0000826154us-gaap:~~FairValueInputsLevel1Memberus-gaap:EstimateOfFairValueFairValueDisclosureMember2022-03-31~~FairValueInputsLevel3Memberus-gaap:CollateralizedMortgageObligationsMember2022-03-31

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 ~~March 31,~~June 30, 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 ~~May 2,~~August 1, 2022: ~~11,054,814.~~10,675,679.

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)	910

	Notes to Consolidated Financial Statements (Unaudited)	1011

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	4243

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	6065

Item 4.	Controls and Procedures	6166

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	6267

Item 1A.	Risk Factors	6267

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	6267

Item 3.	Defaults upon Senior Securities	6267

Item 4.	Mine Safety Disclosures	6267

Item 5.	Other Information	6267

Item 6.	Exhibits	6368

SIGNATURES		6469

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

CMO			Collateralized mortgage obligation


EITC			Educational Improvement Tax Credit Program

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

IRC			Internal Revenue Code of 1986, as amended
LHFS			Loans held for sale
LIBOR			London Interbank Offered Rate
MBS			Mortgage-backed securities

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)	March 31, 2022		December 31, 2021		(Dollars in thousands, except per share amounts)	June 30, 2022		December 31, 2021
Assets	Assets					Assets
Cash and due from banks	Cash and due from banks	$	26,446	$	21,217	Cash and due from banks	$	25,825	$	21,217
Interest-bearing deposits with banks	Interest-bearing deposits with banks	187,792		187,493		Interest-bearing deposits with banks	86,081		187,493

Cash and cash equivalents	Cash and cash equivalents	214,238		208,710		Cash and cash equivalents	111,906		208,710
Restricted investments in bank stocks	Restricted investments in bank stocks	6,791		7,252		Restricted investments in bank stocks	6,500		7,252
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
Securities available for sale (amortized cost of $549,876 and $466,806 at June 30, 2022 and December 31, 2021, respectively)						Securities available for sale (amortized cost of $549,876 and $466,806 at June 30, 2022 and December 31, 2021, respectively)	512,698		472,438
Loans held for sale, at fair value	Loans held for sale, at fair value	7,403		8,868		Loans held for sale, at fair value	7,824		8,868
Loans	Loans	1,978,307		1,979,986		Loans	2,017,629		1,979,986
Less: Allowance for loan losses	Less: Allowance for loan losses	(21,508)		(21,180)		Less: Allowance for loan losses	(23,279)		(21,180)
Net loans	Net loans	1,956,799		1,958,806		Net loans	1,994,350		1,958,806
Premises and equipment, net	Premises and equipment, net	33,704		34,045		Premises and equipment, net	33,429		34,045
Cash surrender value of life insurance	Cash surrender value of life insurance	70,622		70,217		Cash surrender value of life insurance	70,912		70,217
Goodwill	Goodwill	18,724		18,724		Goodwill	18,724		18,724
Other intangible assets, net	Other intangible assets, net	3,891		4,183		Other intangible assets, net	3,610		4,183
Accrued interest receivable	Accrued interest receivable	8,642		8,234		Accrued interest receivable	8,425		8,234
Other assets	Other assets	49,993		43,088		Other assets	55,823		43,088
Total assets	Total assets	$	2,900,537	$	2,834,565	Total assets	$	2,824,201	$	2,834,565
Liabilities	Liabilities					Liabilities
Deposits:	Deposits:					Deposits:
Noninterest-bearing	Noninterest-bearing	$	557,756	$	553,238	Noninterest-bearing	$	569,231	$	553,238
Interest-bearing	Interest-bearing	1,988,236		1,911,691		Interest-bearing	1,909,385		1,911,691
Total deposits	Total deposits	2,545,992		2,464,929		Total deposits	2,478,616		2,464,929
Securities sold under agreements to repurchase	Securities sold under agreements to repurchase	24,624		23,301		Securities sold under agreements to repurchase	24,287		23,301
FHLB advances and other borrowings	FHLB advances and other borrowings	1,788		1,896		FHLB advances and other borrowings	1,678		1,896
Subordinated notes	Subordinated notes	31,978		31,963		Subordinated notes	31,994		31,963
Other liabilities	Other liabilities	41,351		40,820		Other liabilities	50,099		40,820
Total liabilities	Total liabilities	2,645,733		2,562,909		Total liabilities	2,586,674		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; 11,247,545 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
Common stock, no par value—$0.05205 stated value per share 50,000,000 shares authorized; 11,236,558 shares issued and 10,675,679 outstanding at June 30, 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; 11,236,558 shares issued and 10,675,679 outstanding at June 30, 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	188,033		189,689		Additional paid - in capital	188,178		189,689
Retained earnings	Retained earnings	84,943		78,700		Retained earnings	91,723		78,700
Accumulated other comprehensive (loss) income	Accumulated other comprehensive (loss) income	(14,674)		4,449		Accumulated other comprehensive (loss) income	(29,370)		4,449
Treasury stock—168,555 and 75,117 shares, at cost at March 31, 2022 and December 31, 2021, respectively		(4,083)		(1,768)
Treasury stock—560,879 and 75,117 shares, at cost at June 30, 2022 and December 31, 2021, respectively						Treasury stock—560,879 and 75,117 shares, at cost at June 30, 2022 and December 31, 2021, respectively	(13,589)		(1,768)
Total shareholders’ equity	Total shareholders’ equity	254,804		271,656		Total shareholders’ equity	237,527		271,656
Total liabilities and shareholders’ equity	Total liabilities and shareholders’ equity	$	2,900,537	$	2,834,565	Total liabilities and shareholders’ equity	$	2,824,201	$	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			Three Months Ended						Six Months Ended
(Dollars in thousands, except per share amounts)	(Dollars in thousands, except per share amounts)		March 31, 2022			March 31, 2021		(Dollars in thousands, except per share amounts)	June 30, 2022		June 30, 2021		June 30, 2022		June 30, 2021
Interest income	Interest income							Interest income
Loans	Loans		$	21,369		$	21,511	Loans	$	22,027	$	21,323	$	43,396	$	42,834
Investment securities - taxable	Investment securities - taxable		1,598			1,879		Investment securities - taxable	1,957		1,614		3,555		3,493
Investment securities - tax-exempt	Investment securities - tax-exempt		722			500		Investment securities - tax-exempt	1,131		638		1,853		1,138
Short-term investments	Short-term investments		101			39		Short-term investments	235		81		336		120
Total interest income	Total interest income		23,790			23,929		Total interest income	25,350		23,656		49,140		47,585
Interest expense	Interest expense							Interest expense
Deposits	Deposits		685			1,392		Deposits	701		1,081		1,386		2,473
Securities sold under agreements to repurchase	Securities sold under agreements to repurchase		7			9		Securities sold under agreements to repurchase	7		8		14		17
FHLB advances and other borrowings	FHLB advances and other borrowings		22			171		FHLB advances and other borrowings	21		164		43		335
Subordinated notes	Subordinated notes		503			502		Subordinated notes	503		502		1,006		1,004
Total interest expense	Total interest expense		1,217			2,074		Total interest expense	1,232		1,755		2,449		3,829
Net interest income	Net interest income		22,573			21,855		Net interest income	24,118		21,901		46,691		43,756
Provision for loan losses	Provision for loan losses		300			(1,000)		Provision for loan losses	1,775		625		2,075		(375)
Net interest income after provision for loan losses	Net interest income after provision for loan losses		22,273			22,855		Net interest income after provision for loan losses	22,343		21,276		44,616		44,131
Noninterest income	Noninterest income							Noninterest income
Service charges on deposit accounts	Service charges on deposit accounts		920			737		Service charges on deposit accounts	964		698		1,884		1,435
Interchange income	Interchange income		981			955		Interchange income	1,064		1,064		2,045		2,019
Other service charges and fees	Other service charges and fees		153			148		Other service charges and fees	230		182		383		330
Swap fee income	Swap fee income		953			53		Swap fee income	785		15		1,738		68
Trust and investment management income	Trust and investment management income		1,941			1,912		Trust and investment management income	1,905		2,020		3,846		3,932
Brokerage income	Brokerage income		928			811		Brokerage income	989		910		1,917		1,721
Mortgage banking activities	Mortgage banking activities		721			2,189		Mortgage banking activities	498		1,162		1,219		3,351

Income from life insurance	Income from life insurance		566			557		Income from life insurance	593		564		1,159		1,121
Investment securities (losses) gains	Investment securities (losses) gains		(146)			145		Investment securities (losses) gains	(3)		11		(149)		156
Other income	Other income		457			37		Other income	169		38		626		75
Total noninterest income	Total noninterest income		7,474			7,544		Total noninterest income	7,194		6,664		14,668		14,208
Noninterest expenses	Noninterest expenses							Noninterest expenses
Salaries and employee benefits	Salaries and employee benefits		11,337			10,197		Salaries and employee benefits	11,312		10,212		22,649		20,409
Occupancy	Occupancy		1,288			1,240		Occupancy	1,132		1,098		2,420		2,338
Furniture and equipment	Furniture and equipment		1,279			1,278		Furniture and equipment	1,291		1,302		2,570		2,580
Data processing	Data processing		1,053			1,019		Data processing	1,165		1,032		2,218		2,051

Automated teller and interchange fees	Automated teller and interchange fees		305			249		Automated teller and interchange fees	318		319		623		568
Advertising and bank promotions	Advertising and bank promotions		355			425		Advertising and bank promotions	881		274		1,236		699
FDIC insurance	FDIC insurance		283			194		FDIC insurance	190		158		473		352

Professional services	Professional services		808			721		Professional services	722		579		1,530		1,300
Directors' compensation	Directors' compensation		231			234		Directors' compensation	230		235		461		469

Taxes other than income	Taxes other than income		564			451		Taxes other than income	108		462		672		913
Intangible asset amortization	Intangible asset amortization		292			334		Intangible asset amortization	281		324		573		658

