied	509,387		—		—		—		—		—		509,387		Non-owner occupied	558,695		—		—		—		—		—		558,695
Multi-family	Multi-family	112,002		—		—		—		—		—		112,002		Multi-family	93,158		—		—		—		—		—		93,158
Non-owner occupied residential	Non-owner occupied residential	98,459		—		251		—		251		171		98,881		Non-owner occupied residential	101,254		310		—		—		310		100		101,664
Acquisition and development:	Acquisition and development:															Acquisition and development:
1-4 family residential construction	1-4 family residential construction	12,246		—		—		—		—		—		12,246		1-4 family residential construction	15,115		—		—		—		—		—		15,115
Commercial and land development	Commercial and land development	71,774		10		—		—		10		—		71,784		Commercial and land development	105,204		—		—		—		—		—		105,204
Commercial and industrial	Commercial and industrial	534,967		7		—		—		7		2,941		537,915		Commercial and industrial	440,652		207		—		—		207		161		441,020
Municipal	Municipal	13,631		—		—		—		—		—		13,631		Municipal	14,626		—		—		—		—		—		14,626
Residential mortgage:	Residential mortgage:															Residential mortgage:
First lien	First lien	196,076		341		318		35		694		1,659		198,429		First lien	194,216		2,741		—		56		2,797		1,703		198,716
Home equity - term	Home equity - term	7,041		15		—		—		15		7		7,063		Home equity - term	5,786		12		—		—		12		6		5,804
Home equity - lines of credit	Home equity - lines of credit	153,266		208		35		—		243		495		154,004		Home equity - lines of credit	163,725		437		230		—		667		426		164,818
Installment and other loans	Installment and other loans	18,891		70		41		—		111		37		19,039		Installment and other loans	15,231		83		—		—		83		52		15,366
Subtotal	Subtotal	1,917,923		889		645		35		1,569		9,116		1,928,608		Subtotal	1,958,506		4,112		230		56		4,398		5,510		1,968,414
Loans acquired with credit deterioration:	Loans acquired with credit deterioration:															Loans acquired with credit deterioration:
Commercial real estate:	Commercial real estate:															Commercial real estate:
Owner occupied	Owner occupied	2,358		—		—		—		—		—		2,358		Owner occupied	2,298		—		—		—		—		—		2,298
Non-owner occupied	Non-owner occupied	316		—		—		—		—		—		316		Non-owner occupied	304		—		—		—		—		—		304

Non-owner occupied residential	Non-owner occupied residential	1,081		—		—		126		126		—		1,207		Non-owner occupied residential	494		—		—		111		111		—		605

Commercial and industrial	Commercial and industrial	2,290		—		—		—		—		—		2,290		Commercial and industrial	2,150		—		—		—		—		—		2,150

Residential mortgage:	Residential mortgage:															Residential mortgage:
First lien	First lien	4,730		—		—		201		201		—		4,931		First lien	3,837		608		—		70		678		—		4,515
Home equity - term	Home equity - term	16		—		—		—		—		—		16		Home equity - term	15		—		—		1		1		—		16

Installment and other loans	Installment and other loans	38		—		—		—		—		—		38		Installment and other loans	2		3		—		—		3		—		5
Subtotal	Subtotal	10,829		—		—		327		327		—		11,156		Subtotal	9,100		611		—		182		793		—		9,893
		$	1,928,752	$	889	$	645	$	362	$	1,896	$	9,116	$	1,939,764		$	1,967,606	$	4,723	$	230	$	238	$	5,191	$	5,510	$	1,978,307

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				Days Past Due															Days Past Due
		Current		30-59		60-89		90+ (still accruing)		Total Past Due		Non- Accrual		Total Loans			Current		30-59		60-89		90+ (still accruing)		Total Past Due		Non- Accrual		Total Loans
December 31, 2020
December 31, 2021																December 31, 2021
Commercial real estate:	Commercial real estate:															Commercial real estate:
Owner occupied	Owner occupied	$	168,262	$	958	$	—	$	—	$	958	$	3,232	$	172,452	Owner occupied	$	231,371	$	314	$	—	$	891	$	1,205	$	3,763	$	236,339
Non-owner occupied	Non-owner occupied	409,130		108		—		—		108		—		409,238		Non-owner occupied	551,473		—		—		—		—		—		551,473
Multi-family	Multi-family	113,635		—		—		—		—		—		113,635		Multi-family	93,255		—		—		—		—		—		93,255
Non-owner occupied residential	Non-owner occupied residential	112,443		484		—		—		484		268		113,195		Non-owner occupied residential	104,645		161		—		—		161		122		104,928
Acquisition and development:	Acquisition and development:															Acquisition and development:
1-4 family residential construction	1-4 family residential construction	9,486		—		—		—		—		—		9,486		1-4 family residential construction	12,279		—		—		—		—		—		12,279
Commercial and land development	Commercial and land development	50,922		32		58		—		90		814		51,826		Commercial and land development	93,793		132		—		—		132		—		93,925
Commercial and industrial	Commercial and industrial	640,573		9		310		—		319		3,639		644,531		Commercial and industrial	483,088		128		—		—		128		250		483,466
Municipal	Municipal	19,677		846		—		—		846		—		20,523		Municipal	14,989		—		—		—		—		—		14,989
Residential mortgage:	Residential mortgage:															Residential mortgage:
First lien	First lien	230,903		5,758		535		83		6,376		1,730		239,009		First lien	189,043		2,995		281		96		3,372		1,831		194,246
Home equity - term	Home equity - term	10,099		40		—		1		41		10		10,150		Home equity - term	6,042		16		—		—		16		7		6,065
Home equity - lines of credit	Home equity - lines of credit	156,153		268		—		—		268		600		157,021		Home equity - lines of credit	159,628		641		—		—		641		436		160,705
Installment and other loans	Installment and other loans	26,052		168		49		14		231		17		26,300		Installment and other loans	17,467		109		8		—		117		40		17,624
Subtotal	Subtotal	1,947,335		8,671		952		98		9,721		10,310		1,967,366		Subtotal	1,957,073		4,496		289		987		5,772		6,449		1,969,294
Loans acquired with credit deterioration:	Loans acquired with credit deterioration:															Loans acquired with credit deterioration:
Commercial real estate:	Commercial real estate:															Commercial real estate:
Owner occupied	Owner occupied	2,456		—		—		—		—		—		2,456		Owner occupied	2,329		—		—		—		—		—		2,329
Non-owner occupied	Non-owner occupied	329		—		—		—		—		—		329		Non-owner occupied	310		—		—		—		—		—		310

Non-owner occupied residential	Non-owner occupied residential	1,161		—		—		149		149		—		1,310		Non-owner occupied residential	479		—		587		118		705		—		1,184

Commercial and industrial	Commercial and industrial	2,837		—		—		—		—		—		2,837		Commercial and industrial	2,262		—		—		—		—		—		2,262

Residential mortgage:	Residential mortgage:															Residential mortgage:
First lien	First lien	4,341		655		9		307		971		—		5,312		First lien	3,937		387		166		95		648		—		4,585
Home equity - term	Home equity - term	19		—		—		—		—		—		19		Home equity - term	15		—		—		1		1		—		16

Installment and other loans	Installment and other loans	57		4		—		—		4		—		61		Installment and other loans	6		—		—		—		—		—		6
Subtotal	Subtotal	11,200		659		9		456		1,124		—		12,324		Subtotal	9,338		387		753		214		1,354		—		10,692
		$	1,958,535	$	9,330	$	961	$	554	$	10,845	$	10,310	$	1,979,690		$	1,966,411	$	4,883	$	1,042	$	1,201	$	7,126	$	6,449	$	1,979,986

The Company maintains its ALL at a level management believes adequate for probable incurred credit losses. The ALL is established and maintained through a provision for loan losses charged to earnings. On a quarterly basis, management assesses the adequacy of the ALL utilizing a defined methodology, which considers specific credit evaluation of impaired loans as discussed above, historical loan loss experience, and qualitative factors. Management believes its approach properly addresses relevant accounting guidance for loans individually identified as impaired and for loans collectively evaluated for impairment, and other bank regulatory guidance.

In connection with its quarterly evaluation of the adequacy of the ALL, management reviews its methodology to determine if it properly addresses the current risk in the loan portfolio. For each loan class, general allowances based on quantitative factors, principally historical loss trends, are provided for loans that are collectively evaluated for impairment. An

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adjustment to historical loss factors may be incorporated for delinquency and other potential risk not elsewhere defined within the ALL methodology.

In addition to this quantitative analysis, adjustments to the ALL requirements are allocated on loans collectively evaluated for impairment based on additional qualitative factors, including:

Nature and Volume of Loans – including loan growth in the current and subsequent quarters based on the Company’s targeted growth and strategic plan, coupled with the types of loans booked based on risk management and credit culture; the number of exceptions to loan policy; and supervisory loan to value exceptions.

Concentrations of Credit and Changes within Credit Concentrations – including the composition of the Company’s overall portfolio makeup and management's evaluation related to concentration risk management and the inherent risk associated with the concentrations identified.

Underwriting Standards and Recovery Practices – including changes to underwriting standards and perceived impact on anticipated losses; trends in the number of exceptions to loan policy; supervisory loan to value exceptions; and administration of loan recovery practices.

Delinquency Trends – including delinquency percentages noted in the portfolio relative to economic conditions; severity of the delinquencies; and whether the ratios are trending upwards or downwards.

Classified Loans Trends – including internal loan ratings of the portfolio; severity of the ratings; whether the loan segment’s ratings show a more favorable or less favorable trend; and underlying market conditions and impact on the collateral values securing the loans.

Experience, Ability and Depth of Management/Lending staff – including the ~~years’~~level of experience of senior and middle management and the lending staff; turnover of the staff; and instances of repeat ~~criticisms of ratings.~~criticisms.

Quality of Loan Review – including the ~~years~~level of experience of the loan review staff; in-house versus outsourced provider of review; turnover of ~~staff~~the staff; and ~~the perceived quality~~instances of ~~their work in relation to other external information.~~repeat criticisms.

National and Local Economic Conditions – including trends in the consumer price index, unemployment rates, the housing price index, housing statistics compared to the prior year, bankruptcy rates, regulatory and legal environment risks and competition.

All factors noted above were ~~evaluated~~deemed appropriate at March 31, 2022 and ~~remained~~were unchanged for the ~~nine~~three months ended ~~September 30, 2021,~~March 31, 2022, except for a reduction in the National and Local Economic ~~Conditions qualitative~~Conditions. This factor ~~during~~had been previously increased to account for economic concerns in the ~~three months ended March 31, 2021.~~

~~COVID-19~~ ~~– during the nine months ended September 30, 2020, a qualitative allocation was implemented~~commercial real estate portfolio associated with the ~~potential impact of the~~ COVID-19 pandemic on the Company's commercial loan portfolio. The factor assumes downgrades of loans which were granted deferrals or forbearances based upon identified hardships resulting from the economic shutdown driven by the pandemic. The ~~qualitative reserve on~~additional allocation was removed at March 31, 2022 as these loans was reduced over time as sustained performance was demonstrated after the loans were removed from deferral status or the forbearance period ended. During the three and nine months ended September 30, 2021, this qualitative reserve was reduced by $1.0 million and $2.7 million, respectively. This reserve is zero at September 30, 2021.concerns have subsided.

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The following table presents the activity in the ALL for the three ~~and nine~~ months ended ~~September 30, 2021~~March 31, 2022 and ~~2020:~~2021:
Commercial Consumer
Commercial
Real Estate Acquisition
and
Development Commercial
and
Industrial Municipal Total Residential
Mortgage Installment
and Other Total Unallocated Total
Three Months Ended
September 30, 2021
Balance, beginning of period $ 11,315 $ 1,243 $ 3,495 $ 29 $ 16,082 $ 2,863 $ 227 $ 3,090 $ 209 $ 19,381
Provision for loan losses (179) 290 386 (2) 495 (147) 18 (129) (1) 365
Charge-offs (89) — (55) — (144) — (20) (20) — (164)
Recoveries 305 8 60 — 373 5 5 10 — 383
Balance, end of period $ 11,352 $ 1,541 $ 3,886 $ 27 $ 16,806 $ 2,721 $ 230 $ 2,951 $ 208 $ 19,965
September 30, 2020
Balance, beginning of period $ 9,347 $ 1,069 $ 2,916 $ 75 $ 13,407 $ 3,552 $ 386 $ 3,938 $ 172 $ 17,517
Provision for loan losses 1,520 (219) 963 (19) 2,245 (71) 18 (53) 8 2,200
Charge-offs (3) — (193) — (196) — (31) (31) — (227)
Recoveries 171 — 45 — 216 6 13 19 — 235
Balance, end of period $ 11,035 $ 850 $ 3,731 $ 56 $ 15,672 $ 3,487 $ 386 $ 3,873 $ 180 $ 19,725
Nine Months Ended
September 30, 2021
Balance, beginning of period $ 11,151 $ 1,114 $ 3,942 $ 40 $ 16,247 $ 3,362 $ 324 $ 3,686 $ 218 $ 20,151
Provision for loan losses 133 418 109 (13) 647 (578) (69) (647) (10) (10)
Charge-offs (270) — (621) — (891) (92) (49) (141) — (1,032)
Recoveries 338 9 456 — 803 29 24 53 — 856
Balance, end of period $ 11,352 $ 1,541 $ 3,886 $ 27 $ 16,806 $ 2,721 $ 230 $ 2,951 $ 208 $ 19,965
September 30, 2020
Balance, beginning of period $ 7,634 $ 959 $ 2,356 $ 100 $ 11,049 $ 3,147 $ 319 $ 3,466 $ 140 $ 14,655
Provision for loan losses 2,780 (117) 1,875 (44) 4,494 329 162 491 40 5,025
Charge-offs (3) — (689) — (692) (109) (117) (226) — (918)
Recoveries 624 8 189 — 821 120 22 142 — 963
Balance, end of period $ 11,035 $ 850 $ 3,731 $ 56 $ 15,672 $ 3,487 $ 386 $ 3,873 $ 180 $ 19,725

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	Commercial										Consumer
	Commercial Real Estate		Acquisition and Development		Commercial and Industrial		Municipal		Total		Residential Mortgage		Installment and Other		Total		Unallocated		Total














Three Months Ended
March 31, 2022
Balance, beginning of period	$	12,037	$	2,062	$	3,814	$	30	$	17,943	$	2,785	$	215	$	3,000	$	237	$	21,180
Provision for loan losses	(523)		258		500		(1)		234		72		(6)		66		—		300

Charge-offs	—		—		(61)		—		(61)		(10)		(13)		(23)		—		(84)
Recoveries	32		1		48		—		81		26		5		31		—		112
Balance, end of period	$	11,546	$	2,321	$	4,301	$	29	$	18,197	$	2,873	$	201	$	3,074	$	237	$	21,508
March 31, 2021
Balance, beginning of period	$	11,151	$	1,114	$	3,942	$	40	$	16,247	$	3,362	$	324	$	3,686	$	218	$	20,151
Provision for loan losses	(494)		(69)		(54)		(2)		(619)		(289)		(106)		(395)		14		(1,000)
Charge-offs	—		—		(454)		—		(454)		(21)		(20)		(41)		—		(495)
Recoveries	14		1		280		—		295		6		10		16		—		311
Balance, end of period	$	10,671	$	1,046	$	3,714	$	38	$	15,469	$	3,058	$	208	$	3,266	$	232	$	18,967

The following table summarizes the ending loan balance individually evaluated for impairment based upon loan segment, as well as the related ALL loss allocation for each at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020.~~2021. Accruing PCI loans are excluded from loans individually evaluated for impairment.


		Commercial										Consumer											Commercial										Consumer
		Commercial Real Estate		Acquisition and Development		Commercial and Industrial		Municipal		Total		Residential Mortgage		Installment and Other		Total		Unallocated		Total			Commercial Real Estate		Acquisition and Development		Commercial and Industrial		Municipal		Total		Residential Mortgage		Installment and Other		Total		Unallocated		Total
September 30, 2021
March 31, 2022																						March 31, 2022
Loans allocated by:	Loans allocated by:																					Loans allocated by:
Individually evaluated for impairment	Individually evaluated for impairment	$	4,003	$	—	$	2,941	$	—	$	6,944	$	2,974	$	37	$	3,011	$	—	$	9,955	Individually evaluated for impairment	$	3,162	$	—	$	161	$	—	$	3,323	$	2,710	$	52	$	2,762	$	—	$	6,085
Collectively evaluated for impairment	Collectively evaluated for impairment	914,375		84,030		537,264		13,631		1,549,300		361,469		19,040		380,509		—		1,929,809		Collectively evaluated for impairment	1,007,790		120,319		443,009		14,626		1,585,744		371,159		15,319		386,478		—		1,972,222

		$	918,378	$	84,030	$	540,205	$	13,631	$	1,556,244	$	364,443	$	19,077	$	383,520	$	—	$	1,939,764		$	1,010,952	$	120,319	$	443,170	$	14,626	$	1,589,067	$	373,869	$	15,371	$	389,240	$	—	$	1,978,307
ALL allocated by:	ALL allocated by:																					ALL allocated by:
Individually evaluated for impairment	Individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—	$	29	$	—	$	29	$	—	$	29	Individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—	$	29	$	—	$	29	$	—	$	29
Collectively evaluated for impairment	Collectively evaluated for impairment	11,352		1,541		3,886		27		16,806		2,692		230		2,922		208		19,936		Collectively evaluated for impairment	11,546		2,321		4,301		29		18,197		2,844		201		3,045		237		21,479

		$	11,352	$	1,541	$	3,886	$	27	$	16,806	$	2,721	$	230	$	2,951	$	208	$	19,965		$	11,546	$	2,321	$	4,301	$	29	$	18,197	$	2,873	$	201	$	3,074	$	237	$	21,508
December 31, 2020
December 31, 2021																						December 31, 2021
Loans allocated by:	Loans allocated by:																					Loans allocated by:
Individually evaluated for impairment	Individually evaluated for impairment	$	3,528	$	814	$	3,639	$	—	$	7,981	$	3,246	$	17	$	3,263	$	—	$	11,244	Individually evaluated for impairment	$	3,885	$	—	$	250	$	—	$	4,135	$	3,078	$	40	$	3,118	$	—	$	7,253
Collectively evaluated for impairment	Collectively evaluated for impairment	809,087		60,498		643,729		20,523		1,533,837		408,265		26,344		434,609		—		1,968,446		Collectively evaluated for impairment	985,933		106,204		485,478		14,989		1,592,604		362,539		17,590		380,129		—		1,972,733
		$	812,615	$	61,312	$	647,368	$	20,523	$	1,541,818	$	411,511	$	26,361	$	437,872	$	—	$	1,979,690		$	989,818	$	106,204	$	485,728	$	14,989	$	1,596,739	$	365,617	$	17,630	$	383,247	$	—	$	1,979,986
ALL allocated by:	ALL allocated by:																					ALL allocated by:
Individually evaluated for impairment	Individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—	$	33	$	—	$	33	$	—	$	33	Individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—	$	28	$	—	$	28	$	—	$	28
Collectively evaluated for impairment	Collectively evaluated for impairment	11,151		1,114		3,942		40		16,247		3,329		324		3,653		218		20,118		Collectively evaluated for impairment	12,037		2,062		3,814		30		17,943		2,757		215		2,972		237		21,152
		$	11,151	$	1,114	$	3,942	$	40	$	16,247	$	3,362	$	324	$	3,686	$	218	$	20,151		$	12,037	$	2,062	$	3,814	$	30	$	17,943	$	2,785	$	215	$	3,000	$	237	$	21,180

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The following table provides activity for the accretable yield of ~~PCI~~purchased impaired loans for the three ~~and nine~~ months ended ~~September 30, 2021~~March 31, 2022 and ~~2020:~~2021:
Three Months Ended Nine Months Ended
September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020
Accretable yield, beginning of period $ 3,016 $ 4,182 $ 3,438 $ 6,950
Additions (1)
— — — 570
Accretion of income (203) (546) (878) (2,459)
Reclassifications from nonaccretable difference due to improvement in expected cash flows 11 139 128 1,260
Other changes, net (2)
(12) (231) 124 (2,777)
Accretable yield, end of period $ 2,812 $ 3,544 $ 2,812 $ 3,544

~~(1)~~ ~~The amount for the nine months ended September 30, 2020 reflects a measurement period adjustment for Hamilton loans that should have been in the PCI pool at the acquisition date.~~

~~(2)~~ ~~The amount for the nine months ended September 30, 2020 represents the impact of PCI loans sold during that period.~~


	Three Months Ended
		March 31, 2022		March 31, 2021
Accretable yield, beginning of period		$	2,661	$	3,438

Accretion of income		(314)		(466)
Reclassifications from nonaccretable difference due to improvement in expected cash flows		243		44
Other changes, net		(73)		56
Accretable yield, end of period		$	2,517	$	3,072

NOTE 4. LEASES

A lease provides the lessee the right to control the use of an identified asset for a period of time in exchange for consideration. The Company has primarily entered into operating leases for branches and office space. Most of the Company's

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leases contain renewal options, which the Company is reasonably certain to exercise. Including renewal options, the Company's leases range from ~~seven~~6 to 3231 years. Operating lease right-of-use assets and lease liabilities are included in other assets and accrued interest and other liabilities on the Company's unaudited condensed consolidated balance sheets.

The Company uses its incremental borrowing rate to determine the present value of the lease payments, as the rate implicit in the Company's leases is not readily determinable. Lease agreements that contain non-lease components are generally accounted for as a single lease component, while variable costs, such as common area maintenance expenses and property taxes, are expensed as incurred.

The following table summarizes the Company's operating leases at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020:~~2021:


		September 30, 2021			December 31, 2020				March 31, 2022			December 31, 2021
Operating lease ROU assets	Operating lease ROU assets	$	9,301		$	8,686		Operating lease ROU assets	$	10,305		$	10,515
Operating lease ROU liabilities	Operating lease ROU liabilities	9,832			9,143			Operating lease ROU liabilities	10,937			11,119
Weighted-average remaining lease term (in years)	Weighted-average remaining lease term (in years)	16.0			16.8			Weighted-average remaining lease term (in years)	14.4			14.6
Weighted-average discount rate	Weighted-average discount rate	4.2		%	4.3		%	Weighted-average discount rate	4.1		%	4.1		%

The following table presents information related to the Company's operating leases for the three ~~and nine~~ months ended ~~September 30, 2021~~March 31, 2022 and ~~2020:~~2021:


		Three Months Ended				Nine Months Ended					Three Months Ended
		September 30, 2021		September 30, 2020		September 30, 2021		September 30, 2020				March 31, 2022		March 31, 2021
Cash paid for operating lease liabilities	Cash paid for operating lease liabilities	$	331	$	210	$	947	$	847	Cash paid for operating lease liabilities		$	294	$	343
Operating lease expense	Operating lease expense	388		421		1,179		1,171		Operating lease expense		394		403

The following table presents expected future maturities of the Company's lease liabilities as of ~~September 30, 2021:~~March 31, 2022:


Remainder of 2021		$	296
2022	2022	926		2022	$	868
2023	2023	951		2023	1,216
2024	2024	974		2024	1,246
2025	2025	991		2025	1,269
2026				2026	1,302
Thereafter	Thereafter	10,387		Thereafter	9,687
		14,525			15,588
Less: imputed interest	Less: imputed interest	4,693		Less: imputed interest	4,651
Total lease liabilities	Total lease liabilities	$	9,832	Total lease liabilities	$	10,937

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NOTE 5. GOODWILL AND OTHER INTANGIBLE ASSETS

The following table presents changes in goodwill for the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 and ~~2020:~~2021:
September 30, 2021 September 30, 2020
Balance, beginning of year $ 18,724 $ 19,925
Adjustments to acquired goodwill (1)
— (1,201)
Balance, end of period $ 18,724 $ 18,724

~~(1)~~ ~~The Company finalized its purchase accounting adjustments associated with Hamilton as of May 1, 2020.~~


	March 31, 2022		March 31, 2021
Balance, beginning of year	$	18,724	$	18,724



Balance, end of period	$	18,724	$	18,724

Goodwill is not amortized but is reviewed for potential impairment on at least an annual basis, with testing between annual tests if an event occurs or circumstances change that could potentially reduce the fair value of a reporting unit.

The Company ~~typically completes~~conducted its last annual goodwill impairment ~~assessment~~test as of November ~~30. Due to the severe economic impact~~30, 2021 using generally accepted valuation methods. As a result of ~~COVID-19 and a resulting sustained decline in the Company's market value below book value, management performed a quantitative Step 1~~that impairment ~~analysis of its~~test, no goodwill ~~to determine whether the Company's goodwill~~impairment was ~~impaired as~~ of August 31, 2020. This analysis, which was performed in accordance with ASU 2017-04, Intangibles-Goodwill and Other, considered several factors, such as future cash flow projections and estimated market acquisition

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premiums in its analysis. In performing the analysis, management made several assumptions with respect to future operating performance, economic and market conditions and various others, many of which required significant judgment. The analysis performed and the related assumptions reflected the best currently available estimates and judgements regarding future performance of the Company. It was concluded that ~~no impairment existed at August 31, 2020 as the calculated fair value of the reporting unit exceeded its book value.~~identified. No changes ~~have~~ occurred that would impact the results of that analysis through ~~September 30, 2021.~~March 31, 2022.