Other operating expenses	Other operating expenses		1,569			1,441		Other operating expenses	1,164		1,038		2,733		2,479
Total noninterest expenses	Total noninterest expenses		19,364			17,783		Total noninterest expenses	18,794		17,033		38,158		34,816
Income before income tax expense	Income before income tax expense		10,383			12,616		Income before income tax expense	10,743		10,907		21,126		23,523
Income tax expense	Income tax expense		2,015			2,409		Income tax expense	1,872		2,131		3,887		4,540
Net income	Net income		$	8,368		$	10,207	Net income	$	8,871	$	8,776	$	17,239	$	18,983

Table of Contents


							Three Months Ended				Six Months Ended
							June 30, 2022		June 30, 2021		June 30, 2022		June 30, 2021
Per share information:	Per share information:					Per share information:
Basic earnings per share	Basic earnings per share	$	0.77	$	0.93	Basic earnings per share	$	0.84	$	0.80	$	1.61	$	1.73
Diluted earnings per share	Diluted earnings per share	0.76		0.92		Diluted earnings per share	0.83		0.79		1.59		1.71
Dividends paid per share	Dividends paid per share	0.19		0.18		Dividends paid per share	0.19		0.18		0.38		0.36

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			Three Months Ended						Six Months Ended
(Dollars in thousands)	(Dollars in thousands)		March 31, 2022			March 31, 2021		(Dollars in thousands)	June 30, 2022		June 30, 2021		June 30, 2022		June 30, 2021
Net income	Net income		$	8,368		$	10,207	Net income	$	8,871	$	8,776	$	17,239	$	18,983
Other comprehensive (loss) income, net of tax:	Other comprehensive (loss) income, net of tax:							Other comprehensive (loss) income, net of tax:
Unrealized losses on securities available for sale arising during the period			(24,353)			(721)
Unrealized (losses) gains on securities available for sale arising during the period								Unrealized (losses) gains on securities available for sale arising during the period	(18,606)		5,402		(42,959)		4,681
Reclassification adjustment for losses (gains) realized in net income	Reclassification adjustment for losses (gains) realized in net income		146			(145)		Reclassification adjustment for losses (gains) realized in net income	3		(11)		149		(156)
Net unrealized losses on securities available for sale			(24,207)			(866)
Net unrealized (losses) gains on securities available for sale								Net unrealized (losses) gains on securities available for sale	(18,603)		5,391		(42,810)		4,525
Tax effect	Tax effect		5,084			182		Tax effect	3,907		(1,132)		8,991		(950)
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
Total other comprehensive (loss) gain, net of tax and reclassification adjustments on securities available for sale								Total other comprehensive (loss) gain, net of tax and reclassification adjustments on securities available for sale	(14,696)		4,259		(33,819)		3,575
Unrealized (losses) gains on interest rate swaps used in cash flow hedges								Unrealized (losses) gains on interest rate swaps used in cash flow hedges	—		(83)		—		656
Reclassification adjustment for losses realized in net income	Reclassification adjustment for losses realized in net income		—			87		Reclassification adjustment for losses realized in net income	—		89		—		176
Net unrealized gains on interest rate swaps used in cash flow hedges	Net unrealized gains on interest rate swaps used in cash flow hedges		—			826		Net unrealized gains on interest rate swaps used in cash flow hedges	—		6		—		832
Tax effect	Tax effect		—			(173)		Tax effect	—		(2)		—		(175)
Total other comprehensive gains, net of tax and reclassification adjustments on interest rate swaps used in cash flow hedges	Total other comprehensive gains, net of tax and reclassification adjustments on interest rate swaps used in cash flow hedges		—			653		Total other comprehensive gains, net of tax and reclassification adjustments on interest rate swaps used in cash flow hedges	—		4		—		657
Total other comprehensive loss, net of tax and reclassification adjustments			(19,123)			(31)
Total other comprehensive (loss) gain, net of tax and reclassification adjustments								Total other comprehensive (loss) gain, net of tax and reclassification adjustments	(14,696)		4,263		(33,819)		4,232
Total comprehensive (loss) income	Total comprehensive (loss) income		$	(10,755)		$	10,176	Total comprehensive (loss) income	$	(5,825)	$	13,039	$	(16,580)	$	23,215

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 June 30, 2022
(Dollars in thousands, except per share amounts)														(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, April 1, 2022														Balance, April 1, 2022	$	585	$	188,033	$	84,943	$	(14,674)	$	(4,083)	$	254,804
Net income														Net income	—		—		8,871		—		—		8,871

Total other comprehensive loss, net of taxes														Total other comprehensive loss, net of taxes	—		—		—		(14,696)		—		(14,696)
Cash dividends ($0.19 per share)														Cash dividends ($0.19 per share)	—		—		(2,091)		—		—		(2,091)

Share-based compensation plans:														Share-based compensation plans:
10,987 net common shares acquired and 392,324 net treasury shares acquired, including compensation expense totaling $529														10,987 net common shares acquired and 392,324 net treasury shares acquired, including compensation expense totaling $529	—		145		—		—		(9,506)		(9,361)

Balance, June 30, 2022														Balance, June 30, 2022	$	585	$	188,178	$	91,723	$	(29,370)	$	(13,589)	$	237,527

		Three Months Ended March 31, 2022													Six Months Ended June 30, 2022
(Dollars in thousands, except per share amounts)	(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		(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	Balance, January 1, 2022	$	586	$	189,689	$	78,700	$	4,449	$	(1,768)	$	271,656	Balance, January 1, 2022	$	586	$	189,689	$	78,700	$	4,449	$	(1,768)	$	271,656
Net income	Net income	—		—		8,368		—		—		8,368		Net income	—		—		17,239		—		—		17,239

Total other comprehensive loss, net of taxes	Total other comprehensive loss, net of taxes	—		—		—		(19,123)		—		(19,123)		Total other comprehensive loss, net of taxes	—		—		—		(33,819)		—		(33,819)
Cash dividends ($0.19 per share)		—		—		(2,125)		—		—		(2,125)
Cash dividends ($0.38 per share)														Cash dividends ($0.38 per share)	—		—		(4,216)		—		—		(4,216)

Share-based compensation plans:	Share-based compensation plans:													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)
21,609 net common shares acquired and 485,762 net treasury shares acquired, including compensation expense totaling $867														21,609 net common shares acquired and 485,762 net treasury shares acquired, including compensation expense totaling $867	(1)		(1,511)		—		—		(11,821)		(13,333)

Balance, March 31, 2022		$	585	$	188,033	$	84,943	$	(14,674)	$	(4,083)	$	254,804
Balance, June 30, 2022														Balance, June 30, 2022	$	585	$	188,178	$	91,723	$	(29,370)	$	(13,589)	$	237,527

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.

Table of Contents


	Three Months Ended June 30, 2021
(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, April 1, 2021	$	586	$	188,511	$	62,302	$	3,315	$	(266)	$	254,448
Net income	—		—		8,776		—		—		8,776

Total other comprehensive income, net of taxes	—		—		—		4,263		—		4,263
Cash dividends ($0.18 per share)	—		—		(2,026)		—		—		(2,026)

Share-based compensation plans:
207 net common shares acquired and 12,000 net treasury shares issued, including compensation expense totaling $478	—		261		—		—		216		477

Balance, June 30, 2021	$	586	$	188,772	$	69,052	$	7,578	$	(50)	$	265,938




















	Six Months Ended June 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	—		—		18,983		—		—		18,983

Total other comprehensive loss, net of taxes	—		—		—		4,232		—		4,232
Cash dividends ($0.36 per share)	—		—		(4,030)		—		—		(4,030)

Share-based compensation plans:
8,464 net common shares issued and 52,970 net treasury shares issued, including compensation expense totaling $945	—		(294)		—		—		798		504

Balance, June 30, 2021	$	586	$	188,772	$	69,052	$	7,578	$	(50)	$	265,938

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

Table of Contents

Condensed Consolidated Statements of Cash Flows (Unaudited)

ORRSTOWN FINANCIAL SERVICES, INC.
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


	Six Months Ended
(Dollars in thousands)	June 30, 2022		June 30, 2021
Cash flows from operating activities
Net income	$	17,239	$	18,983
Adjustments to reconcile net income to net cash provided by operating activities:
Net premium amortization (discount accretion)	542		(812)
Depreciation and amortization expense	2,374		2,692

Provision for loan losses	2,075		(375)
Share-based compensation	867		945
Gains on sales of loans originated for sale	(395)		(2,791)
Mortgage loans originated for sale	(56,420)		(104,190)
Proceeds from sales of loans originated for sale	55,482		109,877
Gains on sale of portfolio loans	(306)		—


Net loss on disposal of premises and equipment	15		—
Deferred income tax expense (benefit)	1,517		(2,371)
Investment securities losses (gains)	149		(156)

Income from life insurance	(1,159)		(1,121)
(Increase) decrease in accrued interest receivable	(191)		997
Increase in other liabilities	9,279		1,449
Other, net	(5,777)		(3,292)
Net cash provided by operating activities	25,291		19,835
Cash flows from investing activities
Proceeds from sales of AFS securities	3,075		75,719
Maturities, repayments and calls of AFS securities	33,480		21,227
Purchases of AFS securities	(121,487)		(76,858)

Net redemptions of restricted investments in bank stocks	752		872
Distributions from investments in limited partnerships	1,146		—
Net (increase) decrease in loans	(39,208)		35,337
Proceeds from sales of portfolio loans	4,443		—

Purchases of bank premises and equipment	(472)		(556)





Death benefit proceeds from life insurance contracts	142		—

Net cash (used in) provided by investing activities	(118,129)		55,741
Cash flows from financing activities
Net increase in deposits	13,681		137,200
Net increase in borrowings with original maturities less than 90 days	986		3,406

Payments on FHLB advances and other borrowings	(218)		(208)






Dividends paid	(4,216)		(4,030)

Acquisition of treasury stock	(14,056)		—
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 (used in) provided by financing activities	(3,966)		135,928
Net (decrease) increase in cash and cash equivalents	(96,804)		211,504
Cash and cash equivalents at beginning of period	208,710		125,258
Cash and cash equivalents at end of period	$	111,906	$	336,762



Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	2,400	$	3,900
Income taxes	1,725		2,100
Supplemental schedule of noncash activities:
Loans transferred from LHFS to portfolio loans	1,510		—

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

910

Table of Contents

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. 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, 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, 2021 consolidated balance sheet information contained in this Quarterly Report on Form 10-Q was derived from the Company's 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, 2021. Operating results for the ~~three~~six months ended ~~March 31,~~June 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 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.

To prepare financial statements in conformity with GAAP, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could 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.

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.

1011

Table of Contents

Changes to the fair value of derivatives designated and that qualify as cash flow hedges are recorded in 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 AOCI are reclassified immediately into earnings and subsequent changes in the fair value of the cash flow hedge are recognized in earnings. At ~~March 31,~~June 30, 2022 and December 31, 2021, the Company had no interest rate ~~derivative~~derivatives designated as a 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,~~June 30, 2022 and December 31, 2021, the Company had interest rate swaps not designated as hedges with a total notional value of ~~$120.6~~$183.5 million and $75.8 million, respectively.

The Company also may enter into risk participation agreements with a financial institution counterparty for an interest rate derivative contract related to a loan in which the Company may be a participant or the agent bank. 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 manages its credit risk on risk participation agreements by monitoring the creditworthiness of the borrower, which follows the same credit review process as derivative instruments entered into directly with the borrower. The notional amount of a risk participation agreement reflects the Company's pro-rata share of the derivative instrument, consistent with its share of the related participated loan. Changes in the fair value of the risk participation agreement are recognized directly into earnings. At June 30, 2022 and December 31, 2021, the Company had a risk participation with sold protection with a notional value of $15.9 million for both periods, and a risk participation with purchased protection with a notional value of $5.0 million and zero at June 30, 2022 and December 31, 2021, 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 ~~March~~June 30, 2022 and December 31, ~~2022.~~2021.

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

Table of Contents

annual periods beginning after December 15, 2019. The implementation deadline of ASU 2016-13 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 will adopt ASU 2016-13 effective January 1, 2023. The Company is evaluating the impact of the 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~~finalizes which methods will be utilized, another 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

~~Table of Contents~~

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 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 implemented fallback language for loans 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.

Table of Contents

NOTE 2. INVESTMENT SECURITIES

At ~~March 31,~~June 30, 2022 and December 31, 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 ~~March 31,~~June 30, 2022 and December 31, 2021:


		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value			Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
March 31, 2022
June 30, 2022										June 30, 2022
U.S. Treasury securities	U.S. Treasury securities	$	20,081	$	—	$	1,543	$	18,538	U.S. Treasury securities	$	20,077	$	—	$	2,108	$	17,969

States and political subdivisions	States and political subdivisions	244,922		1,984		9,346		237,560		States and political subdivisions	255,144		768		22,385		233,527
GSE residential MBSs	GSE residential MBSs	61,239		—		2,010		59,229		GSE residential MBSs	65,370		—		3,812		61,558
GSE residential CMOs	GSE residential CMOs	74,023		48		3,044		71,027		GSE residential CMOs	73,881		217		4,407		69,691
Non-agency CMOs	Non-agency CMOs	29,832		3		2,832		27,003		Non-agency CMOs	21,993		3		1,298		20,698

Asset-backed	Asset-backed	117,805		—		1,835		115,970		Asset-backed	113,012		—		4,156		108,856
Other	Other	403		—		—		403		Other	399		—		—		399
Totals	Totals	$	548,305	$	2,035	$	20,610	$	529,730	Totals	$	549,876	$	988	$	38,166	$	512,698
December 31, 2021	December 31, 2021									December 31, 2021
U.S. Treasury securities	U.S. Treasury securities	$	20,084	$	—	$	382	$	19,702	U.S. Treasury securities	$	20,084	$	—	$	382	$	19,702

States and political subdivisions	States and political subdivisions	185,437		8,606		673		193,370		States and political subdivisions	185,437		8,606		673		193,370
GSE residential MBSs	GSE residential MBSs	41,260		44		578		40,726		GSE residential MBSs	41,260		44		578		40,726
GSE residential CMOs	GSE residential CMOs	66,430		436		944		65,922		GSE residential CMOs	66,430		436		944		65,922
Non-agency CMOs	Non-agency CMOs	30,676		—		978		29,698		Non-agency CMOs	30,676		—		978		29,698

Asset-backed	Asset-backed	122,520		401		300		122,621		Asset-backed	122,520		401		300		122,621
Other	Other	399		—		—		399		Other	399		—		—		399
Totals	Totals	$	466,806	$	9,487	$	3,855	$	472,438	Totals	$	466,806	$	9,487	$	3,855	$	472,438

~~Table of Contents~~

The following table summarizes investment securities with unrealized losses at ~~March 31,~~June 30, 2022 and December 31, 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
March 31, 2022
June 30, 2022																	June 30, 2022
U.S. Treasury securities	U.S. Treasury securities	3	$	18,538	$	1,543	—	$	—	$	—	3	$	18,538	$	1,543	U.S. Treasury securities	3	$	17,969	$	2,108	—	$	—	$	—	3	$	17,969	$	2,108

States and political subdivisions	States and political subdivisions	30	166,305		9,346		—	—		—		30	166,305		9,346		States and political subdivisions	35	186,442		22,385		—	—		—		35	186,442		22,385
GSE residential MBSs	GSE residential MBSs	14	59,229		2,010		—	—		—		14	59,229		2,010		GSE residential MBSs	15	61,558		3,812		—	—		—		15	61,558		3,812
GSE residential CMOs	GSE residential CMOs	12	66,516		2,782		1	3,501		262		13	70,017		3,044		GSE residential CMOs	8	45,599		3,245		5	18,803		1,162		13	64,402		4,407
Non-agency CMOs	Non-agency CMOs	3	22,303		2,832		—	—		—		3	22,303		2,832		Non-agency CMOs	3	16,222		1,298		—	—		—		3	16,222		1,298

Asset-backed	Asset-backed	12	83,667		1,352		3	31,910		483		15	115,577		1,835		Asset-backed	13	79,365		3,168		3	29,491		988		16	108,856		4,156
Totals	Totals	74	$	416,558	$	19,865	4	$	35,411	$	745	78	$	451,969	$	20,610	Totals	77	$	407,155	$	36,016	8	$	48,294	$	2,150	85	$	455,449	$	38,166
December 31, 2021	December 31, 2021																December 31, 2021
U.S. Treasury securities	U.S. Treasury securities	3	$	19,702	$	382	—	$	—	$	—	3	$	19,702	$	382	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		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 MBSs	9	37,899		578		—	—		—		9	37,899		578
GSE residential CMOs	GSE residential CMOs	7	41,163		944		—	—		—		7	41,163		944		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		Non-agency CMOs	3	24,661		978		—	—		—		3	24,661		978

Asset-backed	Asset-backed	3	21,245		138		3	34,180		162		6	55,425		300		Asset-backed	3	21,245		138		3	34,180		162		6	55,425		300
Totals	Totals	37	$	190,192	$	3,693	3	$	34,180	$	162	40	$	224,372	$	3,855	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.

Table of Contents

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 AOCI on the unaudited condensed consolidated statements of financial condition.

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 ~~March 31,~~June 30, 2022 or December 31, 2021.

States and Political Subdivisions. The unrealized losses presented in the table above have been caused by a rise in interest rates from the time these securities were purchased. Management considers the investment rating, the state of the issuer of 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 ~~March 31,~~June 30, 2022 or December 31, 2021.

~~Table of Contents~~

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 ~~March 31,~~June 30, 2022 or December 31, 2021.

Non-Agency CMOs. The unrealized losses presented in the table above were caused by a widening of spreads 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 ~~March 31,~~June 30, 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.2021.

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 ~~March 31,~~June 30, 2022 or December 31, 2021.

The following table summarizes amortized cost and fair value of investment securities by contractual maturity at ~~March 31,~~June 30, 2022. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with

Table of Contents

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	$	249	$	249
Due after one year through five years	Due after one year through five years	3,376		3,509		Due after one year through five years	3,122		3,191
Due after five years through ten years	Due after five years through ten years	79,079		75,367		Due after five years through ten years	85,322		79,065
Due after ten years	Due after ten years	182,951		177,625		Due after ten years	186,927		169,390
CMOs and MBSs	CMOs and MBSs	165,094		157,259		CMOs and MBSs	161,244		151,947
Asset-backed	Asset-backed	117,805		115,970		Asset-backed	113,012		108,856
Totals	Totals	$	548,305	$	529,730	Totals	$	549,876	$	512,698

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


		Three months ended March 31,			Three months ended June 30,						Six months ended June 30,
			2022			2021			2022		2021		2022		2021
Proceeds from sale of investment securities	Proceeds from sale of investment securities		$	3,075		$	75,736	Proceeds from sale of investment securities	$	—	$	—	$	3,075	$	75,719
Gross gains	Gross gains		25			1,351		Gross gains	—		11		25		1,362
Gross losses	Gross losses		—			1,206		Gross losses	3		—		3		1,206

During the three and six months ended ~~March 31,~~June 30, 2022, the Company recorded net investment security losses of $3 thousand and net investment security gains ~~excluding the OTTI charge noted above,~~ of ~~$25~~$22 thousand, ~~were recorded,~~respectively, compared to net gains of ~~$145~~$11 thousand and $156 thousand for the three and six months ended ~~March 31, 2021.~~June 30, 2021, respectively. A non-agency CMO was called, which resulted in a loss of $171 thousand for the six months ended June 30, 2022. During the ~~three~~six months ended ~~March 31,~~June 30, 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 $75.6 million that were sold for proceeds of $75.7 million during the six months ended June 30, 2021. There were no securities sold during the three months ended ~~March 31,~~June 30, 2022 and 2021. Investment securities with a fair value of ~~$291.0~~$341.9 million and $295.6 million at ~~March 31,~~June 30, 2022 and December 31, 2021, respectively, were pledged to secure public funds and for other purposes as required or permitted by law.