The following table presents changes in and components of other intangible assets for the three ~~and nine~~ months ended ~~September 30, 2021~~March 31, 2022 and ~~2020:~~2021:


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended March 31,
		2021		2020		2021		2020				2022		2021
Beginning of period	Beginning of period	$	4,800	$	6,160	$	5,458	$	7,180	Beginning of period		$	4,183	$	5,458

Amortization expense	Amortization expense	(314)		(357)		(972)		(1,224)		Amortization expense		(292)		(334)
Impairment		—		—		—		(153)

Balance, end of period	Balance, end of period	$	4,486	$	5,803	$	4,486	$	5,803	Balance, end of period		$	3,891	$	5,124

No impairment charges were recorded in the three ~~and nine~~ months ended ~~September 30,~~March 31, 2022 and March 31, 2021. During the nine months ended September 30, 2020, the Company recorded an impairment charge of $153 thousand for the full remaining balance attributable to a customer list intangible asset due to the dissolution of Wheatland Advisors, Inc.

The following table presents the components of other identifiable intangible assets at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020:~~2021:


		September 30, 2021				December 31, 2020					March 31, 2022				December 31, 2021
		Gross Amount		Accumulated Amortization		Gross Amount		Accumulated Amortization			Gross Amount		Accumulated Amortization		Gross Amount		Accumulated Amortization
Amortized intangible assets:	Amortized intangible assets:									Amortized intangible assets:
Core deposit intangibles	Core deposit intangibles	$	8,390	$	3,906	$	8,390	$	2,935	Core deposit intangibles	$	8,390	$	4,500	$	8,390	$	4,208
Other customer relationship intangibles	Other customer relationship intangibles	25		23		25		22		Other customer relationship intangibles	25		24		25		24

Total	Total	$	8,415	$	3,929	$	8,415	$	2,957	Total	$	8,415	$	4,524	$	8,415	$	4,232

The following table presents future estimated aggregate amortization expense for intangible assets remaining at ~~September 30, 2021:~~March 31, 2022:


Remainder of 2021		$	303
2022	2022	1,105		2022	$	813
2023	2023	935		2023	935
2024	2024	766		2024	766
2025	2025	596		2025	596
2026				2026	427
Thereafter	Thereafter	781		Thereafter	354
		$	4,486		$	3,891

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NOTE 6. SHARE-BASED COMPENSATION PLANS

The Company maintains share-based compensation plans under the shareholder-approved 2011 Plan. The purpose of the share-based compensation plans is to provide officers, employees, and non-employee members of the Board of Directors of the Company with additional incentive to further the success of the Company. At March 31, 2022, 881,920 shares of the common stock of the Company were ~~originally~~ reserved, of which ~~258,020~~137,443 shares are available to be ~~issued as~~issued. At the Company's 2022 Annual Meeting of ~~September 30, 2021.~~Shareholders held on April 26, 2022, the Company's shareholders approved an amendment to the 2011 Plan increasing the number of shares available for issuance under the 2011 Plan by 400,000.

The 2011 Plan incentive awards may consist of grants of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, deferred stock units and performance shares. All employees and members of the Board of Directors of the Company and its subsidiaries, are eligible to participate in the 2011 Plan. The 2011 Plan allows for the Compensation Committee of

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the Board of Directors to determine the type of incentive to be awarded, its term, manner of exercise, vesting and restrictions on shares. Generally, awards are nonqualified under the IRC, unless the awards are deemed to be incentive awards to employees at the Compensation Committee’s discretion.

The following table ~~below~~ presents a summary of nonvested restricted shares activity for the ~~nine~~three months ended ~~September 30, 2021:~~March 31, 2022:


		Shares	Weighted Average Grant Date Fair Value			Shares	Weighted Average Grant Date Fair Value
Nonvested shares, beginning of year	Nonvested shares, beginning of year	245,576	$	21.45	Nonvested shares, beginning of year	274,697	$	20.05
Granted	Granted	127,847	19.21		Granted	121,949	25.02
Forfeited	Forfeited	(29,388)	19.69		Forfeited	(10,622)	20.02
Vested	Vested	(78,588)	23.52		Vested	(54,054)	19.31
Nonvested shares, at period end	Nonvested shares, at period end	265,447	$	19.92	Nonvested shares, at period end	331,970	$	22.00

The following table presents restricted shares compensation expense, with tax benefit information, and fair value of shares vested, for the three ~~and nine~~ months ended ~~September 30, 2021~~March 31, 2022 and ~~2020:~~2021:


		Three months ended September 30,				Nine months ended September 30,					Three months ended March 31,
		2021		2020		2021		2020				2022		2021
Restricted share award expense	Restricted share award expense	$	468	$	434	$	1,380	$	1,607	Restricted share award expense		$	330	$	434
Restricted share award tax benefit	Restricted share award tax benefit	98		91		316		337		Restricted share award tax benefit		69		91
Fair value of shares vested	Fair value of shares vested	—		225		1,539		1,314		Fair value of shares vested		1,324		1,028

The unrecognized compensation expense related to the share awards totaled ~~$2.6~~$4.6 million at ~~September 30, 2021~~March 31, 2022 and ~~$2.0~~$2.3 million at December 31, ~~2020.~~2021. The unrecognized compensation expense at ~~September 30, 2021~~March 31, 2022 is expected to be recognized over a weighted-average period of ~~1.8~~2.3 years.

The Company maintains an employee stock purchase plan to provide its employees with an opportunity to purchase Company common stock. Eligible employees may purchase shares in an amount that does not exceed 10% of their annual salary, at the lower of 95% of the fair market value of the shares on the semi-annual offering date or related purchase date. The purchases occur in March and September of each year. The Company reserved 350,000 shares of its common stock to be issued under the employee stock purchase plan. At ~~September 30, 2021, 151,480~~March 31, 2022, 147,527 shares were available to be issued under the employee stock purchase plan.

The following table presents information for the employee stock purchase plan for the three ~~and nine~~ months ended ~~September 30, 2021~~March 31, 2022 and ~~2020:~~2021:


		Three months ended September 30,				Nine months ended September 30,					Three months ended March 31,
		2021		2020		2021		2020				2022		2021
Shares purchased	Shares purchased	3,271		4,218		8,755		7,831		Shares purchased		3,953		5,484
Weighted average price of shares purchased	Weighted average price of shares purchased	$	19.16	$	13.08	$	15.58	$	14.85	Weighted average price of shares purchased		$	22.46	$	13.44
Compensation expense recognized	Compensation expense recognized	15		3		48		6		Compensation expense recognized		8		33

The Company issues ~~either~~ new shares or treasury shares, ~~when available, for award through~~depending on market conditions, in its share-based compensation plans.

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NOTE 7. DERIVATIVE FINANCIAL INSTRUMENTS

The Company is exposed to certain risk arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used as risk management tools by the Company to manage differences in the

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amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s borrowings and are not used for trading or speculative purposes.

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. The Company, however, discontinues cash flow hedge accounting if it is probable the forecasted hedged transactions will not occur in the initially identified time period due to circumstances, such as the impact of the COVID-19 pandemic. Upon discontinuance, the associated gains and losses deferred in ~~accumulated other comprehensive income (loss)~~AOCI are reclassified immediately into earnings and subsequent changes in the fair value of the cash flow hedge are recognized in earnings. ~~During the three months ended September 30,~~At March 31, 2022 and December 31, 2021, the Company terminated its interest rate derivative of $50.0 million that was designated as a cash flow hedge of interest-rate risk associated with overnight borrowings due to the unprecedented nature and impact of the COVID-19 pandemic, and reclassified $398.0 thousand of the realized losses from AOCI to current earnings because the hedged forecasted transaction was determined to behad no ~~longer probable of occurring. At December 31, 2020, the Company had 1~~ interest rate derivative designated as a hedging instrument with an aggregate notional amount of $50.0 million. At September 30, 2021 and December 31, 2020, the Company had cash collateral of zero and $1.7 million held with the counterparty for these derivatives, respectively. The cash collateral was settled with the derivative counterparty upon termination of the cash flow hedge.instrument.

The Company enters into interest rate swaps that allow its commercial loan customers to effectively convert a variable-rate commercial loan agreement to a fixed-rate commercial loan agreement. Under these agreements, the Company enters into a variable-rate loan agreement with a customer in addition to an interest rate swap agreement, which serves to effectively swap the customer’s variable-rate loan into a fixed-rate loan. The Company then enters into a corresponding swap agreement with a third party in order to economically hedge its exposure through the customer agreement. The interest rate swaps with both the customers and third parties are not designated as hedges and are marked through earnings. At ~~September 30, 2021,~~March 31, 2022, the Company had 1114 customer and 1114 corresponding third-party broker interest rate derivatives not designated as a hedging instrument with an aggregate notional amount of ~~$64.9~~$120.6 million. The Company had ~~$61.3~~$75.8 million in notional amount of such derivative instruments at December 31, ~~2020.~~2021. During the three months ended March 31, 2022 and 2021, the Company entered into new interest rate swaps with its commercial loan customers and recognized swap fee income of $953 thousand and zero, respectively, which is included in noninterest income in the unaudited condensed consolidated statements of income. At March 31, 2022 and December 31, 2021, the Company provided cash collateral of zero and $260 thousand to the counterparties for these derivatives, respectively. At March 31, 2022 and December 31, 2021, the Company was holding cash collateral of $2.6 million and $490 thousand from the counterparties for these derivatives, respectively.

The Company entered into a risk participation agreement with a financial institution counterparty (the “Agent Bank”) for an interest rate derivative contract related to a loan in which the Company is a participant. The risk participation agreement provides credit protection to the Agent Bank should the borrower fail to perform on its interest rate derivative contracts with the Agent Bank. The Company received an upfront fee of $53 thousandupon entry into the risk participation agreement during the three months ended March 31, 2021, and is included in noninterest income in the ~~nine months ended~~ ~~September 30, 2021~~unaudited condensed consolidated statements of income. The Company manages its credit risk on the risk participation agreement by monitoring the creditworthiness of the borrower, which is based on the same credit review process as though the Company had entered into the derivative instruments directly with the borrower. The notional amount of such risk participation agreement reflects the Company’s pro-rata share of the derivative instrument, consistent with its share of the related participated loan. ~~As of September 30, 2021 and December 31, 2020, the~~The total notional amount of the risk participation agreement was $15.9 million at both March 31, 2022 and ~~zero, respectively.~~December 31, 2021.

As a part of its normal residential mortgage operations, the Company will enter into an interest rate lock commitment with a potential borrower. The Company will enter into a corresponding commitment with an investor to sell that loan at a specific

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price shortly after origination. In accordance with FASB ASC 820, adjustments are recorded through earnings to account for the net change in fair value of these ~~transactions.~~transactions for the held for sale pipeline.

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The following table summarizes the fair value of the Company's derivative instruments at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020:~~2021:


		September 30, 2021					December 31, 2020						March 31, 2022					December 31, 2021
		Notional Amount		Balance Sheet Location	Fair Value		Notional Amount		Balance Sheet Location	Fair Value			Notional Amount		Balance Sheet Location	Fair Value		Notional Amount		Balance Sheet Location	Fair Value
Derivatives designated as hedging instruments:

Interest rate swaps - balance sheet hedge		$	—		$	—	$	50,000	Other liabilities	$	(1,230)
Total derivatives designated as hedging instruments					$	—				$	(1,230)

Derivatives not designated as hedging instruments:	Derivatives not designated as hedging instruments:											Derivatives not designated as hedging instruments:
Interest rate swap - commercial borrower		$	32,462	Other assets	$	277	$	30,673	Other assets	$	690
Interest rate swap - counterparty		32,462		Other liabilities	(269)		30,673		Other liabilities	(726)
Interest rate swaps												Interest rate swaps	$	60,279	Other assets	$	3,067	$	37,915	Other assets	$	764
Interest rate swaps												Interest rate swaps	60,279		Other liabilities	(3,024)		37,915		Other liabilities	(758)
Risk participation	Risk participation	15,855		Other liabilities	(3)		—			—		Risk participation	15,855		Other liabilities	(1)		15,855		Other liabilities	(2)
Interest rate lock commitments with customers	Interest rate lock commitments with customers	22,025		Other assets	546		22,560		Other assets	673		Interest rate lock commitments with customers	12,302		Other assets	300		16,604		Other assets	353
Forward sale commitment	Forward sale commitment	6,198		Other assets	23		10,400		Other liabilities	(61)		Forward sale commitment	7,537		Other assets	353		8,665		Other assets	52
Total derivatives not designated as hedging instruments	Total derivatives not designated as hedging instruments				$	574				$	576	Total derivatives not designated as hedging instruments				$	695				$	409

The following tables summarize the effect of the Company's derivative financial instruments on OCI and net income for the three ~~and nine~~ months ended ~~September 30, 2021~~March 31, 2022 and ~~2020:~~2021:


		Amount of (Loss) Gain Recognized in OCI on Derivative				Amount of Gain (Loss) Recognized in OCI on Derivative					Amount of Gain Recognized in OCI on Derivative
		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended March 31,
		2021		2020		2021		2020				2022		2021
Derivatives in cash flow hedging relationships:	Derivatives in cash flow hedging relationships:									Derivatives in cash flow hedging relationships:
Interest rate products	Interest rate products	$	(183)	$	208	$	473	$	(1,893)	Interest rate products		$	—	$	739
Total	Total	$	(183)	$	208	$	473	$	(1,893)	Total		$	—	$	739


		Amount of Loss Reclassified from AOCI into Income				Amount of Loss Reclassified from AOCI into Income				Location of Loss Recognized from AOCI into Income		Amount of Loss Reclassified from AOCI into Income			Location of Loss Recognized from AOCI into Income
		Three Months Ended September 30,				Nine Months Ended September 30,						Three Months Ended March 31,
		2021		2020		2021		2020					2022		2021
Derivatives in cash flow hedging relationships:	Derivatives in cash flow hedging relationships:										Derivatives in cash flow hedging relationships:
Interest rate products	Interest rate products	$	(581)	$	(114)	$	(757)	$	(239)	Interest expense / Other operating expenses(1)	Interest rate products		$	—	$	(87)	Interest expense
Total	Total	$	(581)	$	(114)	$	(757)	$	(239)		Total		$	—	$	(87)

~~(1)~~ ~~Includes $514 thousand recorded to other operating expenses due to the loss from the termination of an interest rate swap designated as a cash flow hedge.~~

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Amount of Gain (Loss) Recognized in Income Amount of Gain (Loss) Recognized in Income Location of Gain (Loss) Recognized in Income
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
Derivatives not designated as hedging instruments:
Interest rate products $ 8 $ (4) $ 44 $ (21) Other operating expenses
Risk participation agreement 1 — (3) — Other operating expenses
Interest rate lock commitments with customers 89 157 (128) 1,040 Mortgage banking activities
Forward sale commitment 1 71 84 (126) Mortgage banking activities
Total $ 99 $ 224 $ (3) $ 893

~~The following table is a summary of components for interest rate swaps designated as hedging at September 30, 2021 and~~ ~~December 31, 2020.~~ During the three ~~and nine~~ months ended September 30, 2021, the Company terminated its interest rate ~~derivative~~swap designated as a hedging instrument of $50.0 million.
September 30, 2021 December 31, 2020
Weighted average pay rate — % 0.77 %
Weighted average receive rate — % 0.09 %
Weighted average maturity in years 0.0 4.2


	Amount of Gain (Loss) Recognized in Income			Location of Gain (Loss) Recognized in Income
	Three Months Ended March 31,
		2022		2021
Derivatives not designated as hedging instruments:
Interest rate products		$	37	$	52	Other operating expenses
Risk participation agreement		2		4		Other operating expenses
Interest rate lock commitments with customers		(53)		(1)		Mortgage banking activities
Forward sale commitment		300		254		Mortgage banking activities
Total		$	286	$	309

NOTE 8. SHAREHOLDERS’ EQUITY AND REGULATORY CAPITAL

Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities and certain off-balance sheet items calculated under regulatory accounting practices. Capital

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amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. Under the Basel Committee on Banking Supervision's capital guidelines for U.S. Banks ("Basel III rules"), an entity must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The Company and the Bank have elected not to include net unrealized ~~gain~~gains or ~~loss on available for sale securities~~losses included in AOCI in computing regulatory capital.

The consolidated asset limit on small bank holding companies is $3.0 billion and a company with assets under that limit is not subject to the FRB consolidated capital rules, but may file reports that include capital amounts and ratios. The Company has elected to file those reports.

Management believes that the Company and the Bank met all capital adequacy requirements to which they are subject at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020.~~2021.

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At ~~September 30, 2021,~~March 31, 2022, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Bank's classification.

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The following table presents capital amounts and ratios at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020:~~
Actual For Capital Adequacy Purposes
(includes applicable capital conservation buffer) To Be Well
Capitalized Under
Prompt Corrective Action Provisions
Amount Ratio Amount Ratio Amount Ratio
September 30, 2021
Total risk-based capital:
Orrstown Financial Services, Inc. $ 291,785 15.6 % $ 195,965 10.5 % n/a n/a
Orrstown Bank 273,583 14.7 % 195,899 10.5 % $ 186,570 10.0 %
Tier 1 risk-based capital:
Orrstown Financial Services, Inc. 238,492 12.8 % 158,639 8.5 % n/a n/a
Orrstown Bank 252,238 13.5 % 158,585 8.5 % 149,256 8.0 %
Tier 1 common equity risk-based capital:
Orrstown Financial Services, Inc. 238,492 12.8 % 130,644 7.0 % n/a n/a
Orrstown Bank 252,238 13.5 % 130,599 7.0 % 121,271 6.5 %
Tier 1 leverage capital:
Orrstown Financial Services, Inc. 238,492 8.3 % 115,630 4.0 % n/a n/a
Orrstown Bank 252,238 8.7 % 115,706 4.0 % 144,633 5.0 %
December 31, 2020
Total risk-based capital:
Orrstown Financial Services, Inc. $ 271,184 15.6 % $ 183,099 10.5 % n/a n/a
Orrstown Bank 256,376 14.7 % 183,012 10.5 % $ 174,297 10.0 %
Tier 1 risk-based capital:
Orrstown Financial Services, Inc. 217,582 12.5 % 148,223 8.5 % n/a n/a
Orrstown Bank 234,677 13.5 % 148,152 8.5 % 139,437 8.0 %
Tier 1 common equity risk-based capital:
Orrstown Financial Services, Inc. 217,582 12.5 % 122,066 7.0 % n/a n/a
Orrstown Bank 234,677 13.5 % 122,008 7.0 % 113,293 6.5 %
Tier 1 leverage capital:
Orrstown Financial Services, Inc. 217,582 8.1 % 108,063 4.0 % n/a n/a
Orrstown Bank 234,677 8.7 % 108,148 4.0 % 135,185 5.0 %
2021:


	Actual				For Capital Adequacy Purposes (includes applicable capital conservation buffer)				To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
March 31, 2022
Total risk-based capital:
Orrstown Financial Services, Inc.	$	300,952	14.3	%	$	220,591	10.5	%	n/a		n/a
Orrstown Bank	288,988		13.8	%	220,509		10.5	%	$	210,009	10.0	%
Tier 1 risk-based capital:
Orrstown Financial Services, Inc.	245,833		11.7	%	178,574		8.5	%	n/a		n/a
Orrstown Bank	265,847		12.7	%	178,508		8.5	%	168,007		8.0	%
Tier 1 common equity risk-based capital:
Orrstown Financial Services, Inc.	245,833		11.7	%	147,061		7.0	%	n/a		n/a
Orrstown Bank	265,847		12.7	%	147,006		7.0	%	136,506		6.5	%
Tier 1 leverage capital:
Orrstown Financial Services, Inc.	245,833		8.8	%	112,328		4.0	%	n/a		n/a
Orrstown Bank	265,847		9.5	%	112,352		4.0	%	140,440		5.0	%
December 31, 2021
Total risk-based capital:
Orrstown Financial Services, Inc.	$	297,823	15.0	%	$	208,617	10.5	%	n/a		n/a
Orrstown Bank	278,780		14.0	%	208,550		10.5	%	$	198,619	10.0	%
Tier 1 risk-based capital:
Orrstown Financial Services, Inc.	243,075		12.2	%	168,880		8.5	%	n/a		n/a
Orrstown Bank	255,995		12.9	%	168,826		8.5	%	158,895		8.0	%
Tier 1 common equity risk-based capital:
Orrstown Financial Services, Inc.	243,075		12.2	%	139,078		7.0	%	n/a		n/a
Orrstown Bank	255,995		12.9	%	139,033		7.0	%	129,102		6.5	%
Tier 1 leverage capital:
Orrstown Financial Services, Inc.	243,075		8.5	%	114,384		4.0	%	n/a		n/a
Orrstown Bank	255,995		8.9	%	114,470		4.0	%	143,087		5.0	%

In September 2015, the Board of Directors of the Company authorized a share repurchase program under which the Company may repurchase up to 5% of the Company's outstanding shares of common stock, or approximately 416,000 shares, in accordance with all applicable securities laws and regulations, including Rule 10b-18 of the Exchange Act of 1934, as amended. On April 19, 2021, the Board of Directors authorized the additional future repurchase of up to 562,000 shares of its outstanding common stock. As of September 30, 2021, 201,518 shares had been repurchased at a total cost of $3.7 million, or $18.26 per share. Common stock available for future repurchase totals approximately 776,482 shares, or 7% of the Company's outstanding common stock at September 30, 2021. When and if appropriate, repurchases may be made in the open market or privately negotiated transactions, depending on market conditions, regulatory requirements and other corporate considerations, as determined by management. Share repurchases may not occur and may be discontinued at any time. At March 31, 2022, 415,805 shares had been repurchased at a total cost of $8.9 million, or $21.35 per share. Common stock available for future repurchase totals approximately 562,195 shares, or 5% of the Company's outstanding common stock at March 31, 2022.

On ~~October~~April 18, ~~2021,~~2022, the Board declared a cash dividend of $0.19 per common share, which will be paid on ~~November 8, 2021~~May 9, 2022 to shareholders of record at ~~November 1, 2021.~~May 2, 2022.

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NOTE 9. EARNINGS PER SHARE

The following table presents earnings per share for the three ~~and nine~~ months ended ~~September 30, 2021~~March 31, 2022 and ~~2020:~~2021:


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended March 31,
		2021		2020		2021		2020				2022		2021
Net income	Net income	$	7,192	$	4,977	$	26,175	$	16,404	Net income		$	8,368	$	10,207
Weighted average shares outstanding - basic	Weighted average shares outstanding - basic	10,979		10,941		10,976		10,939		Weighted average shares outstanding - basic		10,860		10,975
Dilutive effect of share-based compensation	Dilutive effect of share-based compensation	143		84		127		88		Dilutive effect of share-based compensation		147		99
Weighted average shares outstanding - diluted	Weighted average shares outstanding - diluted	11,122		11,025		11,103		11,027		Weighted average shares outstanding - diluted		11,007		11,074
Per share information:	Per share information:									Per share information:
Basic earnings per share	Basic earnings per share	$	0.66	$	0.45	$	2.38	$	1.50	Basic earnings per share		$	0.77	$	0.93
Diluted earnings per share	Diluted earnings per share	0.65		0.45		2.36		1.49		Diluted earnings per share		0.76		0.92

Average outstanding ~~stock options~~restricted award shares totaling 0112,223 and ~~6,110~~0 for the three months ended ~~September 30,~~March 31, 2022 and 2021, ~~and 2020, respectively, and 0 and 21,479 for the nine months ended September 30, 2021 and 2020,~~ respectively, were not included in the computation of earnings per share because the effect was antidilutive. The dilutive effect of share-based compensation in each period above relates principally to restricted stock awards.

NOTE 10. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its ~~customers.~~clients. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the unaudited condensed consolidated balance sheets. The contract amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.

The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit and financial guarantees written is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The following table presents these contractual, or notional, amounts:


		Contractual or Notional Amount					Contractual or Notional Amount
		September 30, 2021		December 31, 2020			March 31, 2022		December 31, 2021
Commitments to fund:	Commitments to fund:					Commitments to fund:
Home equity lines of credit	Home equity lines of credit	$	251,607	$	223,216	Home equity lines of credit	$	273,734	$	261,580
1-4 family residential construction loans	1-4 family residential construction loans	35,519		28,928		1-4 family residential construction loans	56,330		40,348
Commercial real estate, construction and land development loans	Commercial real estate, construction and land development loans	122,850		60,606		Commercial real estate, construction and land development loans	142,301		124,488
Commercial, industrial and other loans	Commercial, industrial and other loans	339,569		268,931		Commercial, industrial and other loans	368,199		378,996
Standby letters of credit	Standby letters of credit	21,423		14,491		Standby letters of credit	20,772		19,724

Commitments to extend credit are agreements to lend to a ~~customer~~client as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each ~~customer’s~~client’s credit-worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the ~~customer.~~client. Collateral varies but may include accounts receivable, inventory, equipment, residential real estate, and income-producing commercial properties.