~~Table of Contents~~

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

Table of Contents

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 ~~March 31,~~June 30, 2022 and December 31, 2021, commercial and industrial loans include ~~$122.5~~$30.2 million and $189.9 million, respectively, of loans, net of deferred fees and costs, originated through the SBA PPP. At ~~March 31,~~June 30, 2022, the Bank has ~~$2.4 million~~$758 thousand of net deferred SBA PPP fees remaining to be recognized through net interest income over the remaining life of the ~~loans, which is between~~ ~~two~~ ~~and five years.~~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 ALL at ~~March 31,~~June 30, 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 clients for a specific utility.

~~Table of Contents~~

The Company originates loans to its retail 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 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.

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.

~~Interagency Statement on Loan Modifications by Financial Institutions Working with Customers Affected by the Coronaviru~~
s 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 ~~March 31,~~June 30, 2022 and December 31, 2021:


		March 31, 2022		December 31, 2021			June 30, 2022		December 31, 2021
Commercial real estate:	Commercial real estate:					Commercial real estate:
Owner occupied	Owner occupied	$	256,526	$	238,668	Owner occupied	$	287,825	$	238,668
Non-owner occupied	Non-owner occupied	558,999		551,783		Non-owner occupied	559,309		551,783
Multi-family	Multi-family	93,158		93,255		Multi-family	116,110		93,255
Non-owner occupied residential	Non-owner occupied residential	102,269		106,112		Non-owner occupied residential	109,141		106,112
Acquisition and development:	Acquisition and development:					Acquisition and development:
1-4 family residential construction	1-4 family residential construction	15,115		12,279		1-4 family residential construction	22,650		12,279
Commercial and land development	Commercial and land development	105,204		93,925		Commercial and land development	134,947		93,925
Commercial and industrial (1)	Commercial and industrial (1)	443,170		485,728		Commercial and industrial (1)	379,729		485,728
Municipal	Municipal	14,626		14,989		Municipal	12,957		14,989
Residential mortgage:	Residential mortgage:					Residential mortgage:
First lien	First lien	203,231		198,831		First lien	202,787		198,831
Home equity - term	Home equity - term	5,820		6,081		Home equity - term	5,996		6,081
Home equity - lines of credit	Home equity - lines of credit	164,818		160,705		Home equity - lines of credit	171,269		160,705
Installment and other loans	Installment and other loans	15,371		17,630		Installment and other loans	14,909		17,630
Total loans	Total loans	$	1,978,307	$	1,979,986	Total loans	$	2,017,629	$	1,979,986

(1) This balance includes ~~$122.5~~$30.2 million and $189.9 million of SBA PPP loans, net of deferred fees and costs, at ~~March 31,~~June 30, 2022 and December 31, 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 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

~~Table of Contents~~

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.

1718

Table of Contents

The following table summarizes the Company’s loan portfolio ratings based on its internal risk rating system at ~~March 31,~~June 30, 2022 and December 31, 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
March 31, 2022
June 30, 2022																June 30, 2022
Commercial real estate:	Commercial real estate:															Commercial real estate:
Owner occupied	Owner occupied	$	242,529	$	6,360	$	2,277	$	3,062	$	—	$	2,298	$	256,526	Owner occupied	$	274,188	$	6,086	$	2,375	$	2,910	$	—	$	2,266	$	287,825
Non-owner occupied	Non-owner occupied	537,505		18,771		2,419		—		—		304		558,999		Non-owner occupied	547,382		9,221		2,409		—		—		297		559,309
Multi-family	Multi-family	84,541		8,158		459		—		—		—		93,158		Multi-family	107,779		8,082		249		—		—		—		116,110
Non-owner occupied residential	Non-owner occupied residential	99,545		1,005		1,014		100		—		605		102,269		Non-owner occupied residential	105,680		2,261		503		98		—		599		109,141
Acquisition and development:	Acquisition and development:															Acquisition and development:
1-4 family residential construction	1-4 family residential construction	15,115		—		—		—		—		—		15,115		1-4 family residential construction	22,650		—		—		—		—		—		22,650
Commercial and land development	Commercial and land development	103,486		1,236		482		—		—		—		105,204		Commercial and land development	133,264		1,683		—		—		—		—		134,947
Commercial and industrial	Commercial and industrial	424,425		7,642		8,792		161		—		2,150		443,170		Commercial and industrial	365,407		5,877		6,266		62		—		2,117		379,729
Municipal	Municipal	14,626		—		—		—		—		—		14,626		Municipal	12,957		—		—		—		—		—		12,957
Residential mortgage:	Residential mortgage:															Residential mortgage:
First lien	First lien	196,217		—		221		2,278		—		4,515		203,231		First lien	195,674		—		221		2,448		—		4,444		202,787
Home equity - term	Home equity - term	5,798		—		—		6		—		16		5,820		Home equity - term	5,974		—		—		6		—		16		5,996
Home equity - lines of credit	Home equity - lines of credit	164,327		19		46		426		—		—		164,818		Home equity - lines of credit	170,834		—		46		389		—		—		171,269
Installment and other loans	Installment and other loans	15,314		—		—		52		—		5		15,371		Installment and other loans	14,861		—		—		42		—		6		14,909
		$	1,903,428	$	43,191	$	15,710	$	6,085	$	—	$	9,893	$	1,978,307		$	1,956,650	$	33,210	$	12,069	$	5,955	$	—	$	9,745	$	2,017,629

December 31, 2021	December 31, 2021															December 31, 2021
Commercial real estate:	Commercial real estate:															Commercial real estate:
Owner occupied	Owner occupied	$	219,250	$	7,239	$	6,087	$	3,763	$	—	$	2,329	$	238,668	Owner occupied	$	219,250	$	7,239	$	6,087	$	3,763	$	—	$	2,329	$	238,668
Non-owner occupied	Non-owner occupied	528,010		23,297		166		—		—		310		551,783		Non-owner occupied	528,010		23,297		166		—		—		310		551,783
Multi-family	Multi-family	84,414		8,238		603		—		—		—		93,255		Multi-family	84,414		8,238		603		—		—		—		93,255
Non-owner occupied residential	Non-owner occupied residential	102,588		1,065		1,153		122		—		1,184		106,112		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	12,279		—		—		—		—		—		12,279		1-4 family residential construction	12,279		—		—		—		—		—		12,279
Commercial and land development	Commercial and land development	92,049		1,385		491		—		—		—		93,925		Commercial and land development	92,049		1,385		491		—		—		—		93,925
Commercial and industrial	Commercial and industrial	470,579		7,917		4,720		250		—		2,262		485,728		Commercial and industrial	470,579		7,917		4,720		250		—		2,262		485,728
Municipal	Municipal	14,989		—		—		—		—		—		14,989		Municipal	14,989		—		—		—		—		—		14,989
Residential mortgage:	Residential mortgage:															Residential mortgage:
First lien	First lien	191,386		—		225		2,635		—		4,585		198,831		First lien	191,386		—		225		2,635		—		4,585		198,831
Home equity - term	Home equity - term	6,058		—		—		7		—		16		6,081		Home equity - term	6,058		—		—		7		—		16		6,081
Home equity - lines of credit	Home equity - lines of credit	160,203		20		46		436		—		—		160,705		Home equity - lines of credit	160,203		20		46		436		—		—		160,705
Installment and other loans	Installment and other loans	17,584		—		—		40		—		6		17,630		Installment and other loans	17,584		—		—		40		—		6		17,630
		$	1,899,389	$	49,161	$	13,491	$	7,253	$	—	$	10,692	$	1,979,986		$	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

1819

Table of Contents

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 ~~March 31,~~June 30, 2022 and December 31, 2021, ~~nearly~~except for TDRs, all of the Company’s loan impairments were measured based on the estimated fair value of the collateral securing the ~~loan, except for TDRs.~~loan. 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

1920

Table of Contents

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 ~~March 31,~~June 30, 2022 and December 31, 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)
March 31, 2022
June 30, 2022												June 30, 2022
Commercial real estate:	Commercial real estate:											Commercial real estate:
Owner-occupied	Owner-occupied	$	—	$	—	$	—	$	3,062	$	4,840	Owner-occupied	$	—	$	—	$	—	$	2,910	$	3,862

Non-owner occupied residential	Non-owner occupied residential	—		—		—		100		214		Non-owner occupied residential	—		—		—		98		212

Commercial and industrial	Commercial and industrial	—		—		—		161		447		Commercial and industrial	—		—		—		62		336
Residential mortgage:	Residential mortgage:											Residential mortgage:
First lien	First lien	338		338		29		1,940		2,938		First lien	181		181		28		2,267		3,103
Home equity—term	Home equity—term	—		—		—		6		9		Home equity—term	—		—		—		6		9
Home equity—lines of credit	Home equity—lines of credit	—		—		—		426		651		Home equity—lines of credit	—		—		—		389		619
Installment and other loans	Installment and other loans	—		—		—		52		52		Installment and other loans	—		—		—		42		42
		$	338	$	338	$	29	$	5,747	$	9,151		$	181	$	181	$	28	$	5,774	$	8,183
December 31, 2021	December 31, 2021											December 31, 2021
Commercial real estate:	Commercial real estate:											Commercial real estate:
Owner-occupied	Owner-occupied	$	—	$	—	$	—	$	3,763	$	4,902	Owner-occupied	$	—	$	—	$	—	$	3,763	$	4,902

Non-owner occupied residential	Non-owner occupied residential	—		—		—		122		259		Non-owner occupied residential	—		—		—		122		259