Standby letters of credit and financial guarantees written are conditional commitments issued by the Company to guarantee the performance of a ~~customer~~client to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to ~~customers.~~clients. The Company holds collateral supporting those commitments when deemed necessary by management. The liability at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021 for guarantees under standby letters of credit issued was not considered to be material.

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The Company maintains a reserve, based on historical loss experience of the related loan class and utilization assumptions, for off-balance sheet credit exposures that currently are not funded, in other liabilities on the unaudited condensed consolidated balance sheets. ~~A review of historical loss and line utilization experience in the nine months ended September 30, 2021 resulted in a reduction of loss and utilization assumptions from prior periods.~~ This reserve totaled ~~$1.4~~approximately $1.6 million at ~~September 30, 2021~~both March 31, 2022 and ~~$1.5 million at~~ December 31, ~~2020.~~2021.

NOTE 11. FAIR VALUE

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Certain financial instruments and all non-financial instruments are excluded from disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

The fair value hierarchy distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity's own assumptions about market participant assumptions based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are:

Level 1 – quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access at the measurement date.

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

Level 3 – at least one significant unobservable input that reflects a company's own assumptions about the assumptions that market participants would use in pricing an asset or liability.

In instances in which multiple levels of inputs are used to measure fair value, hierarchy classification is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

The Company used the following methods and significant assumptions to estimate fair value for instruments measured on a recurring basis:

Where quoted prices are available in an active market, investment securities are classified within Level 1 of the valuation hierarchy. Level 1 investment securities include highly liquid government bonds, mortgage products and exchange traded equities. If quoted market prices are not available, investment securities are classified within Level 2 and fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flow. Level 2 investment securities include U.S. agency securities, ~~mortgage-backed securities,~~MBS, obligations of states and political subdivisions and certain corporate, asset backed and other securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, investment securities are classified within Level 3 of the valuation hierarchy. The Company’s investment securities are classified as available for sale.

The fair values of interest rate swaps and risk participation derivatives are determined using models that incorporate readily observable market data into a market standard methodology. This methodology nets the discounted future cash receipts and the discounted expected cash payments. The discounted variable cash receipts and payments are based on expectations of future interest rates derived from observable market interest rate curves. In addition, fair value is adjusted for the effect of nonperformance risk by incorporating credit valuation adjustments for the Company and its counterparties. These assets and liabilities are classified as Level 2 fair values, based upon the lowest level of input that is significant to the fair value measurements.

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The following table summarizes assets and liabilities measured at fair value on a recurring basis at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020:~~2021:


		Level 1		Level 2		Level 3		Total Fair Value Measurements			Level 1		Level 2		Level 3		Total Fair Value Measurements
September 30, 2021
March 31, 2022										March 31, 2022
Financial Assets	Financial Assets									Financial Assets
Investment securities:	Investment securities:									Investment securities:
U.S. Treasury securities	U.S. Treasury securities	$	19,831	$	—	$	—	$	19,831	U.S. Treasury securities	$	18,538	$	—	$	—	$	18,538

States and political subdivisions	States and political subdivisions	—		171,304		10,217		181,521		States and political subdivisions	—		230,539		7,021		237,560
GSE residential MBSs	GSE residential MBSs	—		20,518		—		20,518		GSE residential MBSs	—		59,229		—		59,229
GSE residential CMOs	GSE residential CMOs	—		70,187		—		70,187		GSE residential CMOs	—		71,027		—		71,027
Nonagency CMOs	Nonagency CMOs	—		12,400		13,257		25,657		Nonagency CMOs	—		15,390		11,613		27,003

Asset-backed	Asset-backed	—		126,907		—		126,907		Asset-backed	—		115,970		—		115,970
Other	Other	397		—		—		397		Other	403		—		—		403
Loans held for sale	Loans held for sale	—		6,412		—		6,412		Loans held for sale	—		7,403		—		7,403
Derivatives	Derivatives	—		277		546		823		Derivatives	—		3,067		300		3,367

Totals	Totals	$	20,228	$	408,005	$	24,020	$	452,253	Totals	$	18,941	$	502,625	$	18,934	$	540,500
Financial Liabilities	Financial Liabilities									Financial Liabilities
Derivatives	Derivatives	$	—	$	272	$	—	$	272	Derivatives	$	—	$	3,025	$	—	$	3,025

December 31, 2020
December 31, 2021										December 31, 2021
Financial Assets	Financial Assets									Financial Assets
Investment securities:	Investment securities:									Investment securities:

U.S. Treasury securities										U.S. Treasury securities	$	19,702	$	—	$	—	$	19,702

States and political subdivisions	States and political subdivisions	$	—	$	103,591	$	9,079	$	112,670	States and political subdivisions	—		183,171		10,199		193,370
GSE residential MBSs	GSE residential MBSs	—		4,293		—		4,293		GSE residential MBSs	—		40,726		—		40,726
GSE residential CMOs	GSE residential CMOs	—		58,011		—		58,011		GSE residential CMOs	—		65,922		—		65,922
Nonagency CMOs	Nonagency CMOs	—		—		16,918		16,918		Nonagency CMOs	—		16,750		12,948		29,698

Private label commercial CMOs		—		56,730		5,506		62,236

Asset-backed	Asset-backed	—		211,966		—		211,966		Asset-backed	—		122,621		—		122,621
Other	Other	371		—		—		371		Other	399		—		—		399
Loans held for sale	Loans held for sale	—		11,734		—		11,734		Loans held for sale	—		8,868		—		8,868
Derivatives	Derivatives	—		690		673		1,363		Derivatives	—		764		353		1,117

Totals	Totals	$	371	$	447,015	$	32,176	$	479,562	Totals	$	20,101	$	438,822	$	23,500	$	482,423
Financial Liabilities	Financial Liabilities									Financial Liabilities
Derivatives	Derivatives	$	—	$	1,956	$	—	$	1,956	Derivatives	$	—	$	760	$	—	$	760

The Company had 1 municipal bond and 1 CMO ~~measured~~measured at fair value on a recurring basis using significant unobservable inputs (Level 3) at ~~September 30, 2021. At December~~both March 31, ~~2020, this municipal bond as well as 3 CMOs were measured on a recurring basis using Level 3 unobservable inputs. NaN of the CMOs held at~~2022 and December 31, ~~2020~~ ~~was sold and 1 was called in the nine months ended~~ ~~September 30, 2021~~.2021. The Level 3 valuation is based on a non-executable broker quote, which is considered a significant unobservable input. Such quotes are updated as available and may remain constant for a period of time for certain broker-quoted securities that do not move with the market or that are not interest rate sensitive as a result of their structure or overall attributes.

The Company’s residential mortgage ~~loans held for sale~~LHFS are recorded at fair value utilizing Level 2 measurements. This fair value measurement is determined based upon third party quotes obtained on similar loans. For ~~loans held for sale~~LHFS, for which the fair value option has been elected, the aggregate fair value declined below the aggregate principal balance by $195 thousand as of March 31, 2022, and exceeded the aggregate principal balance by ~~$151~~$150 thousand as of ~~September 30,~~December 31, 2021.

The determination of the fair value of interest rate lock commitments on residential mortgages is based on agreed upon pricing with the respective investor on each loan and includes a pull through percentage. The pull through percentage represents an estimate of loans in the pipeline to be delivered to an investor versus the total loans committed for delivery. Significant changes in this input could result in a significantly higher or lower fair value measurement. As the pull through percentage is a

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significant unobservable input, this is deemed a Level 3 valuation input. The average pull through percentage, which is based

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upon historical experience, was ~~89%~~93% as of ~~September 30, 2021.~~March 31, 2022. An increase or decrease of 5% in the pull through assumption would result in a positive or negative change of ~~$26~~$6 thousand in the fair value of interest rate lock commitments at ~~September 30, 2021.~~March 31, 2022.

The following provides details of the Level 3 fair value measurement activity for the periods ended ~~September 30, 2021~~March 31, 2022 and ~~2020:~~2021:

Investment securities:


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended March 31,
		2021		2020		2021		2020				2022		2021
Balance, beginning of period	Balance, beginning of period	$	24,925	$	23,834	$	31,503	$	24,279	Balance, beginning of period		$	23,147	$	31,503

Unrealized (loss) gain included in OCI		(964)		200		467		(229)
Unrealized loss included in OCI										Unrealized loss included in OCI		(1,360)		(665)

Net discount accretion										Net discount accretion		71		129
Principal payments and other	Principal payments and other	(487)		(142)		(4,951)		(158)		Principal payments and other		—		(1,858)
Sales	Sales	—		—		(3,545)		—		Sales		(3,053)		(3,545)

OTTI										OTTI		(171)		—
Balance, end of period	Balance, end of period	$	23,474	$	23,892	$	23,474	$	23,892	Balance, end of period		$	18,634	$	25,564

Interest rate lock commitments on residential mortgages:


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended March 31,
		2021		2020		2021		2020				2022		2021
Balance, beginning of period	Balance, beginning of period	$	456	$	986	$	673	$	103	Balance, beginning of period		$	353	$	673
Total gains (losses)
Total losses										Total losses
Included in earnings	Included in earnings	90		157		(127)		1,040		Included in earnings		(53)		(1)

Balance, end of period	Balance, end of period	$	546	$	1,143	$	546	$	1,143	Balance, end of period		$	300	$	672

Certain financial assets are measured at fair value on a nonrecurring basis. Adjustments to the fair value of these assets usually results from the application of lower of cost or market accounting or write-downs of individual assets. The Company used the following methods and significant assumptions to estimate fair value for these financial assets.

Impaired Loans

Loans are designated as impaired when, in the judgment of management and based on current information and events, it is probable that all amounts due, according to the contractual terms of the loan agreement, will not be collected. The measurement of loss associated with impaired loans for all loan classes can be based on either the observable market price of the loan, the fair value of the collateral, or discounted cash flows using the rate of return implicit in the original loan for TDRs. For collateral-dependent loans, fair value is measured based on the value of the collateral securing the loan, less estimated costs to sell. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The value of the real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Company using observable market data (Level 2). However, if the collateral is a house or building in the process of construction, or if management adjusts the appraisal value, then the fair value is considered Level 3. The value of business equipment is based upon an outside appraisal, if deemed significant, or the net book value on the applicable business’ financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivable collateral are based on financial statement balances or aging reports (Level 3). Impaired loans with an allocation to the ALL are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the unaudited condensed consolidated statements of income.

Any changes in the fair value of impaired loans still held were not material for the three ~~and nine~~ months ended ~~September 30, 2021~~March 31, 2022 and ~~2020.~~2021.

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Foreclosed Real Estate

OREO property acquired through foreclosure is initially recorded at the fair value of the property at the transfer date less estimated selling cost. Subsequently, OREO is carried at the lower of its carrying value or the fair value less estimated selling

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cost. Fair value is usually determined based upon an independent third-party appraisal of the property or occasionally upon a recent sales offer. The Company had no OREO balances at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020.~~2021.

Mortgage Servicing Rights

The MSR fair value is estimated to be equal to its carrying value, unless the quarterly valuation model calculates the present value of the estimated net servicing income is less than its carrying value, in which case an impairment charge is taken. At ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, an impairment reserve of ~~$372~~$47 thousand and ~~$1.1 million,~~$79 thousand, respectively, existed on the ~~mortgage servicing right~~MSR portfolio. For the three months ended ~~September 30,~~March 31, 2022 and 2021, ~~and 2020, an~~ impairment valuation allowance ~~reversal~~reversals of ~~$43~~$32 thousand and ~~an impairment charge of $166~~$606 thousand were included, respectively, in mortgage banking activities on the unaudited condensed consolidated statements of income. For the nine months ended September 30, 2021 and 2020, an impairment valuation allowance reversal of $695 thousand and an impairment charge of $986 thousand, respectively, were included in mortgage banking activities on the unaudited condensed consolidated statements of income. The impairment charges in 2020 resulted from rapidly declining market rates caused by the COVID-19 pandemic. The reversals in the three ~~and nine~~ months ended ~~September 30,~~March 31, 2022 and 2021 were due to a subsequent ~~increase~~increases in market rates.

The following table summarizes assets measured at fair value on a nonrecurring basis at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020:~~2021:


		Level 1		Level 2		Level 3		Total Fair Value Measurements			Level 1		Level 2		Level 3		Total Fair Value Measurements
September 30, 2021
March 31, 2022										March 31, 2022
Impaired Loans	Impaired Loans									Impaired Loans
Commercial real estate:	Commercial real estate:									Commercial real estate:
Owner occupied	Owner occupied	$	—	$	—	$	776	$	776	Owner occupied	$	—	$	—	$	144	$	144

Non-owner occupied residential	Non-owner occupied residential	—		—		69		69		Non-owner occupied residential	—		—		18		18

Residential mortgage:	Residential mortgage:									Residential mortgage:
First lien	First lien	—		—		677		677		First lien	—		—		491		491

Home equity - lines of credit	Home equity - lines of credit	—		—		77		77		Home equity - lines of credit	—		—		69		69

Total impaired loans	Total impaired loans	$	—	$	—	$	1,599	$	1,599	Total impaired loans	$	—	$	—	$	722	$	722

Mortgage servicing rights	Mortgage servicing rights	$	—	$	—	$	3,642	$	3,642	Mortgage servicing rights	$	—	$	—	$	322	$	322

December 31, 2020
December 31, 2021										December 31, 2021
Impaired Loans	Impaired Loans									Impaired Loans
Commercial real estate:	Commercial real estate:									Commercial real estate:
Owner occupied	Owner occupied	$	—	$	—	$	846	$	846	Owner occupied	$	—	$	—	$	751	$	751

Non-owner occupied residential	Non-owner occupied residential	—		—		36		36		Non-owner occupied residential	—		—		24		24

Commercial and industrial		—		—		12		12

Residential mortgage:	Residential mortgage:									Residential mortgage:
First lien	First lien	—		—		638		638		First lien	—		—		545		545

Home equity - lines of credit	Home equity - lines of credit	—		—		89		89		Home equity - lines of credit	—		—		72		72

Total impaired loans	Total impaired loans	$	—	$	—	$	1,621	$	1,621	Total impaired loans	$	—	$	—	$	1,392	$	1,392

Mortgage servicing rights	Mortgage servicing rights	$	—	$	—	$	2,745	$	2,745	Mortgage servicing rights	$	—	$	—	$	322	$	322

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The following table presents additional qualitative information about assets measured on a nonrecurring basis and for which the Company has utilized Level 3 inputs to determine fair value:

Fair Value
Estimate

Valuation
Techniques

Unobservable Input

Range

Fair Value
Estimate

Valuation
Techniques

Unobservable Input

Range

September 30, 2021

March 31, 2022

Impaired loans

1,599

Appraisal of collateral

Management adjustments on appraisals for property type and recent activity

10% - 25% discount

Impaired loans

722

Appraisal of collateral

Management adjustments on appraisals for property type and recent activity

0% - 25% discount

- Management adjustments for liquidation expenses

6% - 18% discount

- Management adjustments for liquidation expenses

4.73% - 17.93% discount

Mortgage servicing rights

3,642

Discounted cash flows

Weighted average CPR

14.53%

Mortgage servicing rights

322

Discounted cash flows

Weighted average CPR

8.23%

- Weighted average discount rate

9.04%

- Weighted average discount rate

9.03%

December 31, 2020

December 31, 2021

Impaired loans

1,621

Appraisal of collateral

Management adjustments on appraisals for property type and recent activity

5% - 25% discount

Impaired loans

1,392

Appraisal of collateral

Management adjustments on appraisals for property type and recent activity

10% - 25% discount

- Management adjustments for liquidation expenses

6% - 19% discount

- Management adjustments for liquidation expenses

6.08% - 17.93% discount

Mortgage servicing rights

2,745

Discounted cash flows

Weighted average CPR

18.02%

Mortgage servicing rights

322

Discounted cash flows

Weighted average CPR

12.60%

- Weighted average discount rate

9.56%

- Weighted average discount rate

9.03%

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Fair values of financial instruments

GAAP requires disclosure of the fair value of financial assets and liabilities, including those that are not measured and reported at fair value on a recurring or nonrecurring basis. The following table presents carrying amounts and estimated fair values of the ~~Company’s~~ financial ~~instruments~~assets and liabilities at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020:~~2021:


		Carrying Amount		Fair Value		Level 1		Level 2		Level 3			Carrying Amount		Fair Value		Level 1		Level 2		Level 3
September 30, 2021
March 31, 2022												March 31, 2022
Financial Assets	Financial Assets											Financial Assets
Cash and due from banks	Cash and due from banks	$	36,920	$	36,920	$	36,920	$	—	$	—	Cash and due from banks	$	26,446	$	26,446	$	26,446	$	—	$	—
Interest-bearing deposits with banks	Interest-bearing deposits with banks	274,495		274,495		274,495		—		—		Interest-bearing deposits with banks	187,792		187,792		187,792		—		—

Restricted investments in bank stocks		7,051		n/a		n/a		n/a		n/a
Restricted investments in bank stock												Restricted investments in bank stock	6,791		n/a		n/a		n/a		n/a
Investment securities	Investment securities	445,018		445,018		20,228		401,316		23,474		Investment securities	529,730		529,730		18,941		492,155		18,634
Loans held for sale	Loans held for sale	6,412		6,412		—		6,412		—		Loans held for sale	7,403		7,403		—		7,403		—
Loans, net of allowance for loan losses	Loans, net of allowance for loan losses	1,919,799		1,917,091		—		—		1,917,091		Loans, net of allowance for loan losses	1,956,799		1,906,140		—		—		1,906,140

Derivatives	Derivatives	823		823		—		277		546		Derivatives	3,367		3,367		—		3,067		300
Accrued interest receivable	Accrued interest receivable	8,015		8,015		—		2,169		5,846		Accrued interest receivable	8,642		8,642		—		2,940		5,702

Financial Liabilities	Financial Liabilities											Financial Liabilities
Deposits	Deposits	2,502,108		2,503,695		—		2,503,695		—		Deposits	2,545,992		2,545,739		—		2,545,739		—
Securities sold under agreements to repurchase	Securities sold under agreements to repurchase	27,595		27,595		—		27,595		—		Securities sold under agreements to repurchase	24,624		24,624		—		24,624		—
FHLB advances and other		2,003		2,176		—		2,176		—
FHLB advances and other borrowings												FHLB advances and other borrowings	1,788		1,865		—		1,865		—
Subordinated notes	Subordinated notes	31,948		32,781		—		32,781		—		Subordinated notes	31,978		33,094		—		33,094		—
Derivatives	Derivatives	272		272		—		272		—		Derivatives	3,025		3,025		—		3,025		—
Accrued interest payable	Accrued interest payable	631		631		—		631		—		Accrued interest payable	661		661		—		661		—
Off-balance sheet instruments	Off-balance sheet instruments	—		—		—		—		—		Off-balance sheet instruments	—		—		—		—		—

December 31, 2020
December 31, 2021												December 31, 2021
Financial Assets	Financial Assets											Financial Assets
Cash and due from banks	Cash and due from banks	$	26,203	$	26,203	$	26,203	$	—	$	—	Cash and due from banks	$	21,217	$	21,217	$	21,217	$	—	$	—
Interest-bearing deposits with banks	Interest-bearing deposits with banks	99,055		99,055		99,055		—		—		Interest-bearing deposits with banks	187,493		187,493		187,493		—		—

Restricted investments in bank stocks		10,563		n/a		n/a		n/a		n/a
Restricted investments in bank stock												Restricted investments in bank stock	7,252		n/a		n/a		n/a		n/a
Investment securities	Investment securities	466,465		466,465		371		434,591		31,503		Investment securities	472,438		472,438		20,101		429,190		23,147
Loans held for sale	Loans held for sale	11,734		11,734		—		11,734		—		Loans held for sale	8,868		8,868		—		8,868		—
Loans, net of allowance for loan losses	Loans, net of allowance for loan losses	1,959,539		1,953,860		—		—		1,953,860		Loans, net of allowance for loan losses	1,958,806		1,946,365		—		—		1,946,365

Derivatives	Derivatives	1,363		1,363		—		690		673		Derivatives	1,117		1,117		—		764		353
Accrued interest receivable	Accrued interest receivable	8,927		8,927		—		1,529		7,398		Accrued interest receivable	8,234		8,235		—		2,203		6,032

Financial Liabilities	Financial Liabilities											Financial Liabilities
Deposits	Deposits	2,356,880		2,359,317		—		2,359,317		—		Deposits	2,464,929		2,466,191		—		2,466,191		—
Securities sold under agreements to repurchase	Securities sold under agreements to repurchase	19,466		19,466		—		19,466		—		Securities sold under agreements to repurchase	23,301		23,301		—		23,301		—
FHLB advances and other		58,045		58,298		—		58,298		—
FHLB advances and other borrowings												FHLB advances and other borrowings	1,896		2,035		—		2,035		—
Subordinated notes	Subordinated notes	31,903		31,712		—		31,712		—		Subordinated notes	31,963		31,815		—		31,815		—
Derivatives	Derivatives	1,956		1,956		—		1,956		—		Derivatives	760		760		—		760		—
Accrued interest payable	Accrued interest payable	238		238		—		238		—		Accrued interest payable	154		154		—		154		—
Off-balance sheet instruments	Off-balance sheet instruments	—		—		—		—		—		Off-balance sheet instruments	—		—		—		—		—

~~The methods used to estimate the fair value of financial instruments at September 30, 2021 and December 31, 2020 did not necessarily represent an exit price.~~ In accordance with the Company's adoption of ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, the methods utilized to measure the fair value of financial instruments at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021 represent an approximation of exit price; however, an actual exit price may differ.

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NOTE 12. CONTINGENCIES

The nature of the Company’s business generates a certain amount of litigation involving matters arising out of the ordinary course of business. Except as described below, in the opinion of management, there are no legal proceedings that might have a material effect on the results of operations, liquidity, or the financial position of the Company at this time.

On March 5, 2019, Paul Parshall, a purported individual stockholder of Hamilton, filed, on behalf of himself and all of Hamilton’s stockholders other than the named defendants and their affiliates (the “Purported Class”), a derivative and putative class action complaint in the Circuit Court for Baltimore City, Maryland, captioned Paul Parshall v. Carol Coughlin et. al., naming each Hamilton director, Orrstown, and Hamilton as defendants (the “Action”). The Action alleged, among other things, that Hamilton’s directors breached their fiduciary duties to the Purported Class in connection with the merger, and that the Proxy Statement/Prospectus omitted certain material information regarding the merger. Orrstown was alleged to have aided and abetted the Hamilton directors’ alleged breaches of their fiduciary duties. The Action sought, among other remedies, to enjoin the merger or, in the event the merger was completed, rescission of the merger or rescissory damages; unspecified damages; and costs of the lawsuit, including attorneys’ and experts’ fees. A settlement was reached on the Action in March 2020 which resulted in a payment by the Company of $135 thousand in mootness fees to the defendants in April 2020.

On May 25, 2012, SEPTA filed a putative class action complaint in the U.S. District Court for the Middle District of Pennsylvania against the Company, the Bank and certain current and former directors and officers (collectively, the “Orrstown Defendants”). The complaint alleged, among other things, that (i) in connection with the Company’s Registration Statement on Form S-3 dated February 23, 2010 and its Prospectus Supplement dated March 23, 2010, and (ii) during the purported class period of March 24, 2010 through October 27, 2011, the Company issued materially false and misleading statements regarding the Company’s lending practices and financial results, including misleading statements concerning the stringent nature of the Bank’s credit practices and underwriting standards, the quality of its loan portfolio, and the intended use of the proceeds from the Company’s March 2010 public offering of common stock. The complaint asserted claims under Sections 11, 12(a) and 15 of the Securities Act of 1933, Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, and sought class certification, unspecified money damages, interest, costs, fees and equitable or injunctive relief. Under the Private Securities Litigation Reform Act of 1995 (“PSLRA”), the Court appointed SEPTA Lead Plaintiff on August 20, 2012.

On March 4, 2013, SEPTA filed an amended complaint. The amended complaint expanded the list of defendants in the action to include the Company’s former independent registered public accounting firm, Smith Elliott Kearns & Company, LLC (“SEK”), and the underwriters of the Company’s March 2010 public offering of common stock. In addition, among other things, the amended complaint extended the purported 1934 Exchange Act class period from March 15, 2010 through April 5, 2012.

On June 22, 2015, in a 96-page Memorandum, the Court dismissed without prejudice SEPTA’s amended complaint against all defendants, finding that SEPTA failed to state a claim under either the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended. On February 8, 2016, the Court granted SEPTA’s motion for leave to amend again and SEPTA filed its second amended complaint that same day.

On December 7, 2016, the Court issued an Order and Memorandum granting in part and denying in part defendants’ motions to dismiss SEPTA’s second amended complaint. The Court granted the motions to dismiss the Securities Act claims against all defendants, and granted the motions to dismiss the Exchange Act Section 10(b) and Rule 10b-5 claims against all defendants except Orrstown Financial Services, Inc., Orrstown Bank, Thomas R. Quinn, Jr., Bradley S. Everly, and Jeffrey W. Embly. The Court also denied the motions to dismiss the Exchange Act Section 20(a) claims against Quinn, Everly, and Embly.

On December 15, 2017, the Orrstown Defendants and SEPTA exchanged expert reports in opposition to and in support of class certification, respectively. On January 15, 2018, the parties exchanged expert rebuttal reports. SEPTA has not yet filed a motion for class certification.

On August 9, 2018, SEPTA filed a motion to compel the production of Confidential Supervisory Information (CSI) of non-parties the Board of Governors of the FRB and the Pennsylvania Department of Banking and Securities, in the possession of Orrstown and third parties. On August 30, 2018, the FRB filed an unopposed motion to intervene in the Action for the purpose of opposing SEPTA’s motion to compel. On February 12, 2019, the Court denied SEPTA’s motion to compel the production of CSI on the ground that SEPTA had failed to exhaust its administrative remedies.

On April 11, 2019, SEPTA filed a motion for leave to file a third amended complaint. The proposed third amended complaint seeks to reassert the Securities Act claims that the Court dismissed as to all defendants on December 7, 2016, when the Court granted in part and denied in part defendants’ motions to dismiss SEPTA’s second amended complaint. The proposed

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third amended complaint also seeks to reassert the Exchange Act claims against those defendants that the Court dismissed from the case on December 7, 2016.

On June 13, 2019, Orrstown filed a motion for protective order to stay discovery pending resolution of SEPTA’s motion for leave to file a third amended complaint. On July 17, 2019, the Court entered an Order partially granting Orrstown’s motion for protective order, ruling that all deposition discovery in the case was stayed pending a decision on SEPTA’s motion for leave to file a third amended complaint. Party and non-party document discovery in the case has largely been completed.

On February 14, 2020, the Court issued an Order and Memorandum granting SEPTA’s motion for leave to file a third amended complaint. The third amended complaint is now the operative complaint. It reinstates the Orrstown Defendants, as well as SEK and the underwriter defendants, previously dismissed from the case on December 7, 2016. The third amended complaint also revives the previously dismissed Securities Act claim against the Orrstown Defendants, SEK, and the

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underwriter defendants. Defendants filed their motions to dismiss the third amended complaint on April 24, 2020. SEPTA’s opposition was filed on July 8, 2020, and Orrstown’s reply brief was filed on August 12, 2020.

Additionally, on February 24, 2020, the Orrstown Defendants, and the underwriter defendants and SEK, separately filed motions under 28 U.S.C. § 1292(b) asking the District Court to certify its February 14, 2020 Order granting leave to file the third amended complaint for interlocutory appeal to the Third Circuit Court of Appeals. The District Court granted those motions on July 17, 2020, and defendants filed their Petition for Permission to Appeal with the Third Circuit on July 27, 2020. The Third Circuit granted permission to appeal the Order pursuant to 28 U.S.C. § 1292(b) on August 13, 2020. Defendants filed their joint Opening Brief in the Third Circuit on November 2, 2020, asking the Court to reverse the district court’s Order. SEPTA filed its responsive brief on December 2, 2020 and defendants filed their reply brief on December 23, 2020. Oral argument was held on February 10, 2021. On September 2, 2021, the Third Circuit affirmed the District Court's February 14, 2020 Order granting SEPTA leave to file a third amended complaint. Defendants' motions to dismiss the third amended complaint are still pending in the District Court.

The Company believes that SEPTA’s allegations and claims against the defendants are without merit, and the Company ~~and~~ intends to defend itself vigorously against those claims. It is not possible at this time to reasonably estimate possible losses, or even a range of reasonably possible losses, in connection with the litigation.

On March 25, 2022, a customer of the Bank filed a putative class action complaint against the Bank in the Court of Common Pleas of Cumberland County, Pennsylvania in a case captioned Alleman, on behalf of himself and all others similarly situated, v. Orrstown Bank. The complaint alleges, among other things, that the Bank breached its account agreements by charging certain overdraft fees. The complaint seeks a refund of all allegedly improper fees, damages in an amount to be proven at trial, attorneys’ fees and costs, and an injunction against the Bank’s allegedly improper overdraft practices. This lawsuit is similar to lawsuits recently filed against other financial institutions pertaining to overdraft fee disclosures. Based on information available at present, it is not possible at this time to reasonably estimate possible losses, or even a range of reasonably possible losses, in connection with the litigation. Accordingly, the Company has not recognized any liability associated with this action. The Bank believes that the allegations and claims against the Bank are without merit, and intends to defend itself vigorously against those claims.

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

The following discussion and analysis is intended to assist readers in understanding the consolidated financial condition and results of operations of Orrstown and should be read in conjunction with the preceding unaudited condensed consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q, as well as with the audited consolidated financial statements and notes thereto for the year ended December 31, ~~2020,~~2021, included in our Annual Report on Form 10-K. Throughout this discussion, the yield on earning assets is stated on a fully taxable-equivalent basis and balances represent average daily balances unless otherwise stated. Certain prior period amounts presented in this discussion and analysis have been reclassified to conform to current period classifications.

Overview

The Company, headquartered in Shippensburg, Pennsylvania, is a one-bank holding company that has elected status as a financial holding company. The consolidated financial information presented herein reflects the Company and its wholly-owned subsidiary, the Bank. At ~~September 30, 2021,~~March 31, 2022, the Company had total assets of $2.9 billion, total liabilities of $2.6 billion and total shareholders’ equity of ~~$268.6~~$254.8 million.

~~Caution~~Cautionary Note About Forward-Looking Statements

Certain statements appearing herein, which are not historical in nature, ~~may constitute~~are forward-looking statements within the meaning of Section 27A of the Securities Act ~~of 1933, as amended,~~ and Section 21E of the ~~Securities~~ Exchange Act, ~~of 1934, as amended,~~ and are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. In addition, we may make other written and oral communications, from time to time, that contain such statements. Such forward-looking statements ~~refer~~reflect the current views of the Company's management with respect to, aamong other things, future ~~period~~events and the Company's financial performance. These statements are often, but not always, made through the use of words or ~~periods, reflecting our current beliefs~~phrases such as ~~to likely future developments, and use words like~~ “may,” “will,” “expect,” “estimate,” “anticipate” or similar ~~terms.~~terms, or the negative variations of those words or other comparable words of a future or forward-looking nature. Forward-looking statements are statements that include projections, predictions, expectations, estimates or beliefs about events or results or otherwise are not statements of historical facts, ~~including,~~many of which, by their nature, are inherently uncertain and beyond the Company's control, and include, but are not limited to, statements related to new business development, new loan opportunities, growth in the balance sheet and fee-based revenue lines of business, merger and acquisition activity, reducing risk assets, and mitigating losses in the future. ~~Actual~~Accordingly, the Company cautions you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions and uncertainties that are difficult to predict. Although the Company believes that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results ~~and trends could differ~~may prove to be materially different from ~~those set forth in such~~the results expressed or implied by the forward-looking statements and there can be no assurances that wethe Company will achieve the desired level of new business development and new loans, growth in the balance sheet and fee-based revenue lines of business, successful merger and acquisition activity, continue to reduce risk assets or mitigate losses in the future. In addition to risks and uncertainties related to the COVID-19 pandemic (including those related to ~~variants, such as the delta variant)~~variants) and resulting governmental and societal responses, factors that could cause actual results to differ from those expressed or implied by the forward-looking statements include, but are not limited to, the following: ineffectiveness of the Company’s strategic growth plan due to changes in current or future market conditions; the effects of competition and how it may impact our community banking model, including industry consolidation and development of competing financial products and services; the integration of the Company's strategic acquisitions; the inability to fully achieve expected savings, efficiencies or synergies from mergers and acquisitions, or taking longer than estimated for such savings, efficiencies and synergies to be realized; changes in laws and regulations; interest rate movements; changes in credit quality; inability to raise capital, if necessary, under favorable conditions; volatility in the securities markets; the demand for our products and services; deteriorating economic conditions; geopolitical tensions; operational risks including, but not limited to, cybersecurity incidents, fraud, natural disasters and future pandemics; expenses associated with pending litigation and legal proceedings; the failure of the SBA to honor its guarantee of loans issued under the SBA PPP; the timing of the repayment of SBA PPP loans and the impact it has on fee recognition; our ability to convert new relationships gained through the SBA PPP efforts to full banking relationships; and other risks and uncertainties, including those detailed in our Annual Report on Form 10-K for the year ended December 31, ~~2020,~~2021, and our Quarterly Reports on Form 10-Q under the sections titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in other filings made with the SEC. The statements are valid only as of the date hereof and we disclaim any obligation to update this information.

Economic Climate, Inflation and ~~Market Conditions~~Interest Rates

Preliminary real GDP for the ~~third~~first quarter of ~~2021~~2022 reflected an annualized ~~increase~~decrease of ~~2.0%~~1.4%. This is a decrease from the ~~second~~fourth quarter 2021 growth rate of ~~6.7%~~6.9% and annualized growth of ~~4.3%~~6.3% for the ~~fourth~~first quarter of ~~2020.~~2021. The decrease in the ~~third~~first quarter of 2022 was driven by ~~tapering~~decreases in ~~personal consumption expenditures of goods, notably~~private inventory investment which includes wholesale and retail trade on motor vehicles and parts, and a slowdown in food services and accommodations from recent quarters. In the second quarter of 2021, the increase in the rate reflected the reopening of businesses and ongoing government efforts related to COVID-19, yet during the third quarter, new restrictions and delays have occurred in certain regions of the country resulting from an increase in COVID-19 cases. Also, during the third quarter, there was a decrease in federal government spending on unemployment insurance, payments to households established in response to the COVID-19 pandemic and the expiration of processing and administration of PPP loan

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~~applications. Offsetting these decreases were~~vehicles, exports of nondurable goods, and government spending as several federal programs have expired or tapered off partially offset by increases in ~~wholesale~~personal consumption primarily within healthcare and ~~retail trade~~residential and ~~services~~nonresidential fixed investments. Personal consumption expenditures however declined from the fourth quarter of 2022 within the energy sector of nondurable goods. Restrictions and disruptions continued due to new COVID-19 cases related to ~~transportation and health care.~~the Omicron variant throughout the country. The personal consumption expenditures ("PCE") price index increased 7.0% in the first quarter of 2022, compared with an increase of 6.4% in the fourth quarter of 2021. The national unemployment rate declined to ~~4.8%~~3.6% in ~~September 2021~~March 2022, down from ~~5.9%~~3.9% in ~~June~~December 2021 and from ~~6.7%~~6.1% in ~~December 2020.~~April 2021. There ~~were~~continued to be notable job gains in leisure and hospitality ~~education,~~and professional and business services, retail trade and ~~transportation~~manufacturing during the first quarter of 2022. Although there was strong economic recovery in 2021 from the pandemic, the decrease in GDP during the first quarter of 2022 is indicative of the supply chain challenges, labor shortages and ~~warehousing.~~inflation.

Due to the COVID-19 pandemic, market interest rates ~~have~~had declined significantly, with the 10-year Treasury bond falling for the first time below 1.00% on March 3, ~~2020; it was at 0.93% on~~2020, but recovering to 1.51% as of December 31, ~~2020~~2021. At March 31, 2022, the 10-year Treasury bond reached 2.34% as it continued to rise due to stock market volatility and ~~has since recovered to 1.49% as of September 30, 2021.~~inflationary pressures. In 2020, in reaction to the increase in market uncertainty, the ~~Federal Reserve~~FRB cut the Fed Funds rates by 150 basis points to ~~0% to~~ 0.25%. In ~~its most recent meeting in September 2021,~~March 2022, the Federal Reserve Open Markets Committee ~~left~~approved an increase to the Fed Funds rate ~~unchanged with rates~~of 25 basis points due to inflation, elevating geopolitical tensions and the state of the labor market recovery. The Committee forecasted at least three 25 basis point rate increases in 2022 and noted that it expected to ~~remain at this level for an extended period~~conclude its asset purchase program, which tapering occurred during the first quarter of ~~time. The Committee recognized~~2022 to maintain the ~~progress with vaccinations to reduce the spread~~size of the ~~COVID-19 virus~~balance sheet. The Federal Reserve Open Markets Committee will meet next on May 3, 2022.

The majority of the assets and ~~its effect~~liabilities of a financial institution are monetary in nature, and therefore, differ greatly from most commercial and industrial companies that have significant investments in fixed assets or inventories. However, inflation does have an impact on ~~economic activity and employment. However, uncertainty remains~~the Company, particularly with respect to the ~~economic outlook. The Committee has indicated that they will not increase rates until~~growth of total assets and noninterest expenses, which tend to rise during periods of general inflation. Risks also exist due to supply and demand imbalances, employment shortages, the ~~recovery achieves maximum employment~~interest rate environment, and inflation has reached 2% and longer-term inflation expectations are maintained above 2%. Also, the Committee has directed the Open Markets Desk to increase its holdings of U.S. Treasury securities and agency mortgage-backed securities to sustain smooth functioning of markets for these securities. These low interest rates and other effects of the COVID-19 pandemic may adversely affect the Company's financial condition and results of operations in future periods. It is unknown how long the adverse conditions associated with the COVID-19 pandemic will last and what the complete financial effect will be to the Company.geopolitical tensions. It is reasonably foreseeable that estimates made in the financial statements could be materially and adversely impacted in the near term as a result of these conditions, including expected credit losses on loans and the fair value of financial instruments that are carried at fair value.

Critical Accounting Estimates

The Company’s accounting and reporting policies are in accordance with GAAP and follow accounting and reporting guidelines prescribed by bank regulatory authorities and general practices within the financial services industry in which it operates. Our financial position and results of operations are affected by management's application of accounting policies, including estimates, and assumptions and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the balance sheet date and through the date the financial statements are filed with the SEC. Different assumptions in the application of these policies could result in material changes in the consolidated financial position and/or consolidated results of operations and related disclosures. The more critical accounting estimates include accounting for credit losses and valuation methodologies. Accordingly, these critical accounting estimates are discussed in detail in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, ~~2020.~~2021. Significant accounting policies and any changes in accounting principles and effects of new accounting pronouncements are discussed in Note 1, Summary of Significant Accounting Policies, to the Consolidated Financial Statements under Part II, Item 8, "Financial Statements and Supplementary Data," in our Annual Report on Form 10-K for the year ended December 31, ~~2020.~~2021. Additional disclosures regarding the effects of new accounting pronouncements are included in this report in Note 1, Summary of Significant Accounting Policies, to the unaudited condensed consolidated financial statements under Part I, Item 1, "Financial Information."

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RESULTS OF OPERATIONS

Three months ended ~~September 30, 2021~~March 31, 2022 compared with three months ended ~~September 30, 2020~~March 31, 2021

Summary

Net income totaled ~~$7.2~~$8.4 million for the three months ended ~~September 30, 2021~~March 31, 2022 compared with net income of ~~$5.0~~$10.2 million for the same period in ~~2020.~~2021. Diluted earnings per share for the three months ended ~~September 30, 2021~~March 31, 2022 totaled ~~$0.65~~$0.76, compared with ~~$0.45~~$0.92 for the three months ended ~~September 30, 2020.~~March 31, 2021. Net interest income positively influenced results of operations, and totaled ~~$20.6~~$22.6 million for the three months ended ~~September 30, 2021, a $0.2 million decrease from $20.8~~March 31, 2022, compared to $21.9 million in the three months ended ~~September 30, 2020.~~March 31, 2021. Noninterest income totaled ~~$7.7~~approximately $7.5 million for both the three months ended March 31, 2022 and 2021. Noninterest expenses totaled $19.4 million for the three months ended ~~September 30, 2021~~March 31, 2022 compared ~~with $6.9 million in the three months ended September 30, 2020. Noninterest expenses totaled $19.0 million and $19.3~~to $17.8 million for the three months ended ~~September 30,~~March 31, 2021.

The comparison of operating results for 2022 with 2021 reflects the impact of commercial loan growth and ~~2020, respectively.~~

~~Net Interest Income~~

~~Net interest income decreased~~reductions in the cost of funds partially offset by ~~$0.2 million, from $20.8 million to $20.6 million,~~increases in the provision for ~~the three months ended September 30, 2021 compared with the three months ended September 30, 2020. Interest income on loans decreased by $1.7~~loan loss expense and salaries and employee benefits expense.

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~~million,~~Net Interest Income

Net interest income increased by $718 thousand, from ~~$21.6~~$21.9 million to ~~$19.9~~$22.6 million, for the three months ended March 31, 2022 compared with the three months ended March 31, 2021. Total interest expense decreased from $2.1 million to $1.2 million, in comparing the three months ended March 31, 2022 with the three months ended March 31, 2021. Interest income on loans decreased by $142 thousand, from $21.5 million to $21.4 million, and investment securities interest income decreased by ~~$0.4 million,~~$59 thousand, from ~~$2.6~~$2.4 million to ~~$2.2 million. These decreases were mostly offset by~~$2.3 million, for the ~~decrease of $1.8 million in total interest expense from $3.4 million to $1.6 million in comparing the three months ended September 30, 2021 with the three months ended September 30, 2020.~~same period.

The following table presents net interest income, net interest spread and net interest margin for the three months ended ~~September 30,~~March 31, 2022 and 2021 ~~and 2020~~ on a taxable-equivalent basis:


		Three Months Ended September 30, 2021						Three Months Ended September 30, 2020							Three Months Ended March 31, 2022						Three Months Ended March 31, 2021
		Average Balance		Taxable- Equivalent Interest		Taxable- Equivalent Rate		Average Balance		Taxable- Equivalent Interest		Taxable- Equivalent Rate			Average Balance		Taxable- Equivalent Interest		Taxable- Equivalent Rate		Average Balance		Taxable- Equivalent Interest		Taxable- Equivalent Rate
Assets	Assets													Assets
Federal funds sold & interest-bearing bank balances	Federal funds sold & interest-bearing bank balances	$	347,242	$	135	0.15	%	$	31,087	$	9	0.12	%	Federal funds sold & interest-bearing bank balances	$	199,788	$	101	0.20	%	$	145,595	$	39	0.11	%

Investment securities (1)	Investment securities (1)	464,417		2,339		2.00		496,107		2,673		2.14		Investment securities (1)	472,195		2,512		2.13		468,273		2,512		2.18

Loans (1)(2)(3)	Loans (1)(2)(3)	1,919,926		19,945		4.12		2,054,193		21,741		4.21		Loans (1)(2)(3)	1,974,804		21,429		4.39		2,033,219		21,574		4.30
Total interest-earning assets	Total interest-earning assets	2,731,585		22,419		3.26		2,581,387		24,423		3.76		Total interest-earning assets	2,646,787		24,042		3.67		2,647,087		24,125		3.70

Other assets	Other assets	195,089						190,119						Other assets	184,300						182,737

Total	Total	$	2,926,674					$	2,771,506					Total	$	2,831,087					$	2,829,824
Liabilities and Shareholders’ Equity	Liabilities and Shareholders’ Equity													Liabilities and Shareholders’ Equity
Interest-bearing demand deposits	Interest-bearing demand deposits	$	1,411,243	286		0.08		$	1,213,208	939		0.31		Interest-bearing demand deposits	$	1,398,182	256		0.07		$	1,334,219	438		0.13
Savings deposits	Savings deposits	209,112		53		0.10		168,377		67		0.16		Savings deposits	227,676		57		0.10		183,576		45		0.10
Time deposits	Time deposits	349,215		598		0.68		432,438		1,477		1.36		Time deposits	298,618		372		0.51		397,271		909		0.93
Total interest-bearing deposits	Total interest-bearing deposits	1,969,570		937		0.19		1,814,023		2,483		0.54		Total interest-bearing deposits	1,924,476		685		0.14		1,915,066		1,392		0.29
Securities sold under agreements to repurchase	Securities sold under agreements to repurchase	23,578		8		0.13		21,145		20		0.38		Securities sold under agreements to repurchase	23,530		7		0.12		21,452		9		0.17
FHLB Advances and other		45,071		123		1.09		219,567		394		0.71
FHLB Advances and other borrowings														FHLB Advances and other borrowings	1,850		22		4.74		58,000		171		1.20
Subordinated notes	Subordinated notes	31,938		503		6.29		31,881		501		6.29		Subordinated notes	31,969		503		6.29		31,909		502		6.29
Total interest-bearing liabilities	Total interest-bearing liabilities	2,070,157		1,571		0.30		2,086,616		3,398		0.65		Total interest-bearing liabilities	1,981,825		1,217		0.25		2,026,427		2,074		0.42
Noninterest-bearing demand deposits	Noninterest-bearing demand deposits	548,923						417,939						Noninterest-bearing demand deposits	540,139						516,849
Other	Other	38,409						37,330						Other	40,919						36,244
Total liabilities	Total liabilities	2,657,489						2,541,885						Total liabilities	2,562,883						2,579,520
Shareholders’ equity	Shareholders’ equity	269,185						229,621						Shareholders’ equity	268,204						250,304
Total	Total	$	2,926,674					$	2,771,506					Total	$	2,831,087					$	2,829,824
Taxable-equivalent net interest income /net interest spread	Taxable-equivalent net interest income /net interest spread			20,848		2.96	%			21,025		3.12	%	Taxable-equivalent net interest income /net interest spread			22,825		3.42	%			22,051		3.28	%
Taxable-equivalent net interest margin	Taxable-equivalent net interest margin					3.03	%					3.24	%	Taxable-equivalent net interest margin					3.49	%					3.38	%
Taxable-equivalent adjustment	Taxable-equivalent adjustment			(228)						(207)				Taxable-equivalent adjustment			(252)						(196)
Net interest income	Net interest income			$	20,620					$	20,818			Net interest income			$	22,573					$	21,855


NOTES TO ANALYSIS OF NET INTEREST INCOME:
(1)			Yields and interest income on tax-exempt assets have been computed on a taxable-equivalent basis assuming a 21% tax rate.
(2)			Average balances include nonaccrual loans.
(3)			Interest income on loans includes prepayment and late ~~fees.~~fees, where applicable.

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For the three months ended ~~September 30, 2021, taxable-equivalent basis~~March 31, 2022, net interest income ~~decreased~~on a taxable-equivalent basis increased by ~~$177~~$774 thousand ~~compared with~~to $22.8 million from $22.1 million for the three months ended ~~September 30, 2020~~.March 31, 2021. The ~~decrease in~~Company's net interest ~~income reflected a decline in~~spread increased by 14 basis points to 3.42% for the three months ended March 31, 2022 compared to the three months ended March 31, 2021.

Taxable-equivalent net interest margin was 3.49% for the three months ended March 31, 2022, which was 11 basis points higher than 3.38% for the three months ended March 31, 2021. The taxable-equivalent ~~interest income~~yield on interest-earning assets and cost of ~~$1.8 million, offset by a decrease of $1.8 million in interest expense on~~ interest-bearing liabilities both decreased from the three months ended ~~September 30, 2020~~March 31, 2021 to ~~the~~ ~~three~~ ~~months ended September 30, 2021. Average interest-earning assets increased by~~ ~~$150.2 million~~ ~~due to an increase in average cash and average interest-bearing liabilities decreased by~~ ~~$16.5 million~~ ~~from the~~ ~~three~~ ~~months ended September 30, 2020 to the~~ ~~three~~ ~~months ended September 30, 2021.~~

~~For~~ the three months ended ~~September 30,~~March 31, 2022, reflecting a lower interest rate environment and the decrease in time deposit balances. Average loans remained approximately $2.0 billion, during both the three months ended March 31, 2022 and 2021, ~~taxable-equivalent net interest margin~~as the impact of commercial loan growth in three months ended March 31, 2022 was ~~3.03%, which~~offset by SBA PPP loan forgiveness. Average interest-bearing liabilities declined slightly below $2.0 billion for the 2022 period from the 2021 period due to decreased average balances in time deposits and overnight borrowings.

The yield on loans was ~~21 basis points lower than 3.24%~~4.39% for the three months ended ~~September 30, 2020.~~ This reduction was driven by an increase in average cash of $316.2 million, lower purchase accounting accretion of $835 thousand and reduced yield on investment securities. The increase in liquidity has resulted from SBA PPP forgiveness, child tax credits and a seasonal inflow of municipal deposit funds, which continueMarch 31, 2022 compared to ~~negatively impact net interest margin.~~

~~The yield on loans was 4.12%~~4.30% for the three months ended ~~September 30, 2021 compared to 4.21% for the three months ended September 30, 2020.~~March 31, 2021. Taxable-equivalent interest income earned on loans decreased by ~~$1.8~~$145 thousand year-over-year partially due to a decrease in the average balance of loans. The increase in the yield on total loans primarily reflects interest income from SBA PPP loans. This increase is due to accretion and forgiveness of SBA PPP loans recognized as a percent of the lower average balance during the three months ended March 31, 2022 compared to the three months ended March 31, 2021.