Commercial and industrial	Commercial and industrial	—		—		—		250		547		Commercial and industrial	—		—		—		250		547
Residential mortgage:	Residential mortgage:											Residential mortgage:
First lien	First lien	341		341		28		2,294		3,337		First lien	341		341		28		2,294		3,337
Home equity—term	Home equity—term	—		—		—		7		10		Home equity—term	—		—		—		7		10
Home equity—lines of credit	Home equity—lines of credit	—		—		—		436		653		Home equity—lines of credit	—		—		—		436		653
Installment and other loans	Installment and other loans	—		—		—		40		40		Installment and other loans	—		—		—		40		40
		$	341	$	341	$	28	$	6,912	$	9,748		$	341	$	341	$	28	$	6,912	$	9,748

2021

Table of Contents

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 six months ended ~~March 31,~~June 30, 2022 and 2021:


		2022				2021					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 June 30,										Three Months Ended June 30,
Commercial real estate:										Commercial real estate:
Owner-occupied										Owner-occupied	$	3,006	$	—	$	4,072	$	—

Non-owner occupied residential										Non-owner occupied residential	99		—		259		—

Commercial and industrial										Commercial and industrial	117		—		3,302		—
Residential mortgage:										Residential mortgage:
First lien										First lien	2,310		8		2,542		10
Home equity – term										Home equity – term	6		—		18		—
Home equity - lines of credit										Home equity - lines of credit	408		—		547		—
Installment and other loans										Installment and other loans	49		—		13		—
											$	5,995	$	8	$	10,753	$	10

Three Months Ended March 31,
Six Months Ended June 30,										Six Months Ended June 30,
Commercial real estate:	Commercial real estate:									Commercial real estate:
Owner occupied	Owner occupied	$	3,422	$	—	$	3,448	$	1	Owner occupied	$	3,236	$	—	$	3,726	$	1

Multi-family	Multi-family	—		—		19		—		Multi-family	—		—		11		—
Non-owner occupied residential	Non-owner occupied residential	107		—		267		—		Non-owner occupied residential	103		—		263		—
Acquisition and development:	Acquisition and development:									Acquisition and development:

Commercial and land development	Commercial and land development	—		—		614		—		Commercial and land development	—		—		351		—
Commercial and industrial	Commercial and industrial	218		—		2,878		—		Commercial and industrial	168		—		3,049		—
Residential mortgage:	Residential mortgage:									Residential mortgage:
First lien	First lien	2,406		7		2,636		11		First lien	2,369		15		2,593		21
Home equity - term	Home equity - term	7		—		12		—		Home equity - term	6		—		14		—
Home equity - lines of credit	Home equity - lines of credit	432		—		616		—		Home equity - lines of credit	419		—		581		—
Installment and other loans	Installment and other loans	45		—		15		—		Installment and other loans	46		—		12		—
		$	6,637	$	7	$	10,505	$	12		$	6,347	$	15	$	10,600	$	22

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


		March 31, 2022			December 31, 2021				June 30, 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:

Residential mortgage:	Residential mortgage:							Residential mortgage:
First lien	First lien	7	$	575	8	$	804	First lien	7	$	568	8	$	804

									7	568		8	804
Nonaccruing:	Nonaccruing:							Nonaccruing:

Residential mortgage:	Residential mortgage:							Residential mortgage:
First lien	First lien	6	276		5	285		First lien	6	264		5	285
Installment and other loans								Installment and other loans	1	4		—	—
									7	268		5	285
									14	$	836	13	$	1,089
		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 TDRs in 2021.~~

2122

Table of Contents

There were 1 and 2 new TDRs, both on non-accrual status, of $4 thousand and $6 thousand, for the three and six months ended June 30, 2022, respectively. There were no new TDRs in 2021.

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 ~~March 31,~~June 30, 2022 and December 31, 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
March 31, 2022
June 30, 2022																June 30, 2022
Commercial real estate:	Commercial real estate:															Commercial real estate:
Owner occupied	Owner occupied	$	250,844	$	322	$	—	$	—	$	322	$	3,062	$	254,228	Owner occupied	$	282,280	$	369	$	—	$	—	$	369	$	2,910	$	285,559
Non-owner occupied	Non-owner occupied	558,695		—		—		—		—		—		558,695		Non-owner occupied	558,928		84		—		—		84		—		559,012
Multi-family	Multi-family	93,158		—		—		—		—		—		93,158		Multi-family	116,110		—		—		—		—		—		116,110
Non-owner occupied residential	Non-owner occupied residential	101,254		310		—		—		310		100		101,664		Non-owner occupied residential	108,324		120		—		—		120		98		108,542
Acquisition and development:	Acquisition and development:															Acquisition and development:
1-4 family residential construction	1-4 family residential construction	15,115		—		—		—		—		—		15,115		1-4 family residential construction	22,650		—		—		—		—		—		22,650
Commercial and land development	Commercial and land development	105,204		—		—		—		—		—		105,204		Commercial and land development	134,947		—		—		—		—		—		134,947
Commercial and industrial	Commercial and industrial	440,652		207		—		—		207		161		441,020		Commercial and industrial	376,246		1,304		—		—		1,304		62		377,612
Municipal	Municipal	14,626		—		—		—		—		—		14,626		Municipal	12,957		—		—		—		—		—		12,957
Residential mortgage:	Residential mortgage:															Residential mortgage:
First lien	First lien	194,216		2,741		—		56		2,797		1,703		198,716		First lien	195,825		123		466		49		638		1,880		198,343
Home equity - term	Home equity - term	5,786		12		—		—		12		6		5,804		Home equity - term	5,965		9		—		—		9		6		5,980
Home equity - lines of credit	Home equity - lines of credit	163,725		437		230		—		667		426		164,818		Home equity - lines of credit	170,679		133		68		—		201		389		171,269
Installment and other loans	Installment and other loans	15,231		83		—		—		83		52		15,366		Installment and other loans	14,734		103		24		—		127		42		14,903
Subtotal	Subtotal	1,958,506		4,112		230		56		4,398		5,510		1,968,414		Subtotal	1,999,645		2,245		558		49		2,852		5,387		2,007,884
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	2,298		—		—		—		—		—		2,298		Owner occupied	2,266		—		—		—		—		—		2,266
Non-owner occupied	Non-owner occupied	304		—		—		—		—		—		304		Non-owner occupied	297		—		—		—		—		—		297

Non-owner occupied residential	Non-owner occupied residential	494		—		—		111		111		—		605		Non-owner occupied residential	484		—		—		115		115		—		599

Commercial and industrial	Commercial and industrial	2,150		—		—		—		—		—		2,150		Commercial and industrial	2,117		—		—		—		—		—		2,117

Residential mortgage:	Residential mortgage:															Residential mortgage:
First lien	First lien	3,837		608		—		70		678		—		4,515		First lien	4,164		10		112		158		280		—		4,444
Home equity - term	Home equity - term	15		—		—		1		1		—		16		Home equity - term	16		—		—		—		—		—		16

Installment and other loans	Installment and other loans	2		3		—		—		3		—		5		Installment and other loans	6		—		—		—		—		—		6
Subtotal	Subtotal	9,100		611		—		182		793		—		9,893		Subtotal	9,350		10		112		273		395		—		9,745
		$	1,967,606	$	4,723	$	230	$	238	$	5,191	$	5,510	$	1,978,307		$	2,008,995	$	2,255	$	670	$	322	$	3,247	$	5,387	$	2,017,629

2223

Table of Contents



			Days Past Due
	Current		30-59		60-89		90+ (still accruing)		Total Past Due		Non- Accrual		Total Loans
December 31, 2021
Commercial real estate:
Owner occupied	$	231,371	$	314	$	—	$	891	$	1,205	$	3,763	$	236,339
Non-owner occupied	551,473		—		—		—		—		—		551,473
Multi-family	93,255		—		—		—		—		—		93,255
Non-owner occupied residential	104,645		161		—		—		161		122		104,928
Acquisition and development:
1-4 family residential construction	12,279		—		—		—		—		—		12,279
Commercial and land development	93,793		132		—		—		132		—		93,925
Commercial and industrial	483,088		128		—		—		128		250		483,466
Municipal	14,989		—		—		—		—		—		14,989
Residential mortgage:
First lien	189,043		2,995		281		96		3,372		1,831		194,246
Home equity - term	6,042		16		—		—		16		7		6,065
Home equity - lines of credit	159,628		641		—		—		641		436		160,705
Installment and other loans	17,467		109		8		—		117		40		17,624
Subtotal	1,957,073		4,496		289		987		5,772		6,449		1,969,294
Loans acquired with credit deterioration:
Commercial real estate:
Owner occupied	2,329		—		—		—		—		—		2,329
Non-owner occupied	310		—		—		—		—		—		310

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



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

Residential mortgage:
First lien	3,937		387		166		95		648		—		4,585
Home equity - term	15		—		—		1		1		—		16

Installment and other loans	6		—		—		—		—		—		6
Subtotal	9,338		387		753		214		1,354		—		10,692
	$	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

2324

Table of Contents

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 level of experience of senior and middle management and the lending staff; turnover of the staff; and instances of repeat criticisms.

Quality of Loan Review – including the level of experience of the loan review staff; in-house versus outsourced provider of review; turnover of the staff; and instances of 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 deemed appropriate at ~~March 31, 2022 and were unchanged for~~June 30, 2022. For the ~~three~~six months ended ~~March 31,~~June 30, 2022, these factors were unchanged, except for a reduction in the National and Local Economic ~~Conditions.~~Conditions factor during the first quarter of 2022. This factor had been ~~previously~~ increased ~~to account~~previously for economic concerns in the commercial real estate portfolio associated with the COVID-19 pandemic. The additional allocation was removed at March 31, 2022 as these concerns ~~have~~had subsided.