SBA PPP loans, net of deferred fees and costs, averaged $155.3 million ~~year-over-year~~during the three months ended March 31, 2022 compared to $463.9 million during the three months ended March 31, 2021. This decrease was primarily due ~~primarily~~ to ~~consumer loan runoff~~the forgiveness of SBA PPP loans and ~~lower purchase accounting accretion~~was partially offset by ~~the impact~~commercial loan production. The average balance of commercial loans, excluding SBA PPP ~~forgiveness. There was a $134.3~~loans, increased by $295.8 million ~~decrease~~from $1.1 billion in ~~average loan balance year-over-year.~~the three months ended March 31, 2021 to $1.4 billion during the three months ended March 31, 2022. Average ~~residential mortgages~~consumer loans decreased by ~~$81.0~~$17.2 million from ~~$284.0~~$46.5 million for the three months ended ~~September 30, 2020~~March 31, 2021 to ~~$203.0~~$29.3 million for the three months ended ~~September 30,~~March 31, 2022. Average residential mortgage loans decreased from $232.6 million during the three months ended March 31, 2021 to $195.7 million during the three months ended March 31, 2022 due to lower housing inventory and runoff.

For the ~~competitive~~three months ended March 31, 2022, interest income on loans includes $3.5 million of interest and ~~low~~net deferred fee income recognized associated with the SBA PPP loans compared to $4.5 million of such interest ~~rate environment since September 30, 2020. Average other consumer loans was $191.6 million~~and fee income for the three months ended ~~September 30, 2021 compared to $217.3~~March 31, 2021. Net deferred fees on SBA PPP loans were $2.4 million ~~for~~at March 31, 2022, which will be recognized over the ~~three months ended September 30, 2020, which was a decrease~~remaining life of ~~$25.7 million.~~the loans. Accretion of purchase accounting adjustments included in interest income was ~~$296~~$598 thousand and $926 thousand for the three months ended ~~September 30,~~March 31, 2022 and 2021, ~~as compared to $861 thousand for the three months ended September 30, 2020.~~respectively. The three months ended ~~September 30,~~March 31, 2022 and 2021 ~~and 2020~~ included ~~$154~~$260 thousand and ~~$650~~$416 thousand, respectively, of accelerated accretion related to the payoff of acquired loans. Average commercial loans, excluding average SBA PPP loans, increased by $125.3 million from $1.1 billion for the three months ended September 30, 2020 to $1.2 billion for the three months ended September 30, 2021. New commercial loan originations in 2021 had a lower yield than those in the existing portfolio.

SBA PPP loans, net of deferred fees and costs, averaged $303.2 million during the three months ended September 30, 2021 as compared to $456.1 million in the three months ended September 30, 2020. For both the three months ended September 30, 2021 and September 30, 2020, interestInterest income on loans included $3.4 million of interest and net deferred fee income associated with the SBA PPP loans. While the average balance of SBA PPP loans declined over the period, the acceleration of net deferred fees in 2021 resulted in an increased yield on those loans. Net deferred SBA PPP fees of $8.6 million remain at September 30, 2021. These net deferred fees are being recognized over the life of the loans, which was originally between two and five years, but can be accelerated upon satisfactorily completing forgiveness steps with the SBA.

~~Taxable-equivalent~~ investment securities ~~interest income decreased by $334 thousand~~on a tax-equivalent basis remained at approximately $2.5 million year-over-year, with the taxable equivalent yield decreasing from ~~2.14%~~2.18% for the three months ended ~~September 30, 2020~~March 31, 2021 to ~~2.00%~~2.13% for the three months ended ~~September 30, 2021.~~March 31, 2022. The 14 five basis point decrease reflected the ~~decreased~~increased interest rate environment between years impacting our fixed rate securities and certain repositioning within the portfolio under the Company's asset/liability management strategies.

Interest ~~income~~expense on ~~securities was also impacted~~deposits and borrowings decreased by ~~a decrease of $31.7 million~~$857 thousand year-over-year, despite an increase in the average balance of ~~securities from the three months ended September 30, 2020 to the three months ended September 30, 2021~~interest-bearing deposits of $9.4 million due primarily to continued high levels of excess liquidity in the ~~sale of asset-backed securities during the three months ended September 30, 2021.~~

system, as well as seasonal increases from public fund clients. The cost of interest-bearing liabilities ~~decreased by 35~~declined 17 basis points from ~~0.65%~~0.42% for the three months ended ~~September 30, 2020~~March 31, 2021 to ~~0.30%~~0.25% for the three months ended September 30, 2021. The average balance of interest-bearing deposits increased by $155.5 million and the average balance of total borrowings decreased by $172.0 million. The increase in average interest-bearing deposits was due primarily to SBA PPP forgiveness since the prior year and an influx of municipal deposits during the third quarter of 2021, which offset a decline in certificates of deposits,March 31, 2022 due to ~~maturities, and SBA PPP~~the timing of deposit ~~usage. The cost of total deposits was 0.15% for the three months ended September 30, 2021 compared to 0.44% for the three months ended~~ ~~September 30, 2020.~~ ~~Rate~~rate reductions in 2021 combined with the continued maturity of higher yielding certificates of deposits ~~caused this decrease. Average borrowings declined due to repayments~~and the repayment and maturities of overnight ~~borrowings.~~borrowings in the third quarter of 2021.

Provision for Loan Losses

The Company ~~continues to experience~~recorded a ~~low level of charge-offs and nonperforming loans. A~~ provision for loan losses of ~~$365~~$300 thousand ~~was recorded~~ for the three months ended ~~September 30, 2021 due~~March 31, 2022 compared to ~~commercial loan growth compared with $2.2~~negative provision expense of $1.0 million for the same period in ~~2020.~~2021. In calculating the provision for loan losses, both quantitative and qualitative factors, including the Company's historical charge-off data and economic and market conditions, were considered. For the three months ended March 31, 2022, the provision for loan losses was driven primarily by an increase in commercial loan production, but was partially offset by the impact of a reduction in qualitative factors to unwind an increase from 2020 applied to the commercial real estate portfolio due to concerns about the economic impact of the COVID-19 pandemic. The negative provision expense recorded in the three months ended ~~September 30, 2020 was driven by an increase in qualitative factor assumptions as~~ March 31, 2021 was due to the release of a ~~result~~portion of the Company's COVID-19 ~~pandemic. Due to continuing uncertainty~~related reserve and a reduction in outstanding loan balances on non-guaranteed loans. Net recoveries in the ~~external environment, management increased the qualitative factors for certain commercial loan segments~~three months ended March 31, 2022 totaled $28 thousand, compared to net charge-offs of $184 thousand in the ~~Bank’s~~comparable prior year period. Nonaccrual loans were 0.28% of gross loans at March 31, 2022,

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~~allowance for~~compared with 0.48% of gross loans at March 31, 2021. Nonaccrual loans decreased by $4.4 million from March 31, 2021 to March 31, 2022 and classified loans decreased by $9.0 million to $23.4 million from March 31, 2021 to March 31, 2022. The decrease in non-accrual loans includes the payoff of one loan ~~loss analysis~~of $2.6 million and loans returning to accrual status of $591 thousand, with the remaining decrease due to paydowns. The decrease in classified loans reflects upgrades to commercial loans that were previously downgraded due to the ~~three months ended~~ ~~September 30, 2020. During the three months ended September 30, 2021, the Company's COVID-19 related reserve was reversed by $991 thousand as a result~~impact of the ~~relative strength of the economy and performance of the Bank's borrowers. As a result, the Company's~~ COVID-19 related reserve was reduced to zero at September 30, 2021. Net recoveries in the three months ended September 30, 2021 totaled $219 thousand, compared to net recoveries of $8 thousand in the comparable prior year period.pandemic.

Additional information is included in the "Credit Risk Management" section herein.

Noninterest Income

The following table compares noninterest income for the three months ended ~~September 30, 2021~~March 31, 2022 and ~~2020:~~2021:


		Three Months Ended September 30,				$ Change		% Change			Three Months Ended March 31,				$ Change		% Change
		2021		2020		2021-2020		2021-2020			2022		2021		2022-2021		2022-2021
Service charges on deposit accounts	Service charges on deposit accounts	$	796	$	684	$	112	16	%	Service charges on deposit accounts	$	920	$	737	$	183	25	%
Interchange income	Interchange income	1,030		900		130		14	%	Interchange income	981		955		26		3	%
Other service charges and fees	Other service charges and fees	197		168		29		17	%	Other service charges and fees	153		148		5		3	%
Swap fees		67		95		(28)		(29)	%
Swap fee income										Swap fee income	953		53		900		1,698	%
Trust and investment management income	Trust and investment management income	1,930		1,713		217		13	%	Trust and investment management income	1,941		1,912		29		2	%
Brokerage income	Brokerage income	987		751		236		31	%	Brokerage income	928		811		117		14	%
Mortgage banking activities	Mortgage banking activities	1,333		1,985		(652)		(33)	%	Mortgage banking activities	721		2,189		(1,468)		(67)	%

Income from life insurance	Income from life insurance	569		543		26		5	%	Income from life insurance	566		557		9		2	%
Other income	Other income	263		35		228		651	%	Other income	457		37		420		1,135	%

Investment securities gains (losses)		479		(13)		492		3,785	%
Investment securities (losses) gains										Investment securities (losses) gains	(146)		145		(291)		(201)	%
Total noninterest income	Total noninterest income	$	7,651	$	6,861	$	790	12	%	Total noninterest income	$	7,474	$	7,544	$	(70)	(1)	%

The following factors contributed to the more significant changes in noninterest income between the three months ended ~~September 30, 2021~~March 31, 2022 and ~~2020:~~2021:

•Service charges on deposit accounts increased ~~in 2021 following the implementation of fee waivers in 2020~~by $183 thousand due to ~~the COVID-19 pandemic and~~ increased deposit account activity ~~associated with the re-opening of~~as the economy incontinued to recover from the ~~second quarter of 2021. In addition, cash management fees have increased between periods due to an increase in client activity.~~COVID-19 pandemic.

•~~Interchange~~Swap fee income ~~grew from 2020 to 2021~~increased by $900 thousand due to increased ~~spending upon~~client interest in locking in rates in the ~~reopening of the economy and expanded usage of debit cards by consumers.~~

•Strong market conditions and the addition of new clients continue to drive trust and investment management income and brokerage income. Assets under management increased by $239 million from $1.6 billion at ~~September 30, 2020~~ ~~to $1.8 billion at September 30, 2021.~~rising interest rate environment.

•Mortgage banking income ~~declined $652 thousand driven~~decreased by ~~reduced~~$1.5 million due to current market conditions, including low housing inventory and a rising interest rate environment, which caused declines in residential mortgage loan production, asthe residential mortgage loan pipeline and secondary market sales during the first quarter of 2022, compared to strong refinancing activity ~~slowed during the three months ended September 30, 2021 as compared to the three months ended~~ ~~September 30, 2020~~. ~~Mortgage loans sold totaled $48.0 million~~ in the ~~third quarter of~~same period in 2021 ~~compared with $72.8 million~~that resulted in an increase in the ~~third quarter of 2020 resulting~~gain on sale margin. These changes resulted in a decrease in the gain on sale of residential ~~mortgages~~mortgage loans of ~~$415 thousand, a decrease in~~$1.1 million for the ~~fair value~~three months ended March 31, 2022 compared to the first quarter of ~~residential mortgages held for sale and valuation of interest rate lock commitments of $138 thousand and a decrease of $298 thousand in residential mortgage servicing income, offset partially by~~2021. In addition, the Company recorded an MSR valuation reserve reversal of ~~$43~~$47 thousand in the three months ended ~~September 30, 2021~~March 31, 2022 compared to ~~the impairment charge of $166~~$460 thousand in the three months ended ~~September 30, 2020.~~March 31, 2021, which was driven by significant market interest rate reductions caused by the COVID-19 pandemic earlier in 2021. Mortgage loans sold totaled $31.9 million in the first quarter of 2022 compared with $57.3 million in the first quarter of 2021.

•Other income increased by $420 thousand due primarily to the ~~recognition~~gain on sale of ~~tax credits~~an SBA loan of ~~$230~~$271 thousand ~~from~~during the ~~Bank's investment in solar renewable energy partnerships.~~three months ended March 31, 2022.

•~~Investment~~During the three months ended March 31, 2022, the Company recorded net investment securities ~~gains increased during~~losses of $146 thousand due to an OTTI charge of $171 thousand on one non-agency CMO security that is expected to be called by the ~~third~~issuer in the second quarter of ~~2021 from $482~~2022 due to an anticipated default caused by increased prepayment speeds on underlying collateral. The impairment charge was partially offset by a gain of $25 thousand, ~~in gains recorded~~primarily from the ~~sales~~partial sale of ~~$72.8~~$3.1 million of ~~asset-backed securities.~~one municipal security. During the three months ended March 31, 2021, the Company sold 14 securities with a principal balance of $75.6 million for a gain of $128 thousand.

•Other line items within noninterest income showed fluctuations between ~~2021~~2022 and ~~2020~~2021 attributable to normal business operations.

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Noninterest Expenses

The following table compares noninterest expenses for the three months ended ~~September 30, 2021~~March 31, 2022 and ~~2020:~~2021:
Three Months Ended September 30, $ Change % Change
2021 2020 2021-2020 2021-2020
Salaries and employee benefits $ 11,498 $ 10,695 $ 803 7.5 %
Occupancy 1,154 1,231 (77) (6.3) %
Furniture and equipment 1,220 1,203 17 1.4 %
Data processing 990 958 32 3.3 %
Automated teller machine and interchange fees 294 278 16 5.8 %
Advertising and bank promotions 735 197 538 273.1 %
FDIC insurance 218 230 (12) (5.2) %
Professional services 562 603 (41) (6.8) %
Directors' compensation 155 214 (59) (27.6) %
Taxes other than income 16 453 (437) (96.5) %
Intangible asset amortization 314 357 (43) (12.0) %
Branch consolidation expenses — 1,310 (1,310) — %
Other operating expenses 1,879 1,536 343 22.3 %
Total noninterest expenses $ 19,035 $ 19,265 $ (230) (1.2) %


	Three Months Ended March 31,				$ Change		% Change
	2022		2021		2022-2021		2022-2021
Salaries and employee benefits	$	11,337	$	10,197	$	1,140	11.2	%
Occupancy	1,288		1,240		48		3.9	%
Furniture and equipment	1,279		1,278		1		0.1	%
Data processing	1,053		1,019		34		3.3	%

Automated teller machine and interchange fees	305		249		56		22.5	%
Advertising and bank promotions	355		425		(70)		(16.5)	%
FDIC insurance	283		194		89		45.9	%

Professional services	808		721		87		12.1	%
Directors' compensation	231		234		(3)		(1.3)	%


Taxes other than income	564		451		113		25.1	%
Intangible asset amortization	292		334		(42)		(12.6)	%



Other operating expenses	1,569		1,441		128		8.9	%
Total noninterest expenses	$	19,364	$	17,783	$	1,581	8.9	%

The following factors contributed to the more significant changes in noninterest expenses between the three months ended ~~September 30, 2021~~March 31, 2022 and ~~2020:~~2021:

•Salaries and employee benefits expense increased ~~for~~by $1.1 million due primarily to additions to staff to maintain a strong growth trajectory.

•Automated teller machine and interchange fees increased by $56 thousand due to primarily to an increase in card processing rates from a third party vendor.

•FDIC insurance expense increased by $89 thousand due to an increase in the ~~three months ended September 30, 2021~~assessment rate driven by commercial loan growth.

•Professional services increased by $87 thousand due to an increase in compliance and technology consulting during the first quarter of 2022 compared to the ~~three months ended September 30, 2020 due primarily to increases in performance-based incentives, additions to personnel and higher benefit costs.~~

•~~Advertising and bank promotions~~same period of 2021, partially offset by increased ~~by $538 thousand due to reduced marketing efforts in 2020 due to the COVID-19 pandemic and the recognition of Pennsylvania Educational Improvement Tax Credit ("EITC") contributions~~legal costs incurred in the three months ended ~~September 30, 2021.~~March 31, 2021 in connection with the SEPTA litigation.

•Taxes other than income ~~decreased~~increased by ~~$437~~$113 thousand due to ~~tax credits recorded from~~ the ~~EITC contributions~~increase in the ~~three months ended September 30, 2021.~~

•~~Intangible asset amortization decreased principally due to~~Pennsylvania Bank Shares Tax expense, which is based on the ~~elimination of a customer intangible associated with the discontinuance of Wheatland Advisors, Inc. on July 31, 2020~~Bank's total equity balance, and ~~full amortization of a covenant not to compete~~an increase in ~~2020.~~

•~~Branch consolidation expenses were $1.3 million for the three months September 30, 2020 related to the consolidation of six branches and three loan production offices. There were no similar charges~~state personal property taxes for the three months ended ~~September 30,~~March 31, 2022 compared to the three months ended March 31, 2021.

•Other operating expenses increased by ~~$343~~$128 thousand primarily due to ~~a loss~~an increase in loan-related costs of ~~$514~~$186 thousand from commercial loan production, increases of $83 thousand in employee-related costs and $53 thousand in postage, printing and supplies as employees returned from the ~~termination of an interest rate derivative designated~~work-from-home environment resulting from the COVID-19 pandemic and travel increased as ~~a cash flow hedge recorded in~~ the ~~three months ended September 30, 2021,~~economy and businesses recover. These increases were partially offset by a ~~decrease of $172 thousand~~reduction in the reserve for unfunded commitments of $238 thousand from $266 thousand during the three months ended ~~September 30, 2020. A review of historical loss and line utilization experience resulted in no provision expense in~~March 31, 2021 to $28 thousand for the three months ended ~~September 30, 2021.~~March 31, 2022. The reserve for unfunded commitments during the three months ended March 31, 2021 was elevated due to the COVID-19 pandemic.

•Other line items within noninterest expenses showed fluctuations between ~~2021~~2022 and ~~2020~~2021 attributable to normal business operations.

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Income Tax Expense

Income tax expense totaled ~~$1.7~~$2.0 million, an effective tax rate of ~~18.9%~~19.4%, for the three months ended ~~September 30, 2021,~~March 31, 2022 compared with ~~$1.2~~$2.4 million, an effective tax rate of ~~19.9%~~19.1%, for the three months ended ~~September 30, 2020.~~March 31, 2021. The Company’s effective tax rate is less than the 21% federal statutory rate, principally due to tax-free income, which includes interest income on tax-free loans and investment securities and income from life insurance policies, federal income tax credits, and the impact of non-tax deductible expenses. The ~~difference~~increase in the effective tax rate from the three months ended ~~September 30, 2020~~March 31, 2021 to the three months ended ~~September 30, 2021~~March 31, 2022 was due ~~primarily~~partially due to ~~an increase in~~lower estimated ~~earnings before~~federal tax credits for the 2022 fiscal year and a lower pre-tax income ~~taxes for which the impact was reflected~~projection in the ~~three months ended September 30, 2020.~~

~~Nine months ended September 30, 2021 compared with nine months ended September 30, 2020~~

~~Summary~~

Net income totaled $26.2 million for the nine months ended September 30, 2021 compared with net income of $16.4 million for the same period in 2020. Diluted earnings per share for the nine months ended September 30, 2021 totaled $2.36, compared with $1.49 for the nine months ended September 30, 2020. Net interest income positively influenced results of operations, and totaled $64.4 million for the nine months ended September 30, 2021, as compared to $59.9 million in the nine months ended September 30, 2020. Noninterest income totaled $21.9 million for the nine months ended September 30, 2021 compared with $21.1 million in the nine months ended September 30, 2020. Noninterest expenses totaled $53.9 million and $56.0 million for the nine months ended September 30, 2021 and 2020, respectively.

~~The comparability of operating results for 2021 with 2020 have generally been impacted by the SBA PPP loans and related deposits.~~

~~Net Interest Income~~

Net interest income increased by $4.5 million, from $59.9 million to $64.4 million, for the nine months ended September 30, 2021 compared with the nine months ended September 30, 2020. Total interest expense decreased from $13.3 million to $5.4 million, in comparing the nine months ended September 30, 2021 with the nine months ended September 30, 2020. Interest income on loans decreased by $881 thousand, from $63.6 million to $62.7 million, and investment securities interest income decreased by $2.7 million, from $9.5 million to $6.8 million for the same period.

~~Table of Contents~~

~~The following table presents net interest income, net interest spread and net interest margin for the nine months ended September 30, 2021 and 2020 on a taxable-equivalent basis:~~
Nine Months Ended September 30, 2021 Nine Months Ended September 30, 2020
Average
Balance Taxable-
Equivalent
Interest Taxable-
Equivalent
Rate Average
Balance Taxable-
Equivalent
Interest Taxable-
Equivalent
Rate
Assets
Federal funds sold & interest-bearing bank balances $ 261,697 $ 255 0.13 % $ 27,315 $ 101 0.49 %
Investment securities (1)
456,919 7,272 2.13 496,977 9,797 2.63
Loans (1)(2)(3)
1,988,834 62,895 4.23 1,899,186 63,940 4.50
Total interest-earning assets 2,707,450 70,422 3.48 2,423,478 73,838 4.07
Other assets 188,924 193,057
Total $ 2,896,374 $ 2,616,535
Liabilities and Shareholders’ Equity
Interest-bearing demand deposits $ 1,380,241 1,014 0.10 $ 1,113,740 4,100 0.49
Savings deposits 197,792 149 0.10 160,133 194 0.16
Time deposits 376,142 2,247 0.80 466,032 5,853 1.68
Total interest-bearing deposits 1,954,175 3,410 0.23 1,739,905 10,147 0.78
Securities sold under agreements to repurchase 22,490 25 0.15 17,395 72 0.55
FHLB Advances and other 53,608 458 1.14 194,197 1,604 1.10
Subordinated notes 31,924 1,507 6.29 31,867 1,504 6.29
Total interest-bearing liabilities 2,062,197 5,400 0.35 1,983,364 13,327 0.90
Noninterest-bearing demand deposits 537,247 373,614
Other 37,413 35,874
Total liabilities 2,636,857 2,392,852
Shareholders’ equity 259,517 223,683
Total $ 2,896,374 $ 2,616,535
Taxable-equivalent net interest income /net interest spread 65,022 3.13 % 60,511 3.17 %
Taxable-equivalent net interest margin 3.21 % 3.34 %
Taxable-equivalent adjustment (646) (633)
Net interest income $ 64,376 $ 59,878


~~NOTES TO ANALYSIS OF NET INTEREST INCOME:~~
~~(1)~~			~~Yields and interest income on tax-exempt assets have been computed on a taxable-equivalent basis assuming a 21% tax rate.~~
~~(2)~~			~~Average balances include nonaccrual loans.~~
~~(3)~~			~~Interest income on loans includes prepayment and late fees.~~

~~For the nine months ended September 30, 2021, taxable-equivalent basis net interest income increased by $4.5 million compared with the nine months ended September 30, 2020. This increase reflected an increase of~~ ~~$284.0 million~~ ~~in average interest-earning assets due to an increase in average cash, partially offset by an increase of~~ ~~$78.8 million~~ ~~in average interest-bearing liabilities from the nine months ended September 30, 2020 to the nine months ended September 30,~~ 2021. ~~These balances increased primarily due to the SBA PPP loans originated from April 2020 to May 2021.~~

~~Taxable-equivalent net interest margin was 3.21% for the nine months ended September 30, 2021, which was 13 basis points lower than 3.34% for the~~ nine months ended September 30, 2020. This reduction was driven by an increase in average cash of $234.4 million, lower purchase accounting accretion of $1.9 million and reduced yields on investment securities.

~~Table of Contents~~

The yield on loans was 4.23% for the nine months ended September 30, 2021 compared to 4.50% for the nine months ended September 30, 2020. Taxable-equivalent interest income earned on loans decreased by $1.0 million year-over-year despite an increase in the average balance of commercial loans of $210.2 million. The decline in the yield on total loans reflects the impact from an increase in average SBA PPP loans, which have a 1% note rate, and the payoff of higher yielding loans with new loan originations at lower interest rates.

SBA PPP loans, net of deferred fees and costs, averaged $412.2 million during the nine months ended September 30, 2021 as compared to $269.8 million in the nine months ended September 30, 2020. Partially offsetting the increase in loans from SBA PPP were decreases in average consumer loans due to runoff and average residential mortgage loans during the period due to the competitive and low interest rate environment. Average consumer loans decreased by $22.0 million from $63.4 million for the nine months ended September 30, 2020 to $41.4 million for the nine months ended September 30, 2021. Average residential mortgages were $216.9 million for the nine months ended September 30, 2021, a decrease of $89.2 million from $306.1 million for the nine months ended September 30, 2020.

For the nine months ended September 30, 2021, interest income on loans includes $13.0 million of interest and net deferred fee income recognized associated with the SBA PPP loans compared to $6.1 million for the nine months ended September 30, 2020. Net deferred fees of $8.6 million remain at September 30, 2021, which will be recognized over the life of the loans that was originally between two and five years, but can be accelerated upon satisfactorily completing forgiveness steps with the SBA. Accretion of purchase accounting adjustments was $1.4 million for the nine months ended September 30, 2021 as compared to $2.5 million for the nine months ended September 30, 2020. The nine months ended September 30, 2021 and 2020 included $919 thousand and $1.4 million, respectively, of accelerated accretion related to the payoff of acquired loans.