2425

Table of Contents

The following table presents the activity in the ALL for the three and six months ended ~~March 31,~~June 30, 2022 and 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
March 31, 2022
June 30, 2022																						June 30, 2022
Balance, beginning of period	Balance, beginning of period	$	12,037	$	2,062	$	3,814	$	30	$	17,943	$	2,785	$	215	$	3,000	$	237	$	21,180	Balance, beginning of period	$	11,546	$	2,321	$	4,301	$	29	$	18,197	$	2,873	$	201	$	3,074	$	237	$	21,508
Provision for loan losses	Provision for loan losses	(523)		258		500		(1)		234		72		(6)		66		—		300		Provision for loan losses	748		695		184		(3)		1,624		127		24		151		—		1,775

Charge-offs	Charge-offs	—		—		(61)		—		(61)		(10)		(13)		(23)		—		(84)		Charge-offs	—		—		(54)		—		(54)		—		(5)		(5)		—		(59)
Recoveries	Recoveries	32		1		48		—		81		26		5		31		—		112		Recoveries	—		8		40		—		48		4		3		7		—		55
Balance, end of period	Balance, end of period	$	11,546	$	2,321	$	4,301	$	29	$	18,197	$	2,873	$	201	$	3,074	$	237	$	21,508	Balance, end of period	$	12,294	$	3,024	$	4,471	$	26	$	19,815	$	3,004	$	223	$	3,227	$	237	$	23,279
March 31, 2021
June 30, 2021																						June 30, 2021
Balance, beginning of period	Balance, beginning of period	$	11,151	$	1,114	$	3,942	$	40	$	16,247	$	3,362	$	324	$	3,686	$	218	$	20,151	Balance, beginning of period	$	10,671	$	1,046	$	3,714	$	38	$	15,469	$	3,058	$	208	$	3,266	$	232	$	18,967
Provision for loan losses	Provision for loan losses	(494)		(69)		(54)		(2)		(619)		(289)		(106)		(395)		14		(1,000)		Provision for loan losses	806		197		(223)		(9)		771		(142)		19		(123)		(23)		625
Charge-offs	Charge-offs	—		—		(454)		—		(454)		(21)		(20)		(41)		—		(495)		Charge-offs	(181)		—		(112)		—		(293)		(71)		(9)		(80)		—		(373)
Recoveries	Recoveries	14		1		280		—		295		6		10		16		—		311		Recoveries	19		—		116		—		135		18		9		27		—		162
Balance, end of period	Balance, end of period	$	10,671	$	1,046	$	3,714	$	38	$	15,469	$	3,058	$	208	$	3,266	$	232	$	18,967	Balance, end of period	$	11,315	$	1,243	$	3,495	$	29	$	16,082	$	2,863	$	227	$	3,090	$	209	$	19,381
Six Months Ended																						Six Months Ended
June 30, 2022																						June 30, 2022
Balance, beginning of period																						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	225		953		684		(4)		1,858		199		18		217		—		2,075

Charge-offs																						Charge-offs	—		—		(115)		—		(115)		(10)		(18)		(28)		—		(143)
Recoveries																						Recoveries	32		9		88		—		129		30		8		38		—		167
Balance, end of period																						Balance, end of period	$	12,294	$	3,024	$	4,471	$	26	$	19,815	$	3,004	$	223	$	3,227	$	237	$	23,279
June 30, 2021																						June 30, 2021
Balance, beginning of period																						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	312		128		(277)		(11)		152		(431)		(87)		(518)		(9)		(375)
Charge-offs																						Charge-offs	(181)		—		(566)		—		(747)		(92)		(29)		(121)		—		(868)
Recoveries																						Recoveries	33		1		396		—		430		24		19		43		—		473
Balance, end of period																						Balance, end of period	$	11,315	$	1,243	$	3,495	$	29	$	16,082	$	2,863	$	227	$	3,090	$	209	$	19,381

Table of Contents

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 ~~March 31,~~June 30, 2022 and December 31, 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
March 31, 2022
June 30, 2022																						June 30, 2022
Loans allocated by:	Loans allocated by:																					Loans allocated by:
Individually evaluated for impairment	Individually evaluated for impairment	$	3,162	$	—	$	161	$	—	$	3,323	$	2,710	$	52	$	2,762	$	—	$	6,085	Individually evaluated for impairment	$	3,008	$	—	$	62	$	—	$	3,070	$	2,843	$	42	$	2,885	$	—	$	5,955
Collectively evaluated for impairment	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		Collectively evaluated for impairment	1,069,377		157,597		379,667		12,957		1,619,598		377,209		14,867		392,076		—		2,011,674

		$	1,010,952	$	120,319	$	443,170	$	14,626	$	1,589,067	$	373,869	$	15,371	$	389,240	$	—	$	1,978,307		$	1,072,385	$	157,597	$	379,729	$	12,957	$	1,622,668	$	380,052	$	14,909	$	394,961	$	—	$	2,017,629
ALL allocated by:	ALL allocated by:																					ALL allocated by:
Individually evaluated for impairment	Individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—	$	29	$	—	$	29	$	—	$	29	Individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—	$	28	$	—	$	28	$	—	$	28
Collectively evaluated for impairment	Collectively evaluated for impairment	11,546		2,321		4,301		29		18,197		2,844		201		3,045		237		21,479		Collectively evaluated for impairment	12,294		3,024		4,471		26		19,815		2,976		223		3,199		237		23,251

		$	11,546	$	2,321	$	4,301	$	29	$	18,197	$	2,873	$	201	$	3,074	$	237	$	21,508		$	12,294	$	3,024	$	4,471	$	26	$	19,815	$	3,004	$	223	$	3,227	$	237	$	23,279
December 31, 2021	December 31, 2021																					December 31, 2021
Loans allocated by:	Loans allocated by:																					Loans allocated by:
Individually evaluated for impairment	Individually evaluated for impairment	$	3,885	$	—	$	250	$	—	$	4,135	$	3,078	$	40	$	3,118	$	—	$	7,253	Individually evaluated for impairment	$	3,885	$	—	$	250	$	—	$	4,135	$	3,078	$	40	$	3,118	$	—	$	7,253
Collectively evaluated for impairment	Collectively evaluated for impairment	985,933		106,204		485,478		14,989		1,592,604		362,539		17,590		380,129		—		1,972,733		Collectively evaluated for impairment	985,933		106,204		485,478		14,989		1,592,604		362,539		17,590		380,129		—		1,972,733
		$	989,818	$	106,204	$	485,728	$	14,989	$	1,596,739	$	365,617	$	17,630	$	383,247	$	—	$	1,979,986		$	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	$	—	$	—	$	—	$	—	$	—	$	28	$	—	$	28	$	—	$	28	Individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—	$	28	$	—	$	28	$	—	$	28
Collectively evaluated for impairment	Collectively evaluated for impairment	12,037		2,062		3,814		30		17,943		2,757		215		2,972		237		21,152		Collectively evaluated for impairment	12,037		2,062		3,814		30		17,943		2,757		215		2,972		237		21,152
		$	12,037	$	2,062	$	3,814	$	30	$	17,943	$	2,785	$	215	$	3,000	$	237	$	21,180		$	12,037	$	2,062	$	3,814	$	30	$	17,943	$	2,785	$	215	$	3,000	$	237	$	21,180

~~Table of Contents~~

The following table provides activity for the accretable yield ofon purchased impaired loans for the three and six months ended ~~March 31,~~June 30, 2022 and ~~2021:~~2021, respectively:


		Three Months Ended			Three Months Ended						Six Months Ended
			March 31, 2022			March 31, 2021			June 30, 2022		June 30, 2021		June 30, 2022		June 30, 2021
Accretable yield, beginning of period	Accretable yield, beginning of period		$	2,661		$	3,438	Accretable yield, beginning of period	$	2,517	$	3,072	$	2,661	$	3,438

Accretion of income	Accretion of income		(314)			(466)		Accretion of income	(276)		(209)		(590)		(676)
Reclassifications from nonaccretable difference due to improvement in expected cash flows	Reclassifications from nonaccretable difference due to improvement in expected cash flows		243			44		Reclassifications from nonaccretable difference due to improvement in expected cash flows	102		74		345		118
Other changes, net	Other changes, net		(73)			56		Other changes, net	77		79		4		136
Accretable yield, end of period	Accretable yield, end of period		$	2,517		$	3,072	Accretable yield, end of period	$	2,420	$	3,016	$	2,420	$	3,016

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 leases contain renewal options, which the Company is reasonably certain to exercise. Including renewal options, the Company's

Table of Contents

leases range from 6six to 31 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 ~~March 31,~~June 30, 2022 and December 31, 2021:


		March 31, 2022			December 31, 2021				June 30, 2022			December 31, 2021
Operating lease ROU assets	Operating lease ROU assets	$	10,305		$	10,515		Operating lease ROU assets	$	10,093		$	10,515
Operating lease ROU liabilities	Operating lease ROU liabilities	10,937			11,119			Operating lease ROU liabilities	10,753			11,119
Weighted-average remaining lease term (in years)	Weighted-average remaining lease term (in years)	14.4			14.6			Weighted-average remaining lease term (in years)	14.3			14.6
Weighted-average discount rate	Weighted-average discount rate	4.1		%	4.1		%	Weighted-average discount rate	4.1		%	4.1		%

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


		Three Months Ended			Three Months Ended						Six Months Ended
			March 31, 2022			March 31, 2021			June 30, 2022		June 30, 2021		June 30, 2022		June 30, 2021
Cash paid for operating lease liabilities	Cash paid for operating lease liabilities		$	294		$	343	Cash paid for operating lease liabilities	$	295	$	318	$	589	$	616
Operating lease expense	Operating lease expense		394			403		Operating lease expense	349		388		743		791

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


2022		$	868
Remainder of 2022				Remainder of 2022	$	573
2023	2023	1,216		2023	1,216
2024	2024	1,246		2024	1,246
2025	2025	1,269		2025	1,269
2026	2026	1,302		2026	1,302
Thereafter	Thereafter	9,687		Thereafter	9,687
		15,588			15,293
Less: imputed interest	Less: imputed interest	4,651		Less: imputed interest	4,540
Total lease liabilities	Total lease liabilities	$	10,937	Total lease liabilities	$	10,753

~~Table of Contents~~

NOTE 5. GOODWILL AND OTHER INTANGIBLE ASSETS

~~The following table presents changes~~At June 30, 2022 and 2021, goodwill was $18.7 million. No impairment charges were recorded in ~~goodwill for~~ the three and six months ended ~~March 31,~~June 30, 2022 and ~~2021:~~June 30, 2021.
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 conducted its last annual goodwill impairment test as of November 30, 2021 using generally accepted valuation methods. As a result of that impairment test, no goodwill impairment was identified. No changes occurred that would impact the results of that analysis through ~~March 31,~~June 30, 2022.