~~Taxable-equivalent securities interest income decreased by $2.5 million year-over-year, with the taxable equivalent yield~~ ~~decreasing from 2.63% for the nine months ended September 30, 2020 to 2.13% for the nine months ended September 30, 2021.~~ The 50 basis point decrease reflected the decreased interest rate environment between years and certain repositioning within the portfolio under the Company's asset/liability management strategies. Interest income on securities was also impacted by the decrease of $40.1 million in the average balance of securities from the nine months ended September 30, 2020 to the nine months ended September 30, 2021 due primarily to the sale of the non-agency CMBS portfolio during the nine months ended September 30, 2021.

Interest expense on deposits and borrowings decreased by $7.9 million year-over-year, with the average balance of interest-bearing deposits increasing by $214.3 million and the average balance of total borrowings decreasing by $135.4 million. The increase in average interest-bearing deposits was due primarily to the SBA PPP forgiveness since the prior year, which was partially offset by maturities of certificates of deposits. The decrease in average borrowings was due to maturities and repayments of overnight borrowings. There was a decrease of 55 basis points in the cost of interest-bearing liabilities, which was driven by rate reductions in 2021 as well as maturities of higher yielding certificates of deposits. The balance of deposits associated with the SBA PPP loans are expected to decline into the second half of 2021 as the funds are drawn by the borrowers.

~~Provision for Loan Losses~~

The Company continues to experience a low level of charge-offs and nonperforming loans. The provision for loan losses was negative $10 thousand for the nine months ended September 30, 2021 compared with expense of $5.0 million for the same period in 2020. The provision recorded in the nine months ended September 30, 2020 was driven by an increase in qualitative factor assumptions as a result of the COVID-19 pandemic. The negative provision recorded in the nine months ended September 30, 2021 was due to the release of $2.7 million of the Company's COVID-19 related reserves, as the credit performance was strong in the past year following the re-opening of the economy. As a result, the Company's COVID-19 reserve was reduced to zero at September 30, 2021. Offsetting the impact to the provision for loan losses from the decrease in the COVID-19 qualitative factors was an increase in the provision expense from commercial loan production. Net charge-offs in the nine months ended September 30, 2021 totaled $176 thousand, as compared to net recoveries of $45 thousand in the comparable prior year period. Nonaccrual loans were 0.47% of gross loans at September 30, 2021, compared with 0.39% of gross loans at September 30, 2020. Nonaccrual loans increased by $1.2 million from September 30, 2020 to September 30, 2021; however, classified loans decreased by $9.5 million to $26.9 million from September 30, 2020 to September 30, 2021.

~~Additional information is included in the "Credit Risk Management" section herein.~~

~~Table of Contents~~

~~Noninterest Income~~

~~The following table compares noninterest income for the nine months ended September 30, 2021 and 2020:~~
Nine Months Ended September 30, $ Change % Change
2021 2020 2021-2020 2021-2020
Service charges on deposit accounts $ 2,231 $ 2,085 $ 146 7 %
Interchange income 3,049 2,507 542 22 %
Other service charges and fees 527 473 54 11 %
Swap fees 135 527 (392) (74) %
Trust and investment management income 5,862 5,049 813 16 %
Brokerage income 2,708 2,069 639 31 %
Mortgage banking activities 4,684 3,926 758 19 %
Gain on sale of portfolio loans — 2,803 (2,803) (100) %
Income from life insurance 1,690 1,615 75 5 %
Other income 338 118 220 186 %
Investment securities gains (losses) 635 (44) 679 1,543 %
Total noninterest income $ 21,859 $ 21,128 $ 731 3 %

~~The following factors contributed to the more significant changes in noninterest income between the nine months ended September 30, 2021 and 2020:~~

•Service charges on deposit accounts increased in 2021 following the implementation of fee waivers in 2020 due to the COVID-19 pandemic and increased deposit account activity associated with the re-opening of the economy in the second quarter of 2021.

•~~Interchange income grew from 2020 to 2021 due to increased spending upon the reopening of the economy and expanded usage of debit cards by consumers.~~

•~~Swap fees declined due to less interest from potential clients in a low interest rate environment. Swap fee income fluctuates based on the number of transactions entered into in a period.~~

•~~Mortgage banking income increased by $758 thousand due to an MSR valuation reserve reversal of $695 thousand in the~~ ~~nine~~ ~~months ended September 30, 2021 compared to an MSR impairment charge of $986 thousand in the~~ ~~nine~~ ~~months ended September 30, 2020, which was driven~~ by significant market interest rate reductions caused by the COVID-19 pandemic. This was partially offset by a decrease of $1.1 million in the fair value of the residential mortgages held for sale and valuation of interest rate lock commitments attributed to reduced production due to less refinancing activity and the impact of higher rates on the valuations during the ~~nine months ended September 30, 2021 as compared to the~~ ~~nine months ended~~ ~~September 30, 2020~~. ~~Refinance activity was strong in the second and third quarters of 2020 due to the decrease in interest rates, and the gain on sale margin increased.~~

•~~During the nine months ended~~ ~~September 30, 2020~~, the Bank recorded $2.8 million in gains due to the sale of $10.9 million of classified loans for net gains of $2.5 million, and the sale of an $11.0 million portfolio of recreational vehicle loans for a gain of $314 thousand.

•~~Other income increased due primarily to the recognition of tax credits of $230 thousand from the Bank's investment in solar renewable energy partnerships in the nine months ended September 30, 2021.~~

•During the nine months ended September 30, 2021, the Company recorded net investment securities gains of $635 thousand from the sales of $148.4 million of commercial mortgage-backed securities and asset-backed securities. There were no sales of debt securities during the ~~nine months ended~~ ~~September 30, 2020.~~

•~~Other line items within noninterest income showed fluctuations between 2021 and 2020 attributable to normal business operations.~~

~~Table of Contents~~

~~Noninterest Expenses~~

~~The following table compares noninterest expenses for the nine months ended September 30, 2021 and 2020:~~
Nine Months Ended September 30, $ Change % Change
2021 2020 2021-2020 2021-2020
Salaries and employee benefits $ 31,907 $ 32,352 $ (445) (1.4) %
Occupancy 3,492 3,480 12 0.3 %
Furniture and equipment 3,800 3,569 231 6.5 %
Data processing 3,041 2,620 421 16.1 %
Automated teller machine and interchange fees 862 778 84 10.8 %
Advertising and bank promotions 1,434 1,153 281 24.4 %
FDIC insurance 570 491 79 16.1 %
Professional services 1,862 2,340 (478) (20.4) %
Directors' compensation 624 679 (55) (8.1) %
Taxes other than income 929 904 25 2.8 %
Intangible asset amortization 972 1,224 (252) (20.6) %
Branch consolidation expenses — 1,310 (1,310) — %
Insurance claim receivable recovery — (486) 486 (100.0) %
Other operating expenses 4,358 5,586 (1,228) (22.0) %
Total noninterest expenses $ 53,851 $ 56,000 $ (2,149) (3.8) %

~~The following factors contributed to the more significant changes in noninterest expenses between the nine months ended September 30, 2021 and 2020:~~

•~~The decrease in salaries and employee benefits from 2020 to 2021 was driven by reduced staffing as a result of the prior year's restructurings.~~

•~~Data processing expenses increased by $421 thousand due primarily to increased core system costs and trust data processing activity.~~

•~~Advertising and bank promotions increased by $281 thousand due to increased marketing efforts from the post-pandemic environment.~~

•~~The increase in FDIC insurance expense reflects the increase in FDIC assessments during 2021 compared to 2020, which is impacted by credits in the nine months ended~~ ~~September 30, 2020 that did not recur in 2021.~~

•~~Professional services decreased by $478 thousand due to legal costs incurred in the nine months ended September 30, 2020 in connection with the SEPTA litigation.~~

•Intangible asset amortization decreased principally due to the elimination of a customer intangible associated with the discontinuance of Wheatland Advisors, Inc. on July 31, 2020 and full amortization of a covenant not to compete in 2020.

•Branch consolidation expenses were $1.3 million for the nine months September 30, 2020 related to the consolidation of six branches and three loan production offices. There were no similar charges for the nine months September 30, 2021.

•~~During the nine months ended September 30, 2020, $486 thousand of refunds were received from an insurance company related to a 2018 cyber security incident.~~

•~~Other operating expenses declined by $1.2 million primarily due to a reduction in the reserve for unfunded commitments of $340 thousand and a reduction of~~ ~~$724 tho~~usand in expenses associated with the sale of a property recorded in the nine months ended September 30, 2020. For the nine months ended September 30, 2020, the reserve for unfunded commitments was higher due to increased qualitative factors from the COVID-19 pandemic, which were reversed in 2021 following a review of historical loss and line utilization experience. This was partially offset by the loss of $514 thousand from the termination of the interest rate derivative designated as a cash flow hedge during the nine months September 30, 2021.

•~~Other line items within noninterest expenses showed fluctuations between 2021 and 2020 attributable to normal business operations.~~

~~Table of Contents~~

~~Income Tax Expense~~

Income tax expense totaled $6.2 million, an effective tax rate of 19.2%, for the nine months ended September 30, 2021 compared with $3.6 million, an effective tax rate of 17.9%, for the nine months ended September 30, 2020. The Company’s effective tax rate is less than the 21% federal statutory rate, principally due to tax-free income, which includes interest income on tax-free loans and securities and income from life insurance policies, federal income tax credits, and the impact of non-tax deductible expenses. The difference in the effective tax rate from the nine months ended September 30, 2020 to the nine months ended September 30, 2021 was due primarily to higher estimated earnings before income taxes for the 2021 fiscal year.

FINANCIAL CONDITION

Management devotes substantial time to overseeing the investment of funds in loans and investment securities and the formulation of policies directed toward the profitability and management of the risks associated with these investments.

Investment Securities

The Company utilizes investment securities to manage interest rate risk, to enhance income through interest and dividend income, to provide liquidity and to provide collateral for certain deposits and borrowings. At ~~September 30, 2021,~~March 31, 2022, AFS securities ~~available for sale~~ totaled ~~$445.0~~$529.7 million, ~~a decrease~~an increase of ~~$21.4~~$57.3 million, from ~~$466.5~~$472.4 million at December 31, ~~2020.~~2021. During the ~~nine~~three months ended ~~September 30, 2021,~~March 31, 2022, the Company ~~sold $148.4~~purchased $62.9 million ~~of commercial mortgage-backed securities~~ and ~~asset-backed securities for a net gain of $609 thousand, and purchased $156.9~~$32.0 million of ~~mortgage-backed securities,~~ municipal securities and ~~United States Treasury notes.~~

agency MBS and partially sold $3.1 million of a municipal security for a gain of $22 thousand. During the ~~nine months ended September 30, 2021 and 2020,~~first quarter of 2022, the Company recorded ~~a gain~~an OTTI charge of ~~$26~~$171 thousand ~~and a loss~~on one $14.7 million par value non-agency CMO, which is expected to be called by the issuer in the second quarter of ~~$44 thousand, respectively,~~2022 due to ~~market value adjustments on~~ an ~~equity security.~~anticipated default. The balance of investment securities included net unrealized ~~gains~~losses of ~~$7.2~~$18.6 million at ~~September 30, 2021 as~~March 31, 2022 compared to net unrealized gains of ~~$5.5~~$5.6 million at December 31, ~~2020. This increase reflects the impact of improved~~2021 due to market ~~rates on the Company's investment security portfolio.~~interest rate increases.

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The following table summarizes the credit ratings and collateral associated with the Company's investment portfolio, excluding equity securities, at ~~September 30, 2021:~~March 31, 2022:


Sector	Sector	Portfolio Mix		Amortized Book		Fair Value		Credit Enhancement		AAA		AA		A		BBB		NR		Collateral Type	Sector	Portfolio Mix		Amortized Book		Fair Value		Credit Enhancement		AAA		AA		A		BBB		NR		Collateral Type
Unsecured ABS	Unsecured ABS	1	%	$	3,103	$	3,159	31	%	—	%	—	%	—	%	—	%	100	%	Unsecured Consumer Debt	Unsecured ABS	1	%	$	6,548	$	6,549	33	%	—	%	—	%	—	%	—	%	100	%	Unsecured Consumer Debt
Student Loan ABS	Student Loan ABS	2		9,385		9,367		18		—		—		—		—		100		Seasoned Student Loans	Student Loan ABS	1		8,228		8,124		26		—		—		—		—		100		Seasoned Student Loans
Federal Family Education Loan ABS	Federal Family Education Loan ABS	23		101,309		101,383		5		67		27		5		—		—		Federal Family Education Loan (1)	Federal Family Education Loan ABS	18		97,140		95,572		6		85		15		—		—		—		Federal Family Education Loan (1)
PACE Loan ABS	PACE Loan ABS	1		3,880		3,969		5		100		—		—		—		—		PACE Loans	PACE Loan ABS	1		3,350		3,267		5		100		—		—		—		—		PACE Loans

Non-Agency RMBS	Non-Agency RMBS	6		25,929		25,657		49		100		—		—		—		—		Reverse Mortgages (2)	Non-Agency RMBS	5		25,135		22,303		31		44		—		—		—		56		Reverse Mortgages (2)
Municipal - General Obligation	Municipal - General Obligation	21		93,094		97,365				7		86		7		—		—			Municipal - General Obligation	20		112,387		109,100				6		88		6		—		—
Municipal - Revenue	Municipal - Revenue	18		81,145		84,156				—		76		12		—		13			Municipal - Revenue	24		132,534		128,460				—		83		12		—		5
SBA ReRemic	SBA ReRemic	2		9,049		9,029				—		100		—		—		—		SBA Guarantee (3)	SBA ReRemic	1		7,237		7,157				—		100		—		—		—		SBA Guarantee (3)
Agency MBS	Agency MBS	21		90,474		90,705				—		100		—		—		—		Residential Mortgages (3)	Agency MBS	25		135,262		130,257				—		100		—		—		—		Residential Mortgages (3)
U.S. Treasury securities	U.S. Treasury securities	5		20,087		19,831				—		100		—		—		—			U.S. Treasury securities	4		20,081		18,538				—		100		—		—		—
Bank CDs	Bank CDs	—		249		249				—		—		—		—		100		FDIC Insured CD	Bank CDs	—		249		249				—		—		—		—		100		FDIC Insured CD
		100	%	$	437,704	$	444,870			24	%	66	%	5	%	—	%	5	%			100	%	$	548,151	$	529,576			19	%	70	%	4	%	—	%	7	%

(1) Minimum of 97% guaranteed by U.S. government
(1) Minimum of 18% guaranteed by U.S. government																					(1) Minimum of 18% guaranteed by U.S. government
(2) Reverse mortgages fund over time, credit enhancement is estimated based on prior experience	(2) Reverse mortgages fund over time, credit enhancement is estimated based on prior experience																				(2) Reverse mortgages fund over time, credit enhancement is estimated based on prior experience
(3) 100% guaranteed by U.S. government agencies
(3) 74% guaranteed by U.S. government agencies																					(3) 74% guaranteed by U.S. government agencies

Note : Ratings in table are the lowest of the six rating agencies (Standard & Poor's, Moody's, Morningstar, DBRS, KBRA and Fitch). Standard & Poor's rates U.S. government obligations at AA+	Note : Ratings in table are the lowest of the six rating agencies (Standard & Poor's, Moody's, Morningstar, DBRS, KBRA and Fitch). Standard & Poor's rates U.S. government obligations at AA+																				Note : Ratings in table are the lowest of the six rating agencies (Standard & Poor's, Moody's, Morningstar, DBRS, KBRA and Fitch). Standard & Poor's rates U.S. government obligations at AA+

Loan Portfolio

The Company offers a variety of products to meet the credit needs of its borrowers, principally commercial real estate loans, commercial and industrial loans, ~~and~~ retail ~~loans consisting of~~ loans secured by residential properties, and to a lesser extent, installment loans. No loans are extended to non-domestic borrowers or governments.

The risks associated with lending activities differ among loan classes and are subject to the impact of changes in interest rates, market conditions of collateral securing the loans and general economic conditions. Any of these factors may adversely impact a borrower’s ability to repay loans, and also impact the associated collateral. See Note 3, Loans and Allowance for Loan Losses, to the unaudited condensed consolidated financial statements under Part I, Item 1, "Financial Information," for a description of the Company’s loan classes and differing levels of associated credit risk.

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The following table presents the loan portfolio, excluding residential LHFS, by segment and class at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020:~~2021:


		September 30, 2021		December 31, 2020			March 31, 2022		December 31, 2021
Commercial real estate:	Commercial real estate:					Commercial real estate:
Owner occupied	Owner occupied	$	196,585	$	174,908	Owner occupied	$	256,526	$	238,668
Non-owner occupied	Non-owner occupied	509,703		409,567		Non-owner occupied	558,999		551,783
Multi-family	Multi-family	112,002		113,635		Multi-family	93,158		93,255
Non-owner occupied residential	Non-owner occupied residential	100,088		114,505		Non-owner occupied residential	102,269		106,112
Acquisition and development:	Acquisition and development:					Acquisition and development:
1-4 family residential construction	1-4 family residential construction	12,246		9,486		1-4 family residential construction	15,115		12,279
Commercial and land development	Commercial and land development	71,784		51,826		Commercial and land development	105,204		93,925
Commercial and industrial (1)	Commercial and industrial (1)	540,205		647,368		Commercial and industrial (1)	443,170		485,728
Municipal	Municipal	13,631		20,523		Municipal	14,626		14,989
Residential mortgage:	Residential mortgage:					Residential mortgage:
First lien	First lien	203,360		244,321		First lien	203,231		198,831
Home equity - term	Home equity - term	7,079		10,169		Home equity - term	5,820		6,081
Home equity - lines of credit	Home equity - lines of credit	154,004		157,021		Home equity - lines of credit	164,818		160,705
Installment and other loans	Installment and other loans	19,077		26,361		Installment and other loans	15,371		17,630
		$	1,939,764	$	1,979,690		$	1,978,307	$	1,979,986

(1) This balance includes ~~$259.9~~$122.5 million and ~~$403.3~~$189.9 million of SBA PPP loans at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, respectively.

Total loans declined by ~~$39.9~~$1.7 million from December 31, ~~2020~~2021 to ~~September 30, 2021.~~March 31, 2022. This decrease is due ~~primarily~~ to SBA PPP loan forgiveness of ~~$376.0~~$67.4 million ~~in the nine months ended September 30, 2021~~ and ~~payoffs~~a decrease of $2.3 million in ~~the residential mortgage loan and~~ installment and other loan portfolios due to payoffs, offset by commercial loan production, excluding SBA PPP loans, of ~~$157.9~~$59.7 million, and increases in residential mortgage loans and home equity lines of credit of $4.4 million and $4.1 million, respectively, during the ~~nine~~three months ended ~~September 30, 2021.~~March 31, 2022. Overall loan growth, excluding SBA PPP loans, was 7%4% for the ~~nine~~three months ended ~~September 30, 2021.~~March 31, 2022.

Asset Quality

Risk Elements

The Company’s loan portfolio is subject to varying degrees of credit risk. Credit risk is managed through ~~our~~the Company's underwriting standards, on-going credit reviews, and monitoring of asset quality measures. Additionally, loan portfolio diversification, which limits exposure to a single industry or borrower, and collateral requirements also mitigate ~~our~~the Company's risk of credit loss.

The loan portfolio consists principally of loans to borrowers in south central Pennsylvania and the greater Baltimore, Maryland region. As the majority of loans are concentrated in these geographic regions, a substantial portion of the borrowers' ability to honor their obligations may be affected by the level of economic activity in the market areas.

Nonperforming assets include nonaccrual loans and foreclosed real estate. In addition, restructured loans still accruing and loans past due 90 days or more and still accruing are also deemed to be risk assets. For all loan classes, the accrual of interest income generally ceases when principal or interest is past due 90 days or more and collateral is inadequate to cover principal and interest or immediately if, in the opinion of management, full collection is unlikely. Interest will continue to accrue on loans past due 90 days or more if the collateral is adequate to cover principal and interest, and the loan is in the process of collection. Interest accrued, but not collected, as of the date of placement on nonaccrual status, is generally reversed and charged against interest income, unless fully collateralized. Subsequent payments received are either applied to the outstanding principal balance or recorded as interest income, depending on management’s assessment of the ultimate collectability of principal. Loans are returned to accrual status, for all loan classes, when all the principal and interest amounts contractually due are brought current, the loans have performed in accordance with the contractual terms of the note for a reasonable period of time, generally six months, and the ultimate collectability of the total contractual principal and interest is reasonably assured. Past due status is based on contract terms of the loan.

Loans, the terms of which are modified, are classified as TDRs if a concession was granted for legal or economic reasons related to a borrower’s financial difficulties. Concessions granted under a TDR typically involve a temporary deferral of scheduled loan payments, an extension of a loan’s stated maturity date, temporary reduction in interest rates, or below market

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rates. If a modification occurs while the loan is on accruing status, it will continue to accrue interest under the modified terms.

~~Table of Contents~~

Nonaccrual TDRs are restored to accrual status if scheduled principal and interest payments, under the modified terms, are current for six months after modification, and the borrower continues to demonstrate its ability to meet the modified terms. TDRs are evaluated individually for impairment if they have been restructured during the most recent calendar year, or if they are not performing according to their modified terms.

The following table presents the Company’s total nonperforming and other risk ~~elements,~~assets, including the aggregate balances of nonaccrual loans, restructured loans still accruing, loans past due 90 days or more, and OREO as of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020. Relevant~~2021. Loans 30-89 days past due and relevant asset quality ratios as of March 31, 2022 and December 31, 2021 are also presented.


		September 30, 2021			December 31, 2020				March 31, 2022			December 31, 2021
Nonaccrual loans	Nonaccrual loans	$	9,116		$	10,310		Nonaccrual loans	$	5,510		$	6,449
OREO	OREO	—			—			OREO	—			—
Total nonperforming assets	Total nonperforming assets	9,116			10,310			Total nonperforming assets	5,510			6,449
Restructured loans still accruing	Restructured loans still accruing	839			934			Restructured loans still accruing	575			804
Loans past due 90 days or more and still accruing	Loans past due 90 days or more and still accruing	362			554			Loans past due 90 days or more and still accruing	238			1,201
Total nonperforming and other risk assets (total risk assets)	Total nonperforming and other risk assets (total risk assets)	$	10,317		$	11,798		Total nonperforming and other risk assets (total risk assets)	$	6,323		$	8,454
Loans 30-89 days past due	Loans 30-89 days past due	$	1,534		$	10,291		Loans 30-89 days past due	$	4,953		$	5,925
Asset quality ratios:	Asset quality ratios:							Asset quality ratios:
Total nonaccrual loans to total loans		0.47		%	0.52		%
Total nonperforming loans to total loans								Total nonperforming loans to total loans	0.28		%	0.33		%
Total nonperforming assets to total assets	Total nonperforming assets to total assets	0.32		%	0.37		%	Total nonperforming assets to total assets	0.19		%	0.23		%
Total nonperforming assets to total loans and OREO	Total nonperforming assets to total loans and OREO	0.47		%	0.52		%	Total nonperforming assets to total loans and OREO	0.28		%	0.33		%
Total risk assets to total loans and OREO	Total risk assets to total loans and OREO	0.53		%	0.60		%	Total risk assets to total loans and OREO	0.32		%	0.43		%
Total risk assets to total assets	Total risk assets to total assets	0.36		%	0.43		%	Total risk assets to total assets	0.22		%	0.30		%
ALL to total loans	ALL to total loans	1.03		%	1.02		%	ALL to total loans	1.09		%	1.07		%
ALL to nonperforming loans	ALL to nonperforming loans	219.01		%	195.45		%	ALL to nonperforming loans	390.34		%	328.42		%
ALL to nonperforming loans and restructured loans still accruing	ALL to nonperforming loans and restructured loans still accruing	200.55		%	179.22		%	ALL to nonperforming loans and restructured loans still accruing	353.46		%	292.02		%

Total nonperforming and other risk assets decreased by ~~$1.5~~$2.1 million, or ~~12.6%~~25%, from December 31, ~~2020~~2021 to ~~September 30, 2021.~~March 31, 2022. There was a reduction of $~~1.2 million~~939 thousand in non-accrual loans from December 31, 2021 to March 31, 2022 due to ~~payment activity~~$591 thousand of loans returning to accrual status and ~~a decrease~~payoffs of ~~$192 thousand~~ ~~in loans~~$376 thousand. Loans past 90 days and still accruing decreased by $963 thousand from December 31, ~~2020~~2021 to ~~September 30, 2021.~~March 31, 2022 due to the collection on a loan guaranteed by the SBA.