Table of Contents

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


		Three Months Ended March 31,			Three Months Ended June 30,						Six Months Ended June 30,
			2022			2021			2022		2021		2022		2021
Beginning of period	Beginning of period		$	4,183		$	5,458	Beginning of period	$	3,891	$	5,124	$	4,183	$	5,458

Amortization expense	Amortization expense		(292)			(334)		Amortization expense	(281)		(324)		(573)		(658)

Balance, end of period	Balance, end of period		$	3,891		$	5,124	Balance, end of period	$	3,610	$	4,800	$	3,610	$	4,800

No impairment charges were recorded in the three and six months ended ~~March 31,~~June 30, 2022 and ~~March 31,~~June 30, 2021.

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


		March 31, 2022				December 31, 2021					June 30, 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	$	4,500	$	8,390	$	4,208	Core deposit intangibles	$	8,390	$	4,781	$	8,390	$	4,208
Other customer relationship intangibles	Other customer relationship intangibles	25		24		25		24		Other customer relationship intangibles	25		24		25		24

Total	Total	$	8,415	$	4,524	$	8,415	$	4,232	Total	$	8,415	$	4,805	$	8,415	$	4,232

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


2022		$	813
Remainder of 2022				Remainder of 2022	$	532
2023	2023	935		2023	935
2024	2024	766		2024	766
2025	2025	596		2025	596
2026	2026	427		2026	427
Thereafter	Thereafter	354		Thereafter	354
		$	3,891		$	3,610

~~Table of Contents~~

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 reserved, of which 137,443 shares are available to be issued. At~~ the Company's 2022 Annual Meeting of 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. At June 30, 2022, 1,281,920 shares of the common stock of the Company were reserved, of which 537,611 shares are available to be issued.

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 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.

Table of Contents

The following table presents a summary of nonvested restricted shares activity for the ~~three~~six months ended ~~March 31,~~June 30, 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	274,697	$	20.05	Nonvested shares, beginning of year	274,697	$	20.05
Granted	Granted	121,949	25.02		Granted	137,449	24.89
Forfeited	Forfeited	(10,622)	20.02		Forfeited	(26,290)	21.40
Vested	Vested	(54,054)	19.31		Vested	(76,931)	19.67
Nonvested shares, at period end	Nonvested shares, at period end	331,970	$	22.00	Nonvested shares, at period end	308,925	$	22.18

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


		Three months ended March 31,			Three months ended June 30,						Six months ended June 30,
			2022			2021			2022		2021		2022		2021
Restricted share award expense	Restricted share award expense		$	330		$	434	Restricted share award expense	$	529	$	478	$	859	$	912
Restricted share award tax benefit	Restricted share award tax benefit		69			91		Restricted share award tax benefit	111		126		180		218
Fair value of shares vested	Fair value of shares vested		1,324			1,028		Fair value of shares vested	540		511		1,864		1,539

The unrecognized compensation expense related to the share awards totaled ~~$4.6~~$4.1 million at ~~March 31,~~June 30, 2022 and $2.3 million at December 31, 2021. The unrecognized compensation expense at ~~March 31,~~June 30, 2022 is expected to be recognized over a weighted-average period of ~~2.3~~2.0 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 ~~March 31,~~June 30, 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 six months ended ~~March 31,~~June 30, 2022 and 2021:


		Three months ended March 31,			Three months ended June 30,						Six months ended June 30,
			2022			2021			2022		2021		2022		2021
Shares purchased	Shares purchased		3,953			5,484		Shares purchased	—		—		3,953		5,484
Weighted average price of shares purchased	Weighted average price of shares purchased		$	22.46		$	13.44	Weighted average price of shares purchased	$	—	$	—	$	22.46	$	13.44
Compensation expense recognized	Compensation expense recognized		8			33		Compensation expense recognized	—		—		8		33

The Company issues new shares or treasury shares, depending on market conditions, in its share-based compensation plans.

~~Table of Contents~~

NOTE 7. DERIVATIVE FINANCIAL INSTRUMENTS

The Company is exposed to certain ~~risk~~risks 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~~may enter 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~~Derivative financial instruments ~~are~~may be used as risk management tools by the Company to manage differences in the 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

Table of Contents

of the COVID-19 pandemic. Upon discontinuance, the associated gains and losses deferred in AOCI are reclassified immediately into earnings and subsequent changes in the fair value of the cash flow hedge are recognized in earnings. At ~~March 31,~~June 30, 2022 and December 31, 2021, the Company had no interest rate derivative designated as a hedging 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 ~~March 31,~~June 30, 2022, the Company had 1417 customer and 1417 corresponding third-party broker interest rate derivatives not designated as a hedging instrument with an aggregate notional amount of ~~$120.6~~$183.5 million. The Company had $75.8 million in notional amount of such derivative instruments at December 31, 2021. ~~During the three months ended March 31, 2022 and 2021, the~~The Company entered into 3 new interest rate swaps with its commercial loan customers and recognized swap fee income of ~~$953~~$785 thousand during the three months ended June 30, 2022 compared to 1 new interest rate swap that resulted in swap fee income of $15 thousand during the three months ended June 30, 2021. During the six months ended June 30, 2022 and ~~zero,~~2021, the Company recognized swap fee income of $1.7 million from 5 new interest rate swaps and $68 thousand from 2 new interest rate swaps, respectively, which isare included in noninterest income in the unaudited condensed consolidated statements of income. At ~~March 31,~~June 30, 2022 and December 31, 2021, the Company provided cash collateral of ~~zero~~$2.7 million and $260 thousand to the ~~counterparties~~third parties for these derivatives, respectively. At ~~March 31,~~June 30, 2022 and December 31, 2021, the Company was holding cash collateral of ~~$2.6~~$6.1 million and $490 thousand from the ~~counterparties~~third parties for these derivatives, respectively.

The Company ~~entered~~also may enter into a risk participation ~~agreement~~agreements with a financial institution counterparty ~~(the “Agent Bank”)~~ for an interest rate derivative contract related to a loan in which the Company ismay be a ~~participant.~~participant or the agent bank. The risk participation agreement provides credit protection to the ~~Agent Bank~~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 thousand~~ ~~upon entry into the risk participation agreement during the three months ended March 31, 2021,~~ ~~and is included in noninterest income in the unaudited condensed consolidated statements of income~~.agent bank. The Company manages its credit risk on the risk participation agreement by monitoring the creditworthiness of the borrower, which ~~is based on~~follows the same credit review process as ~~though the Company had entered into~~ the derivative instruments entered into directly with the ~~borrower.~~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. ~~The total~~At June 30, 2022 and December 31, 2021, the Company had a risk participation with sold protection with a notional ~~amount~~value of $15.9 million for both periods, and a risk participation with purchased protection with a notional value of $5.0 million and zero at June 30, 2022 and December 31, 2021, respectively. For the three and six months ended June 30, 2021, the Company received an upfront fee of zero and $53 thousand, respectively, upon entry into the risk participation agreement with sold protection, which is included in noninterest income in the unaudited condensed consolidated statements of income. There was ~~$15.9 million at both March 31, 2022~~no upfront fee on the new risk participation during the three and ~~December 31, 2021.~~six months ended June 30, 2022.

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 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 for the held for sale pipeline.

~~Table of Contents~~

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


		March 31, 2022					December 31, 2021						June 30, 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 not designated as hedging instruments:	Derivatives not designated as hedging instruments:											Derivatives not designated as hedging instruments:
Interest rate swaps	Interest rate swaps	$	60,279	Other assets	$	3,067	$	37,915	Other assets	$	764	Interest rate swaps	$	91,731	Other assets	$	5,853	$	37,915	Other assets	$	764
Interest rate swaps	Interest rate swaps	60,279		Other liabilities	(3,024)		37,915		Other liabilities	(758)		Interest rate swaps	91,731		Other liabilities	(5,717)		37,915		Other liabilities	(758)
Risk participation		15,855		Other liabilities	(1)		15,855		Other liabilities	(2)
Risk participation - sold credit protection												Risk participation - sold credit protection	15,855		Other liabilities	—		15,855		Other liabilities	(2)
Risk participation - purchased credit protection												Risk participation - purchased credit protection	4,992		Other assets	28		—		Not applicable	—
Interest rate lock commitments with customers	Interest rate lock commitments with customers	12,302		Other assets	300		16,604		Other assets	353		Interest rate lock commitments with customers	7,713		Other assets	186		16,604		Other assets	353
Forward sale commitment		7,537		Other assets	353		8,665		Other assets	52
Forward sale commitments												Forward sale commitments	8,328		Other assets	683		8,665		Other assets	52
Total derivatives not designated as hedging instruments	Total derivatives not designated as hedging instruments				$	695				$	409	Total derivatives not designated as hedging instruments				$	1,033				$	409

Table of Contents

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


		Amount of Gain Recognized in OCI on Derivative			Amount of Loss Recognized in OCI on Derivative						Amount of Gain Recognized in OCI on Derivative
		Three Months Ended March 31,			Three Months Ended June 30,						Six Months Ended June 30,
			2022			2021			2022		2021		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		$	—		$	739	Interest rate products	$	—	$	(83)	$	—	$	656
Total	Total		$	—		$	739	Total	$	—	$	(83)	$	—	$	656


		Amount of Loss Reclassified from AOCI into Income			Location of Loss Recognized from AOCI into Income		Amount of Loss Reclassified from AOCI into Income					Amount of Loss Reclassified from AOCI into Income				Location of Loss Recognized from AOCI into Income
		Three Months Ended March 31,					Three Months Ended June 30,					Six Months Ended June 30,
			2022		2021					2022		2021		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		$	—	$	(87)		Interest expense	Interest rate products	$	—	$	(89)	$	—	$	(176)	Interest expense
Total	Total		$	—	$	(87)			Total	$	—	$	(89)	$	—	$	(176)

During the three months ended September 30, 2021, the Company terminated its interest rate swap designated as a hedging instrument of $50.0 million.