The following table presents detail of impaired loans at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020:~~2021:


		September 30, 2021						December 31, 2020							March 31, 2022						December 31, 2021
		Nonaccrual Loans		Restructured Loans Still Accruing		Total		Nonaccrual Loans		Restructured Loans Still Accruing		Total			Nonaccrual Loans		Restructured Loans Still Accruing		Total		Nonaccrual Loans		Restructured Loans Still Accruing		Total
Commercial real estate:	Commercial real estate:													Commercial real estate:
Owner occupied	Owner occupied	$	3,806	$	26	$	3,832	$	3,232	$	28	$	3,260	Owner occupied	$	3,062	$	—	$	3,062	$	3,763	$	—	$	3,763

Non-owner occupied residential	Non-owner occupied residential	171		—		171		268		—		268		Non-owner occupied residential	100		—		100		122		—		122
Acquisition and development:

Commercial and land development		—		—		—		814		—		814

Commercial and industrial	Commercial and industrial	2,941		—		2,941		3,639		—		3,639		Commercial and industrial	161		—		161		250		—		250
Residential mortgage:	Residential mortgage:													Residential mortgage:
First lien	First lien	1,659		813		2,472		1,730		898		2,628		First lien	1,703		575		2,278		1,831		804		2,635
Home equity - term	Home equity - term	7		—		7		10		—		10		Home equity - term	6		—		6		7		—		7
Home equity - lines of credit	Home equity - lines of credit	495		—		495		600		8		608		Home equity - lines of credit	426		—		426		436		—		436
Installment and other loans	Installment and other loans	37		—		37		17		—		17		Installment and other loans	52		—		52		40		—		40
		$	9,116	$	839	$	9,955	$	10,310	$	934	$	11,244		$	5,510	$	575	$	6,085	$	6,449	$	804	$	7,253

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The following table presents our exposure to ~~borrowers~~relationships with an impaired balance, which excludes accruing PCI loans, and the partial charge-offs taken to date and specific reserves established on ~~the borrowing~~those relationships at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020.~~2021. Of the relationships deemed to be impaired at ~~September 30, 2021, two~~March 31, 2022, one had a recorded balance in excess of $1.0 million, and ~~62,~~59 relationships, which represents ~~35.1%~~49% of total impaired loans, had recorded balances of less than $250 thousand.


		# of Relationships	Recorded Investment		Partial Charge-offs to Date		Specific Reserves			# of Relationships	Recorded Investment		Partial Charge-offs to Date		Specific Reserves
September 30, 2021
March 31, 2022									March 31, 2022
Relationships greater than $1,000,000	Relationships greater than $1,000,000	2	$	5,225	$	—	$	—	Relationships greater than $1,000,000	1	$	2,492	$	—	$	—
Relationships greater than $500,000 but less than $1,000,000	Relationships greater than $500,000 but less than $1,000,000	1	619		17		—		Relationships greater than $500,000 but less than $1,000,000	—	—		—		—
Relationships greater than $250,000 but less than $500,000	Relationships greater than $250,000 but less than $500,000	2	612		—		—		Relationships greater than $250,000 but less than $500,000	2	595		—		—
Relationships less than $250,000	Relationships less than $250,000	62	3,499		623		29		Relationships less than $250,000	59	2,998		280		29
		67	$	9,955	$	640	$	29		62	$	6,085	$	280	$	29
December 31, 2020
December 31, 2021									December 31, 2021
Relationships greater than $1,000,000	Relationships greater than $1,000,000	2	$	5,639	$	—	$	—	Relationships greater than $1,000,000	1	$	2,535	$	—	$	—
Relationships greater than $500,000 but less than $1,000,000	Relationships greater than $500,000 but less than $1,000,000	2	1,211		17		—		Relationships greater than $500,000 but less than $1,000,000	1	602		17		—
Relationships greater than $250,000 but less than $500,000	Relationships greater than $250,000 but less than $500,000	2	637		—		—		Relationships greater than $250,000 but less than $500,000	2	601		—		—
Relationships less than $250,000	Relationships less than $250,000	65	3,757		545		33		Relationships less than $250,000	63	3,515		303		28
		71	$	11,244	$	562	$	33		67	$	7,253	$	320	$	28

The Company takes partial charge-offs on collateral-dependent loans when carrying value exceeds estimated fair value, as determined by the most recent appraisal adjusted for current (within the quarter) conditions, less costs to dispose. Impairment reserves remain in place if updated appraisals are pending, and represent management’s estimate of potential loss.

Internal loan reviews are completed annually on all commercial relationships with a committed loan balance in excess of $1.0 million, which includes confirmation of risk rating by an independent credit officer. In addition, all commercial relationships greater than $500 thousand rated Substandard, Doubtful or Loss are reviewed and corresponding risk ratings are reaffirmed by the Bank's Problem Loan Committee, with subsequent reporting to the Management ERM Committee.

In its individual loan impairment analysis, the Company determines the extent of any full or partial charge-offs that may be required, or any reserves that may be needed. The determination of the Company’s charge-offs or impairment reserve include an evaluation of the outstanding loan balance and the related collateral securing the credit. Through a combination of collateral securing the loans and partial charge-offs taken to date, the Company believes that it has adequately provided for the potential losses that it may incur on these relationships at ~~September 30, 2021.~~March 31, 2022. However, over time, additional information may result in increased reserve allocations or, alternatively, it may be deemed that the reserve allocations exceed those that are needed.

In an effort to assist clients that were negatively impacted by the COVID-19 pandemic, the Bank offered various mitigation options, including a loan payment deferral program. Under this program, most commercial deferrals were for a 90-day period, while most consumer deferrals were for a 180-day period. ~~As of September 30, 2021, the Company had loan deferrals under this program for consumer clients with a total loan balance of $317 thousand. I~~nIn accordance with the revised Interagency Statement on Loan Modifications by Financial Institutions Working with Customers Affected by the Coronavirus issued on April 7, 2020, these deferrals are exempt from TDR status as they meet the specified requirements.

~~The following table summarizes outstanding COVID-19 related modifications, including deferrals and forbearances at September 30, 2021~~ At March 31, 2022 and December 31, ~~2020:~~2021, the remaining loan deferral balances were inconsequential.

Loan Type Amount of Loans Percent of Non-PPP Loans
September 30, 2021 December 31, 2020 September 30, 2021 December 31, 2020
Commercial $ — $ 15,702 — % 1.4 %
Consumer 317 2,504 0.1 0.6
Total Loans $ 317 $ 18,206 — % 1.2 %

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Credit Risk Management

Allowance for Loan Losses

The Company maintains the ALL at a level deemed adequate by management for probable incurred credit losses. The ALL is established and maintained through a provision for loan losses, which is charged to earnings. ~~Quarterly,~~On a quarterly basis, management assesses the adequacy of the ALL using a defined methodology which considers specific credit evaluation of impaired loans, ~~past loan~~historical loss ~~historical~~ experience and qualitative factors. Management addresses the requirements for loans individually identified as impaired, loans collectively evaluated for impairment, and other bank regulatory guidance in its assessment.

The ALL is evaluated based on review of the collectability of loans in light of historical experience; the nature and volume of the loan portfolio; adverse situations that may affect a borrower’s ability to repay; estimated value of any underlying collateral; and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. A description of the methodology for establishing the allowance and provision for loan losses and related procedures in establishing the appropriate level of reserve is included in Note 3, Loans and Allowance for Loan Losses, to the unaudited condensed consolidated financial statements under Part I, Item 1, "Financial Information."

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The following table summarizes the Company’s internal risk ratings at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020:~~2021:


		Pass		Special Mention		Non-Impaired Substandard		Impaired - Substandard		Doubtful		PCI Loans		Total			Pass		Special Mention		Non-Impaired Substandard		Impaired - Substandard		Doubtful		PCI Loans		Total
September 30, 2021
March 31, 2022																March 31, 2022
Commercial real estate:	Commercial real estate:															Commercial real estate:
Owner occupied	Owner occupied	$	176,029	$	8,219	$	6,147	$	3,832	$	—	$	2,358	$	196,585	Owner occupied	$	242,529	$	6,360	$	2,277	$	3,062	$	—	$	2,298	$	256,526
Non-owner occupied	Non-owner occupied	476,947		32,272		168		—		—		316		509,703		Non-owner occupied	537,505		18,771		2,419		—		—		304		558,999
Multi-family	Multi-family	91,726		19,662		614		—		—		—		112,002		Multi-family	84,541		8,158		459		—		—		—		93,158
Non-owner occupied residential	Non-owner occupied residential	95,338		2,028		1,344		171		—		1,207		100,088		Non-owner occupied residential	99,545		1,005		1,014		100		—		605		102,269
Acquisition and development:	Acquisition and development:															Acquisition and development:
1-4 family residential construction	1-4 family residential construction	12,246		—		—		—		—		—		12,246		1-4 family residential construction	15,115		—		—		—		—		—		15,115
Commercial and land development	Commercial and land development	70,648		636		500		—		—		—		71,784		Commercial and land development	103,486		1,236		482		—		—		—		105,204
Commercial and industrial	Commercial and industrial	521,530		7,939		5,505		2,941		—		2,290		540,205		Commercial and industrial	424,425		7,642		8,792		161		—		2,150		443,170
Municipal	Municipal	13,631		—		—		—		—		—		13,631		Municipal	14,626		—		—		—		—		—		14,626
Residential mortgage:	Residential mortgage:															Residential mortgage:
First lien	First lien	195,717		—		240		2,472		—		4,931		203,360		First lien	196,217		—		221		2,278		—		4,515		203,231
Home equity - term	Home equity - term	7,056		—		—		7		—		16		7,079		Home equity - term	5,798		—		—		6		—		16		5,820
Home equity - lines of credit	Home equity - lines of credit	153,436		21		52		495		—		—		154,004		Home equity - lines of credit	164,327		19		46		426		—		—		164,818
Installment and other loans	Installment and other loans	19,002		—		—		37		—		38		19,077		Installment and other loans	15,314		—		—		52		—		5		15,371
		$	1,833,306	$	70,777	$	14,570	$	9,955	$	—	$	11,156	$	1,939,764		$	1,903,428	$	43,191	$	15,710	$	6,085	$	—	$	9,893	$	1,978,307
December 31, 2020
December 31, 2021																December 31, 2021
Commercial real estate:	Commercial real estate:															Commercial real estate:
Owner occupied	Owner occupied	$	148,846	$	12,491	$	7,855	$	3,260	$	—	$	2,456	$	174,908	Owner occupied	$	219,250	$	7,239	$	6,087	$	3,763	$	—	$	2,329	$	238,668
Non-owner occupied	Non-owner occupied	351,860		57,378		—		—		—		329		409,567		Non-owner occupied	528,010		23,297		166		—		—		310		551,783
Multi-family	Multi-family	92,769		20,224		642		—		—		—		113,635		Multi-family	84,414		8,238		603		—		—		—		93,255
Non-owner occupied residential	Non-owner occupied residential	107,557		3,948		1,422		268		—		1,310		114,505		Non-owner occupied residential	102,588		1,065��		1,153		122		—		1,184		106,112
Acquisition and development:	Acquisition and development:															Acquisition and development:
1-4 family residential construction	1-4 family residential construction	9,101		385		—		—		—		—		9,486		1-4 family residential construction	12,279		—		—		—		—		—		12,279
Commercial and land development	Commercial and land development	49,832		655		525		814		—		—		51,826		Commercial and land development	92,049		1,385		491		—		—		—		93,925
Commercial and industrial	Commercial and industrial	617,213		17,561		6,118		3,639		—		2,837		647,368		Commercial and industrial	470,579		7,917		4,720		250		—		2,262		485,728
Municipal	Municipal	20,523		—		—		—		—		—		20,523		Municipal	14,989		—		—		—		—		—		14,989
Residential mortgage:	Residential mortgage:															Residential mortgage:
First lien	First lien	236,381		—		—		2,628		—		5,312		244,321		First lien	191,386		—		225		2,635		—		4,585		198,831
Home equity - term	Home equity - term	10,076		—		64		10		—		19		10,169		Home equity - term	6,058		—		—		7		—		16		6,081
Home equity - lines of credit	Home equity - lines of credit	156,264		95		54		608		—		—		157,021		Home equity - lines of credit	160,203		20		46		436		—		—		160,705
Installment and other loans	Installment and other loans	26,283		—		—		17		—		61		26,361		Installment and other loans	17,584		—		—		40		—		6		17,630
		$	1,826,705	$	112,737	$	16,680	$	11,244	$	—	$	12,324	$	1,979,690		$	1,899,389	$	49,161	$	13,491	$	7,253	$	—	$	10,692	$	1,979,986

Potential problem loans are defined as performing loans which have characteristics that cause management concern over the ability of the borrower to perform under present loan repayment terms and which may result in the reporting of these loans as nonperforming loans in the future. Generally, management feels that Substandard loans that are currently performing and not

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considered impaired result in some doubt as to the borrower’s ability to continue to perform under the terms of the loan, and

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represent potential problem loans. Non-impaired Substandard loans totaled $15.7 million at March 31, 2022.

Additionally, the Special Mention classification is intended to be a temporary classification reflective of loans that have potential weaknesses that may, if not monitored or corrected, weaken the asset or inadequately protect the Company’s position at some future date. Special Mention loans represent an elevated risk, but their weakness does not yet justify a more severe, or classified, rating. These loans require inquiry by lenders on the cause of the potential weakness and, once analyzed, the loan classification may be downgraded to Substandard or, alternatively, could be upgraded to Pass. Special Mention loans decreased by ~~$42.0~~$6.0 million from December 31, ~~2020~~2021 to ~~September 30, 2021~~March 31, 2022 due to continued improvements in economic conditions asresulting in upgrades to commercial loans that were previously downgraded due to the impact of the COVID-19 ~~restrictions are eased and government stimulus drives increases in spending.~~pandemic.

The following table summarizes activity in the ALL for the three ~~and nine~~ months ended ~~September 30, 2021~~March 31, 2022 and ~~2020:~~2021:


																							Commercial										Consumer
																							Commercial Real Estate		Acquisition and Development		Commercial and Industrial		Municipal		Total		Residential Mortgage		Installment and Other		Total		Unallocated		Total

		Commercial										Consumer
		Commercial Real Estate		Acquisition and Development		Commercial and Industrial		Municipal		Total		Residential Mortgage		Installment and Other		Total		Unallocated		Total
Three Months Ended	Three Months Ended																					Three Months Ended
September 30, 2021
March 31, 2022																						March 31, 2022
Balance, beginning of period	Balance, beginning of period	$	11,315	$	1,243	$	3,495	$	29	$	16,082	$	2,863	$	227	$	3,090	$	209	$	19,381	Balance, beginning of period	$	12,037	$	2,062	$	3,814	$	30	$	17,943	$	2,785	$	215	$	3,000	$	237	$	21,180
Provision for loan losses	Provision for loan losses	(179)		290		386		(2)		495		(147)		18		(129)		(1)		365		Provision for loan losses	(523)		258		500		(1)		234		72		(6)		66		—		300

Charge-offs	Charge-offs	(89)		—		(55)		—		(144)		—		(20)		(20)		—		(164)		Charge-offs	—		—		(61)		—		(61)		(10)		(13)		(23)		—		(84)
Recoveries	Recoveries	305		8		60		—		373		5		5		10		—		383		Recoveries	32		1		48		—		81		26		5		31		—		112
Balance, end of period	Balance, end of period	$	11,352	$	1,541	$	3,886	$	27	$	16,806	$	2,721	$	230	$	2,951	$	208	$	19,965	Balance, end of period	$	11,546	$	2,321	$	4,301	$	29	$	18,197	$	2,873	$	201	$	3,074	$	237	$	21,508
September 30, 2020
March 31, 2021																						March 31, 2021
Balance, beginning of period	Balance, beginning of period	$	9,347	$	1,069	$	2,916	$	75	$	13,407	$	3,552	$	386	$	3,938	$	172	$	17,517	Balance, beginning of period	$	11,151	$	1,114	$	3,942	$	40	$	16,247	$	3,362	$	324	$	3,686	$	218	$	20,151
Provision for loan losses	Provision for loan losses	1,520		(219)		963		(19)		2,245		(71)		18		(53)		8		2,200		Provision for loan losses	(494)		(69)		(54)		(2)		(619)		(289)		(106)		(395)		14		(1,000)
Charge-offs	Charge-offs	(3)		—		(193)		—		(196)		—		(31)		(31)		—		(227)		Charge-offs	—		—		(454)		—		(454)		(21)		(20)		(41)		—		(495)
Recoveries	Recoveries	171		—		45		—		216		6		13		19		—		235		Recoveries	14		1		280		—		295		6		10		16		—		311
Balance, end of period	Balance, end of period	$	11,035	$	850	$	3,731	$	56	$	15,672	$	3,487	$	386	$	3,873	$	180	$	19,725	Balance, end of period	$	10,671	$	1,046	$	3,714	$	38	$	15,469	$	3,058	$	208	$	3,266	$	232	$	18,967
Nine Months Ended
September 30, 2021
Balance, beginning of period		$	11,151	$	1,114	$	3,942	$	40	$	16,247	$	3,362	$	324	$	3,686	$	218	$	20,151
Provision for loan losses		133		418		109		(13)		647		(578)		(69)		(647)		(10)		(10)

Charge-offs		(270)		—		(621)		—		(891)		(92)		(49)		(141)		—		(1,032)
Recoveries		338		9		456		—		803		29		24		53		—		856
Balance, end of period		$	11,352	$	1,541	$	3,886	$	27	$	16,806	$	2,721	$	230	$	2,951	$	208	$	19,965
September 30, 2020
Balance, beginning of period		$	7,634	$	959	$	2,356	$	100	$	11,049	$	3,147	$	319	$	3,466	$	140	$	14,655
Provision for loan losses		2,780		(117)		1,875		(44)		4,494		329		162		491		40		5,025
Charge-offs		(3)		—		(689)		—		(692)		(109)		(117)		(226)		—		(918)
Recoveries		624		8		189		—		821		120		22		142		—		963
Balance, end of period		$	11,035	$	850	$	3,731	$	56	$	15,672	$	3,487	$	386	$	3,873	$	180	$	19,725

The ALL totaled $21.5 million at ~~September 30, 2021, decreased by $186~~March 31, 2022, an increase of $328 thousand from December 31, ~~2020, reflecting~~2021, resulting from a ~~negative~~ provision for loan losses of ~~$10~~$300 thousand and net recoveries of $28 thousand during the ~~nine~~three months ended ~~September 30,~~March 31, 2022. At March 31, 2022, the ALL is higher as a percentage of the total loan portfolio at 1.09% compared to 1.07% at March 31, 2021. The ~~allowance for loan losses decreased~~ALL increased in the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 primarily as a result of ~~the reduction of qualitative factor adjustments for the impact of the COVID-19 pandemic on the Bank’s~~commercial loan ~~portfolio as the COVID-19 related deferrals returned to normal paying status and the loans performed for an extended period of time,~~production; however, this was partially offset by the impact of ~~increased~~a reduction in qualitative factors to unwind an increase from 2020 applied to the commercial ~~loan production.~~

~~The increase~~real estate portfolio due to concerns about the economic impact of ~~$240 thousand~~the COVID-19 pandemic. Excluding SBA loans, which are 100% guaranteed, the ALL to total loans remained at 1.2% at both March 31, 2022 and December 31, 2021. Despite generally favorable historical charge-off data, the impact of current economic conditions may result in the ~~ALL from September 30, 2020 to September 30, 2021 reflects the COVID-19 related exposure~~need for additional provisions for loan losses in the loan portfolio and non-SBA PPP commercial loan production. Net recoveries totaled $219 thousand and net charge-offs totaled $176 thousand for the three and nine months ended September 30, 2021, respectively, compared with net recoveries of $8 thousand and $45 thousand for the three and nine months ended September 30, 2020.future quarters.

Classified loans totaled ~~$26.9~~$23.4 million at ~~September 30, 2021,~~March 31, 2022, or ~~1.4%~~1.2% of total loans outstanding, reflecting ~~a decrease~~an increase from ~~$33.1~~$23.1 million, or ~~1.7%~~also 1.2% of loans outstanding, at December 31, ~~2020.~~2021. The asset quality ratios previously noted are indicative of the continued benefit the Company has received from favorable historical charge-off statistics and generally stable economic and market conditions for the last few years, even while the commercial loan portfolio has been growing. ~~Recent loan growth trends~~

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contributed to management's determination that an increased provision for loan losses was required to maintain an adequate ALL, with an ALL to total loans ratio of 1.03% at September 30, 2021 as compared to 1.02% at December 31, 2020. Excluding SBA loans, which are 100% guaranteed, the ALL to total loans was 1.2% at September 30, 2021 and 1.3% at December 31, 2020. Despite generally favorable historical charge-off data, the impact of the COVID-19 pandemic on economic conditions may result in the need for additional provisions for loan losses in future quarters.

The following table summarizes the ending loan balances individually or collectively evaluated for impairment based on loan type, as well as the ALL allocation for each, at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, including PCI loans:


		Commercial										Consumer											Commercial										Consumer
		Commercial Real Estate		Acquisition and Development		Commercial and Industrial		Municipal		Total		Residential Mortgage		Installment and Other		Total		Unallocated		Total			Commercial Real Estate		Acquisition and Development		Commercial and Industrial		Municipal		Total		Residential Mortgage		Installment and Other		Total		Unallocated		Total
September 30, 2021
March 31, 2022																						March 31, 2022
Loans allocated by:	Loans allocated by:																					Loans allocated by:
Individually evaluated for impairment	Individually evaluated for impairment	$	4,003	$	—	$	2,941	$	—	$	6,944	$	2,974	$	37	$	3,011	$	—	$	9,955	Individually evaluated for impairment	$	3,162	$	—	$	161	$	—	$	3,323	$	2,710	$	52	$	2,762	$	—	$	6,085
Collectively evaluated for impairment	Collectively evaluated for impairment	914,375		84,030		537,264		13,631		1,549,300		361,469		19,040		380,509		—		1,929,809		Collectively evaluated for impairment	1,007,790		120,319		443,009		14,626		1,585,744		371,159		15,319		386,478		—		1,972,222

		$	918,378	$	84,030	$	540,205	$	13,631	$	1,556,244	$	364,443	$	19,077	$	383,520	$	—	$	1,939,764		$	1,010,952	$	120,319	$	443,170	$	14,626	$	1,589,067	$	373,869	$	15,371	$	389,240	$	—	$	1,978,307
ALL allocated by:	ALL allocated by:																					ALL allocated by:
Individually evaluated for impairment	Individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—	$	29	$	—	$	29	$	—	$	29	Individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—	$	29	$	—	$	29	$	—	$	29
Collectively evaluated for impairment	Collectively evaluated for impairment	11,352		1,541		3,886		27		16,806		2,692		230		2,922		208		19,936		Collectively evaluated for impairment	11,546		2,321		4,301		29		18,197		2,844		201		3,045		237		21,479

		$	11,352	$	1,541	$	3,886	$	27	$	16,806	$	2,721	$	230	$	2,951	$	208	$	19,965		$	11,546	$	2,321	$	4,301	$	29	$	18,197	$	2,873	$	201	$	3,074	$	237	$	21,508
December 31, 2020
December 31, 2021																						December 31, 2021
Loans allocated by:	Loans allocated by:																					Loans allocated by:
Individually evaluated for impairment	Individually evaluated for impairment	$	3,528	$	814	$	3,639	$	—	$	7,981	$	3,246	$	17	$	3,263	$	—	$	11,244	Individually evaluated for impairment	$	3,885	$	—	$	250	$	—	$	4,135	$	3,078	$	40	$	3,118	$	—	$	7,253
Collectively evaluated for impairment	Collectively evaluated for impairment	809,087		60,498		643,729		20,523		1,533,837		408,265		26,344		434,609		—		1,968,446		Collectively evaluated for impairment	985,933		106,204		485,478		14,989		1,592,604		362,539		17,590		380,129		—		1,972,733
		$	812,615	$	61,312	$	647,368	$	20,523	$	1,541,818	$	411,511	$	26,361	$	437,872	$	—	$	1,979,690		$	989,818	$	106,204	$	485,728	$	14,989	$	1,596,739	$	365,617	$	17,630	$	383,247	$	—	$	1,979,986
ALL allocated by:	ALL allocated by:																					ALL allocated by:
Individually evaluated for impairment	Individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—	$	33	$	—	$	33	$	—	$	33	Individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—	$	28	$	—	$	28	$	—	$	28
Collectively evaluated for impairment	Collectively evaluated for impairment	11,151		1,114		3,942		40		16,247		3,329		324		3,653		218		20,118		Collectively evaluated for impairment	12,037		2,062		3,814		30		17,943		2,757		215		2,972		237		21,152
		$	11,151	$	1,114	$	3,942	$	40	$	16,247	$	3,362	$	324	$	3,686	$	218	$	20,151		$	12,037	$	2,062	$	3,814	$	30	$	17,943	$	2,785	$	215	$	3,000	$	237	$	21,180

In addition to the specific reserve allocations on impaired loans noted previously, 12eight loans, with aggregate outstanding principal balances of ~~$1.2 million,~~$413 thousand, have had cumulative partial charge-offs to the ALL totaling ~~$640~~$280 thousand at ~~September 30, 2021.~~March 31, 2022. As updated appraisals are received on collateral-dependent loans, partial charge-offs are taken to the extent the loans’ principal balance exceeds their fair value.

Management believes the allocation of the ALL ~~between~~among the various loan classes adequately reflects the probable incurred credit losses in each portfolio and is based on the methodology outlined in Note 3, Loans and Allowance for Loan Losses, to the Consolidated Financial Statements under Part I, Item 1, "Financial Information." Management re-evaluates and makes enhancements to its reserve methodology to better reflect the risks inherent in the different segments of the portfolio, particularly in light of increased charge-offs, with noticeable differences between the different loan classes. Management believes these enhancements to the ALL methodology improve the accuracy of quantifying probable incurred credit losses inherent in the portfolio. Management charges actual loan losses to the reserve and bases the provision for loan losses on its overall analysis.

The unallocated portion of the ALL reflects estimated inherent losses within the portfolio that have not been detected, as well as the risk of error in the specific and general reserve allocation, other potential exposure in the loan portfolio, variances in

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management’s assessment of national and local economic conditions and other factors management believes appropriate at the time. The unallocated portion of the ALL ~~totaled $208 thousand, or 1.0% of the ALL balance, at September 30, 2021 compared with $218 thousand, or~~was 1.1% of the ALL balance at both March 31, 2022 and December 31, ~~2020.~~2021. The Company monitors the unallocated portion of the ALL and, by policy, has determined it should not exceed 3% of the total reserve. Future negative provisions for loan losses may result if the unallocated portion was to increase, and management determined the reserves were not required for the anticipated risk in the portfolio.

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Management believes the Company’s ALL is adequate based on currently available information. Future adjustments to the ALL and enhancements to the methodology may be necessary due to changes in economic conditions, regulatory guidance, or management’s assumptions as to future delinquencies or loss rates.

Deposits

Deposits ~~totaled~~grew by $81.1 million, or 3%, but remained at approximately $2.5 billion at ~~September 30, 2021, an increase of $145.2 million, or 6.2%, from $2.4 billion at~~both March 31, 2022 and December 31, ~~2020.~~2021.

Noninterest-bearing deposits increased by ~~$88.5~~$4.5 million, or ~~19.4%~~1%, to ~~$545.3~~$557.8 million, from December 31, ~~2020~~2021 to ~~September 30, 2021.~~March 31, 2022. Interest-bearing deposits totaled $2.0 billion at ~~September 30, 2021,~~March 31, 2022, an increase of ~~$56.7~~$76.5 million, or ~~3.0%~~4%, from the $1.9 billion balance at December 31, ~~2020.~~2021, despite a decrease in time deposits, due to maturities, of $14.6 million, or 5%.

Deposit growth in the first ~~nine~~three months of ~~2021~~2022 was principally due to continued high levels of excess liquidity in the ~~high usage of checking accounts for SBA PPP loan funds and an influx of municipal deposits. As the SBA PPP clients continue to utilize their borrowings to~~system as well as seasonal increases from public fund ~~operations, the associated deposits are expected to decline, in addition to a decrease from the runoff of certificates of deposit.~~clients.

Shareholders' Equity, Capital Adequacy and Regulatory Matters

Capital management in a regulated financial services industry must properly balance return on equity to its shareholders while maintaining sufficient levels of capital and related risk-based regulatory capital ratios to satisfy statutory regulatory requirements. The Company’s capital management strategies have been developed to provide attractive rates of returns to its shareholders, while maintaining a “well capitalized” position of regulatory strength.

Shareholders’ equity totaled ~~$268.6~~$254.8 million at ~~September 30, 2021, an increase~~March 31, 2022, a decrease of ~~$22.4~~$16.9 million, or ~~9.1%~~6%, from ~~$246.2~~$271.7 million at December 31, ~~2020.~~2021. The ~~increase~~decrease was primarily attributable to other comprehensive losses of $19.1 million due to an increase in unrealized losses on available-for-sale securities caused by a substantial increase in market interest rates, as well as dividends paid of $2.1 million and shared-based compensation costs, inclusive of common share repurchases, of $4.0 million, partially offset by net income ~~totaling $26.2 million and other comprehensive income~~ of ~~$2.3 million for the nine months ended September 30, 2021. This is offset by dividends paid on common stock totaling $6.2 million~~ ~~during the nine months ended September 30, 2021~~.$8.4 million.

The Company routinely evaluates its capital levels in light of its risk profile to assess its capital needs. The Company and the Bank are subject to various regulatory capital requirements administered by federal and state banking agencies. The consolidated asset limit on small bank holding companies is $3.0 billion and a company with assets under that limit is not subject to the FRB consolidated capital rules, but may file reports that include capital amounts and ratios. The Company has elected to file those reports.

At ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, the Bank was considered well capitalized under applicable banking regulations. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. Prompt corrective action provisions are not applicable to bank holding companies, including financial holding companies.

Note 8, Shareholders' Equity and Regulatory Capital, to the Notes to Unaudited Condensed Consolidated Financial Statements under Part I, Item 1, "Financial Information," includes a table presenting capital amounts and ratios for the Company and the Bank at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020.~~2021.

In addition to the minimum capital ratio requirement and minimum capital ratio to be well capitalized presented in the referenced table in Note 8, the Bank must maintain a capital conservation buffer as more fully described in the Company's Annual Report on Form 10-K for the year ended December 31, ~~2020,~~2021, Item 1 - Business, under the topic Basel III Capital Rules. At ~~September 30, 2021,~~March 31, 2022, the Bank's capital conservation buffer, based on the most restrictive Total Capital to risk weighted assets capital ratio, was ~~6.7%~~5.8%, which is greater than the 2.5% requirement.

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Liquidity

The primary function of asset/liability management is to ensure adequate liquidity and manage the Company’s sensitivity to changing interest rates. Liquidity management involves the ability to meet the cash flow requirements of ~~customers~~clients who may be either depositors wanting to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs. ~~Our~~The Company's primary sources of funds consist of deposit inflows, loan repayments, maturities and sales of investment securities, the sale of mortgage loans and borrowings from the FHLB of Pittsburgh. While maturities and scheduled amortization of loans and investment securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. The maximum borrowing capacity from the FHLB is ~~$841.6~~$914.0 million at ~~September 30, 2021.~~March 31, 2022.

WeThe Company regularly ~~adjust our~~adjusts its investments in liquid assets based upon our assessment of expected loan demand, expected deposit flows, yields available on interest-earning deposits and investment securities and the objectives of our asset/liability management policy. Unencumbered investment securities totaled ~~$128.9~~$238.8 million at ~~September 30, 2021.~~March 31, 2022. At ~~September 30, 2021,~~March 31, 2022, the Company had ~~$34.2~~$18.0 million of investment securities pledged at the FRB Discount Window, with no associated borrowings outstanding.

The Company had applied for and received access to the Paycheck Protection Program Liquidity Facility ("PPPLF"), created by the FRB for the pledging of PPP loans, to further expand its already robust access to off balance sheet liquidity. Effective July 30, 2021, PPPLF was terminated and no new extensions of credit under the PPPLF were made.

Supplemental Reporting of Non-GAAP Measures

As a result of acquisitions, the Company had intangible assets consisting of goodwill and core deposit and other intangible assets totaling ~~$23.2~~$22.6 million and ~~$24.2~~$22.9 million at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, respectively.

Management believes providing certain “non-GAAP” financial information will assist investors in their understanding of the effect of acquisition activity on reported results, particularly to overcome comparability issues related to the influence of intangibles (principally goodwill) created in acquisitions. Management also believes providing certain other "non-GAAP" financial information will provide investors with clarity on its ALL to total loans ratios. The Company believes that excluding SBA-guaranteed loans, due to their credit enhancement, from loans held for investment is useful due to the size and effect on the total and ratio.

Tangible book value per share and the ~~allowance~~ALL to non-SBA guarantee loans, as used by the Company in this supplemental reporting presentation, are determined by methods other than in accordance with GAAP. While we believe this information is a useful supplement to ~~GAAP based~~GAAP-based measures presented in this Form 10-Q, readers are cautioned that this non-GAAP disclosure has limitations as an analytical tool, should not be viewed as a substitute for financial measures determined in accordance with GAAP, and should not be considered in isolation or as a substitute for analysis of our results and financial condition as reported under GAAP, nor are such measures necessarily comparable to non-GAAP performance measures that may be presented by other companies. This supplemental presentation should not be construed as an inference that our future results will be unaffected by similar adjustments to be determined in accordance with GAAP. The decrease in tangible book value per share (non-GAAP) from December 31, 2021 to March 31, 2022 is primarily due to an increase in other comprehensive losses, net of taxes, of $19.1 million due to higher unrealized losses on available-for-sale securities.

The following table presents the computation of each non-GAAP based measure shown together with its most directly comparable GAAP based measure.


		September 30, 2021		December 31, 2020			March 31, 2022		December 31, 2021
Tangible Book Value per Common Share	Tangible Book Value per Common Share					Tangible Book Value per Common Share
Shareholders' equity	Shareholders' equity	$	268,569	$	246,249	Shareholders' equity	$	254,804	$	271,656
Less: Goodwill	Less: Goodwill	18,724		18,724		Less: Goodwill	18,724		18,724
Other intangible assets	Other intangible assets	4,486		5,458		Other intangible assets	3,891		4,183
Related tax effect	Related tax effect	(942)		(1,146)		Related tax effect	(817)		(878)
Tangible common equity (non-GAAP)	Tangible common equity (non-GAAP)	$	246,301	$	223,213	Tangible common equity (non-GAAP)	$	233,006	$	249,627

Common shares outstanding	Common shares outstanding	11,205		11,201		Common shares outstanding	11,079		11,183

Book value per share (most directly comparable GAAP based measure)	Book value per share (most directly comparable GAAP based measure)	$	23.97	$	21.98	Book value per share (most directly comparable GAAP based measure)	$	23.00	$	24.29
Intangible assets per share	Intangible assets per share	1.99		2.05		Intangible assets per share	1.97		1.97
Tangible book value per share (non-GAAP)	Tangible book value per share (non-GAAP)	$	21.98	$	19.93	Tangible book value per share (non-GAAP)	$	21.03	$	22.32

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		September 30, 2021			December 31, 2020				March 31, 2022			December 31, 2021
Allowance to Non-SBA Guaranteed Loans:
Allowance for Loan Losses to Non-SBA Guaranteed Loans:								Allowance for Loan Losses to Non-SBA Guaranteed Loans:
Allowance for loan losses	Allowance for loan losses	$	19,965		$	20,151		Allowance for loan losses	$	21,508		$	21,180
Gross loans	Gross loans	$	1,939,764		$	1,979,690		Gross loans	$	1,978,307		$	1,979,986
less: SBA guaranteed loans	less: SBA guaranteed loans	(261,138)			(404,205)			less: SBA guaranteed loans	(124,545)			(195,585)
Non-SBA guaranteed loans	Non-SBA guaranteed loans	$	1,678,626		$	1,575,485		Non-SBA guaranteed loans	$	1,853,762		$	1,784,401

Allowance to non-SBA guaranteed loans		1.2		%	1.3		%
Allowance for loan losses to non-SBA guaranteed loans								Allowance for loan losses to non-SBA guaranteed loans	1.2		%	1.2		%

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Market risk comprises exposure to interest rate risk, foreign currency exchange rate risk, commodity price risk, and other relevant market rate or price risks. In the banking industry, a major risk exposure is changing interest rates. The primary objective of monitoring our interest rate sensitivity, or risk, is to provide management the tools necessary to manage the balance sheet to minimize adverse changes in net interest income as a result of changes in the direction and level of interest rates. ~~Federal Reserve Board~~FRB monetary control efforts, ~~the effects of deregulation,~~ economic uncertainty and legislative changes have been significant factors affecting the task of managing interest rate sensitivity positions in recent years.

Interest Rate Risk

Interest rate risk is the exposure to fluctuations in the Company’s future earnings (earnings at risk) and value (value at risk) resulting from changes in interest rates. This exposure results from differences between the amounts of interest-earning assets and interest-bearing liabilities that reprice within a specified time period as a result of scheduled maturities, scheduled and unscheduled repayments, the propensity of borrowers and depositors to react to changes in their economic interests, and loan contractual interest rate changes.

We attempt to manage the level of repricing and maturity mismatch through our asset/liability management process so that fluctuations in net interest income are maintained within policy limits across a range of market conditions, while satisfying liquidity and capital requirements. Management recognizes that a certain amount of interest rate risk is inherent, appropriate and necessary to ensure the Company’s profitability. Thus, the goal of interest rate risk management is to evaluate the amount of reward for taking risk and adjusting both the size and composition of the balance sheet relative to the level of reward available for taking risk.

Management endeavors to control the exposure to changes in interest rates by understanding, reviewing and making decisions based on its risk position. The Company primarily uses its securities portfolio, FHLB advances, interest rate swaps and brokered deposits to manage its interest rate risk position. Additionally, pricing, promotion and product development activities are directed in an effort to emphasize the loan and deposit term or repricing characteristics that best meet current interest rate risk objectives.

We use simulation analysis to assess earnings at risk and net present value analysis to assess value at risk. These methods allow management to regularly monitor both the direction and magnitude of our interest rate risk exposure. These analyses require numerous assumptions including, but not limited to, changes in balance sheet mix, prepayment rates on loans and securities, cash flows and repricing of all financial instruments, changes in volumes and pricing, future shapes of the yield curve, relationship of market interest rates to each other (basis risk), credit spread and deposit sensitivity. Assumptions are based on management’s best estimates but may not accurately reflect actual results under certain changes in interest rate due to the timing, magnitude and frequency of rate changes and changes in market conditions and management strategies, among other factors. However, the analyses are useful in quantifying risk and providing a relative gauge of our interest rate risk position over time.

Our asset/liability committee operates under management policies, approved by the Board of Directors, which define guidelines and limits on the level of risk. The committee meets regularly and reviews our interest rate risk position and monitors various liquidity ratios to ensure a satisfactory liquidity position. By utilizing our analyses, we can determine changes

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that may need to be made to the asset and liability mixes to mitigate the change in net interest income under various interest rate scenarios. Management continually evaluates the condition of the economy, the pattern of market interest rates and other economic data to inform the committee on the selection of investment securities. Regulatory authorities also monitor our interest rate risk position along with other liquidity ratios.

~~Table of Contents~~

Net Interest Income Sensitivity

Simulation analysis evaluates the effect of upward and downward changes in market interest rates on future net interest income. The analysis involves changing the interest rates used in determining net interest income over the next twelve months. The resulting percentage change in net interest income in various rate scenarios is an indication of our short-term interest rate risk. The analysis assumes recent pricing trends in new loan and deposit volumes will continue while balances remain constant. Additional assumptions are applied to modify pricing under the various rate scenarios.

The simulation analysis results are presented in the Net Interest Income table below. At ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, results indicated the Company would be better positioned over the subsequent 12 months in an increasing rate environment than it would be if interest rates decreased. This is due to the composition of the balance sheet between fixed- and floating-rate assets, and liabilities that will reprice more rapidly as deposits migrate from certificates of deposit to non-maturity ~~deposits, coupled with the steep decline in rates during 2020.~~deposits. The Company has become more asset sensitive ~~since December 31, 2020~~ due to the increase in liquidity and overall size of the balance sheet size and mix, specifically through non-maturity deposits. As such, an increase in interest rates would benefit the ~~Company more than in prior periods.~~Company.

Economic Value

Net present value analysis provides information on the risk inherent in the balance sheet that might not be considered in the simulation analysis due to the short time horizon used in that analysis. The net present value of the balance sheet incorporates the discounted present value of expected asset cash flows minus the discounted present value of expected liability cash flows. The analysis involves changing the interest rates used in determining the expected cash flows and in discounting the cash flows. The resulting percentage change in net present value in various rate scenarios is an indication of the longer term repricing risk and options embedded in the balance sheet.

At ~~September 30, 2021,~~March 31, 2022, similar to December 31, ~~2020, these~~2021, the results indicate the Company is asset sensitive and would ~~be better positioned~~benefit in a rising interest rate environment more than it would be if interest rates decreased. The results at ~~September 30, 2021~~March 31, 2022 are still driven by the impact of the low interest rate environment, ~~and~~ the composition of the balance ~~sheet.~~sheet and the duration of assets. To improve the comparability across periods, the Company follows best practices related to the assumption setting and maintains the size and mix of the period end balance sheet; thus, the results do not reflect actions management may take ~~to improve~~through the normal course of business that would impact results.


Net Interest Income	Net Interest Income					Economic Value					Net Interest Income					Economic Value
		% Change in Net Interest Income					% Change in Market Value					% Change in Net Interest Income					% Change in Market Value
Change in Market Interest Rates (basis points)	Change in Market Interest Rates (basis points)	September 30, 2021		December 31, 2020		Change in Market Interest Rates (basis points)	September 30, 2021		December 31, 2020		Change in Market Interest Rates (basis points)	March 31, 2022		December 31, 2021		Change in Market Interest Rates (basis points)	March 31, 2022		December 31, 2021
(100)	(100)	(0.9)	%	(0.8)	%	(100)	(48.0)	%	(99.6)	%	(100)	(6.0)	%	(1.4)	%	(100)	(24.3)	%	(43.8)	%
100	100	3.1	%	1.7	%	100	29.0	%	70.7	%	100	3.3	%	3.7	%	100	14.4	%	25.8	%
200	200	5.4	%	2.4	%	200	46.0	%	116.4	%	200	4.9	%	6.7	%	200	21.3	%	41.2	%
300	300	4.7	%	0.7	%	300	56.0	%	144.9	%	300	3.7	%	6.7	%	300	23.9	%	49.3	%

Item 4. Controls and Procedures

Based on the evaluation required by Securities Exchange Act Rules 13a-15(b) and 15d-15(b), the Company's management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of its disclosure controls and procedures, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e), at ~~September 30, 2021.~~March 31, 2022. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective at ~~September 30, 2021.~~March 31, 2022. There have been no changes in internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting during the ~~nine~~three months ended ~~September 30, 2021.~~March 31, 2022.

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PART II – OTHER INFORMATION

Item 1 – Legal Proceedings

Information regarding legal proceedings is included in Note 12, Contingencies, to the Consolidated Financial Statements under Part I, Item 1, "Financial Statements" and incorporated herein by reference.

Item 1A – Risk Factors

There have been no material changes from the risk factors as disclosed in our Annual Report on Form 10-K for the year ended December 31, ~~2020 and our Quarterly Report on Form 10-Q for the quarterly periods ended March 31,~~ 2021 ~~and June 30, 2021.~~.

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

(a) (b) (c) (d)
Period Total number of shares (or units) purchased Average price paid per share (or unit) Total number of shares (or units) purchased as part of publicly announced plans or programs Maximum number (or approximate dollar value) of shares (or units) that may yet be purchased under the plans or programs
July 1, 2021 to July 31, 2021 — $ — — 823,320
August 1, 2021 to August 29, 2021 1,973 22.86 1,973 821,347
September 1, 2021 to September 30, 2021 44,865 22.82 44,865 776,482
Total 46,838 $ 22.82 46,838


	(a)	(b)		(c)	(d)
Period	Total number of shares (or units) purchased	Average price paid per share (or unit)		Total number of shares (or units) purchased as part of publicly announced plans or programs	Maximum number (or approximate dollar value) of shares (or units) that may yet be purchased under the plans or programs
January 1, 2022 to January 31, 2022	30,250	$	24.84	30,250	713,580
February 1, 2022 to February 28, 2022	68,961	24.65		68,961	644,619
March 1, 2022 to March 31, 2022	82,424	23.76		82,424	562,195
Total	181,635	$	24.27	181,635

In September 2015, the Board of Directors of the Company authorized a share repurchase program under which the Company may repurchase up to 5% of the Company's outstanding shares of common stock, or approximately 416,000 shares, in accordance with all applicable securities laws and regulations, including Rule 10b-18 of the Exchange Act. On April 19, 2021, the Board of Directors authorized the additional future repurchase of up to 562,000 shares of its outstanding common stock. At September 30, 2021, 201,518 shares had been repurchased under the program at a total cost of $3.7 million, or $18.26 per share. Common stock available for future repurchase totals approximately 776,482 shares, or 7% of the Company's outstanding common stock at September 30, 2021. When and if appropriate, repurchases may be made in open market or privately negotiated transactions, depending on market conditions, regulatory requirements and other corporate considerations, as determined by management. Share repurchases may not occur and may be discontinued at any time. For the three months ended ~~September 30, 2021,~~March 31, 2022, the Company repurchased ~~46,838~~181,635 shares of its common stock at an average price of ~~$22.82~~$24.27 per share. At March 31, 2022, 415,805 shares had been repurchased under the program at a total cost of $8.9 million, or $21.35 per share. Common stock available for future repurchase totals approximately 562,195 shares, or 5% of the Company's outstanding common stock at March 31, 2022.

Item 3 – Defaults Upon Senior Securities

Not applicable.

Item 4 – Mine Safety Disclosures

Not applicable.

Item 5 – Other Information

None.

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Item 6 – Exhibits


3.1						Articles of Incorporation as amended, incorporated by reference to Exhibit 3.1 of the Registrant’s Report on Form 8-K filed on January 29, 2010.

3.2						By-laws as amended, incorporated by reference to Exhibit 3.2 to the Registrant’s Report on Form 8-K filed June 2, 2021 .

4.1						Specimen Common Stock Certificate, incorporated by reference to the Registrant’s Registration Statement on Form S-3 filed February 8, 2010 (File No. 333-164780).

10.1						Amended and Restated Change in Control Agreement between Orrstown Financial Services, Inc., Orrstown Bank and Neelesh Kalani "incorporated by reference to Exhibit 10.1 to the Registrant's Form 8-K filed April 11, 2022."

31.1						Rule 13a – 14(a)/15d-14(a) Certification (Principal Executive Officer)

31.2						Rule 13a – 14(a)/15d-14(a) Certifications (Principal Financial Officer)

32.1						Section 1350 Certifications (Principal Executive Officer)

32.2						Section 1350 Certifications (Principal Financial Officer)

101.LAB						XBRL Taxonomy Extension Label Linkbase

101.PRE						XBRL Taxonomy Extension Presentation Linkbase

101.INS						XBRL Instance Document

101.SCH						XBRL Taxonomy Extension Schema

101.CAL						XBRL Taxonomy Extension Calculation Linkbase

101.DEF						XBRL Taxonomy Extension Definition Linkbase

104						Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

All other exhibits for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


			/s/ Thomas R. Quinn, Jr.
			Thomas R. Quinn, Jr.
			President and Chief Executive Officer
			(Principal Executive Officer)

			/s/ Neelesh Kalani
			Neelesh Kalani
			Executive Vice President and Chief Financial Officer
			(Principal Financial Officer)

			Date: ~~November~~May 5, ~~2021~~2022

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	September 30, 2021		December 31, 2020
Weighted average pay rate	—	%	0.77	%
Weighted average receive rate	—	%	0.09	%
Weighted average maturity in years	0.0		4.2


	Nine Months Ended September 30, 2021						Nine Months Ended September 30, 2020
	Average Balance		Taxable- Equivalent Interest		Taxable- Equivalent Rate		Average Balance		Taxable- Equivalent Interest		Taxable- Equivalent Rate
Assets
Federal funds sold & interest-bearing bank balances	$	261,697	$	255	0.13	%	$	27,315	$	101	0.49	%


Investment securities (1)	456,919		7,272		2.13		496,977		9,797		2.63


Loans (1)(2)(3)	1,988,834		62,895		4.23		1,899,186		63,940		4.50
Total interest-earning assets	2,707,450		70,422		3.48		2,423,478		73,838		4.07


Other assets	188,924						193,057

Total	$	2,896,374					$	2,616,535
Liabilities and Shareholders’ Equity
Interest-bearing demand deposits	$	1,380,241	1,014		0.10		$	1,113,740	4,100		0.49
Savings deposits	197,792		149		0.10		160,133		194		0.16
Time deposits	376,142		2,247		0.80		466,032		5,853		1.68
Total interest-bearing deposits	1,954,175		3,410		0.23		1,739,905		10,147		0.78
Securities sold under agreements to repurchase	22,490		25		0.15		17,395		72		0.55
FHLB Advances and other	53,608		458		1.14		194,197		1,604		1.10
Subordinated notes	31,924		1,507		6.29		31,867		1,504		6.29
Total interest-bearing liabilities	2,062,197		5,400		0.35		1,983,364		13,327		0.90
Noninterest-bearing demand deposits	537,247						373,614
Other	37,413						35,874
Total liabilities	2,636,857						2,392,852
Shareholders’ equity	259,517						223,683
Total	$	2,896,374					$	2,616,535
Taxable-equivalent net interest income /net interest spread			65,022		3.13	%			60,511		3.17	%
Taxable-equivalent net interest margin					3.21	%					3.34	%
Taxable-equivalent adjustment			(646)						(633)
Net interest income			$	64,376					$	59,878


Loan Type	Amount of Loans				Percent of Non-PPP Loans
	September 30, 2021		December 31, 2020		September 30, 2021		December 31, 2020
Commercial	$	—	$	15,702	—	%	1.4	%
Consumer	317		2,504		0.1		0.6
Total Loans	$	317	$	18,206	—	%	1.2	%