		Amount of Gain (Loss) Recognized in Income			Location of Gain (Loss) Recognized in Income		Amount of Gain (Loss) Recognized in Income					Amount of Gain (Loss) Recognized in Income				Location of Gain (Loss) Recognized in Income
		Three Months Ended March 31,					Three Months Ended June 30,					Six Months Ended June 30,
			2022		2021					2022		2021		2022		2021
Derivatives not designated as hedging instruments:	Derivatives not designated as hedging instruments:							Derivatives not designated as hedging instruments:
Interest rate products	Interest rate products		$	37	$	52		Other operating expenses	Interest rate products	$	93	$	(16)	$	130	$	37	Other operating expenses
Risk participation agreement	Risk participation agreement		2		4			Other operating expenses	Risk participation agreement	28		—		30		(4)		Other operating expenses
Interest rate lock commitments with customers	Interest rate lock commitments with customers		(53)		(1)			Mortgage banking activities	Interest rate lock commitments with customers	(113)		(216)		(167)		(217)		Mortgage banking activities
Forward sale commitment	Forward sale commitment		300		254			Mortgage banking activities	Forward sale commitment	330		(171)		631		83		Mortgage banking activities
Total	Total		$	286	$	309			Total	$	339	$	(403)	$	624	$	(101)

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

~~Table of Contents~~

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 gains or 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 ~~March 31,~~June 30, 2022 and December 31, 2021.

Table of Contents

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 ~~March 31,~~June 30, 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.

~~Table of Contents~~

The following table presents capital amounts and ratios at ~~March 31,~~June 30, 2022 and December 31, 2021:


		Actual				For Capital Adequacy Purposes (includes applicable capital conservation buffer)				To Be Well Capitalized Under Prompt Corrective Action Provisions					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			Amount		Ratio		Amount		Ratio		Amount		Ratio
March 31, 2022
June 30, 2022														June 30, 2022
Total risk-based capital:	Total risk-based capital:													Total risk-based capital:
Orrstown Financial Services, Inc.	Orrstown Financial Services, Inc.	$	300,952	14.3	%	$	220,591	10.5	%	n/a		n/a		Orrstown Financial Services, Inc.	$	300,376	13.5	%	$	234,163	10.5	%	n/a		n/a
Orrstown Bank	Orrstown Bank	288,988		13.8	%	220,509		10.5	%	$	210,009	10.0	%	Orrstown Bank	296,723		13.3	%	234,096		10.5	%	$	222,949	10.0	%
Tier 1 risk-based capital:	Tier 1 risk-based capital:													Tier 1 risk-based capital:
Orrstown Financial Services, Inc.	Orrstown Financial Services, Inc.	245,833		11.7	%	178,574		8.5	%	n/a		n/a		Orrstown Financial Services, Inc.	243,470		10.9	%	189,560		8.5	%	n/a		n/a
Orrstown Bank	Orrstown Bank	265,847		12.7	%	178,508		8.5	%	168,007		8.0	%	Orrstown Bank	271,811		12.2	%	189,506		8.5	%	178,359		8.0	%
Tier 1 common equity risk-based capital:	Tier 1 common equity risk-based capital:													Tier 1 common equity risk-based capital:
Orrstown Financial Services, Inc.	Orrstown Financial Services, Inc.	245,833		11.7	%	147,061		7.0	%	n/a		n/a		Orrstown Financial Services, Inc.	243,470		10.9	%	156,109		7.0	%	n/a		n/a
Orrstown Bank	Orrstown Bank	265,847		12.7	%	147,006		7.0	%	136,506		6.5	%	Orrstown Bank	271,811		12.2	%	156,064		7.0	%	144,917		6.5	%
Tier 1 leverage capital:	Tier 1 leverage capital:													Tier 1 leverage capital:
Orrstown Financial Services, Inc.	Orrstown Financial Services, Inc.	245,833		8.8	%	112,328		4.0	%	n/a		n/a		Orrstown Financial Services, Inc.	243,470		8.5	%	114,400		4.0	%	n/a		n/a
Orrstown Bank	Orrstown Bank	265,847		9.5	%	112,352		4.0	%	140,440		5.0	%	Orrstown Bank	271,811		9.5	%	114,452		4.0	%	143,065		5.0	%
December 31, 2021	December 31, 2021													December 31, 2021
Total risk-based capital:	Total risk-based capital:													Total risk-based capital:
Orrstown Financial Services, Inc.	Orrstown Financial Services, Inc.	$	297,823	15.0	%	$	208,617	10.5	%	n/a		n/a		Orrstown Financial Services, Inc.	$	297,823	15.0	%	$	208,617	10.5	%	n/a		n/a
Orrstown Bank	Orrstown Bank	278,780		14.0	%	208,550		10.5	%	$	198,619	10.0	%	Orrstown Bank	278,780		14.0	%	208,550		10.5	%	$	198,619	10.0	%
Tier 1 risk-based capital:	Tier 1 risk-based capital:													Tier 1 risk-based capital:
Orrstown Financial Services, Inc.	Orrstown Financial Services, Inc.	243,075		12.2	%	168,880		8.5	%	n/a		n/a		Orrstown Financial Services, Inc.	243,075		12.2	%	168,880		8.5	%	n/a		n/a
Orrstown Bank	Orrstown Bank	255,995		12.9	%	168,826		8.5	%	158,895		8.0	%	Orrstown Bank	255,995		12.9	%	168,826		8.5	%	158,895		8.0	%
Tier 1 common equity risk-based capital:	Tier 1 common equity risk-based capital:													Tier 1 common equity risk-based capital:
Orrstown Financial Services, Inc.	Orrstown Financial Services, Inc.	243,075		12.2	%	139,078		7.0	%	n/a		n/a		Orrstown Financial Services, Inc.	243,075		12.2	%	139,078		7.0	%	n/a		n/a
Orrstown Bank	Orrstown Bank	255,995		12.9	%	139,033		7.0	%	129,102		6.5	%	Orrstown Bank	255,995		12.9	%	139,033		7.0	%	129,102		6.5	%
Tier 1 leverage capital:	Tier 1 leverage capital:													Tier 1 leverage capital:
Orrstown Financial Services, Inc.	Orrstown Financial Services, Inc.	243,075		8.5	%	114,384		4.0	%	n/a		n/a		Orrstown Financial Services, Inc.	243,075		8.5	%	114,384		4.0	%	n/a		n/a
Orrstown Bank	Orrstown Bank	255,995		8.9	%	114,470		4.0	%	143,087		5.0	%	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.~~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. 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,~~June 30, 2022, ~~415,805~~823,629 shares had been repurchased at a total cost of ~~$8.9~~$18.8 million, or ~~$21.35~~$22.79 per share. Common stock available for future repurchase totals approximately ~~562,195~~154,371 shares, or 5%1% of the Company's outstanding common stock at ~~March 31,~~June 30, 2022.

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

3233

Table of Contents

NOTE 9. EARNINGS PER SHARE

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


		Three Months Ended March 31,			Three Months Ended June 30,						Six Months Ended June 30,
			2022			2021			2022		2021		2022		2021
Net income	Net income		$	8,368		$	10,207	Net income	$	8,871	$	8,776	$	17,239	$	18,983
Weighted average shares outstanding - basic	Weighted average shares outstanding - basic		10,860			10,975		Weighted average shares outstanding - basic	10,610		10,975		10,735		10,975
Dilutive effect of share-based compensation	Dilutive effect of share-based compensation		147			99		Dilutive effect of share-based compensation	134		137		140		118
Weighted average shares outstanding - diluted	Weighted average shares outstanding - diluted		11,007			11,074		Weighted average shares outstanding - diluted	10,744		11,112		10,875		11,093
Per share information:	Per share information:							Per share information:
Basic earnings per share	Basic earnings per share		$	0.77		$	0.93	Basic earnings per share	$	0.84	$	0.80	$	1.61	$	1.73
Diluted earnings per share	Diluted earnings per share		0.76			0.92		Diluted earnings per share	0.83		0.79		1.59		1.71

Average outstanding restricted award shares totaling ~~112,223~~4,433 and 0zero for the three months ended ~~March 31,~~June 30, 2022 and 2021, respectively, and 58,328 and zero for the six months ended June 30, 2022 and 2021, 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 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
		March 31, 2022		December 31, 2021			June 30, 2022		December 31, 2021
Commitments to fund:	Commitments to fund:					Commitments to fund:
Home equity lines of credit	Home equity lines of credit	$	273,734	$	261,580	Home equity lines of credit	$	282,911	$	261,580
1-4 family residential construction loans	1-4 family residential construction loans	56,330		40,348		1-4 family residential construction loans	63,345		40,348
Commercial real estate, construction and land development loans	Commercial real estate, construction and land development loans	142,301		124,488		Commercial real estate, construction and land development loans	153,906		124,488
Commercial, industrial and other loans	Commercial, industrial and other loans	368,199		378,996		Commercial, industrial and other loans	291,305		378,996
Standby letters of credit	Standby letters of credit	20,772		19,724		Standby letters of credit	22,322		19,724

Commitments to extend credit are agreements to lend to a 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 the 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 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 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 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 clients. The Company holds collateral supporting those commitments when deemed necessary by management. The liability at ~~March 31,~~June 30, 2022 and December 31, 2021 for guarantees under standby letters of credit issued was not considered to be material.

3334

Table of Contents

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. This reserve totaled approximately $1.6 million at both ~~March 31,~~June 30, 2022 and December 31, 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, 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.

3435

Table of Contents

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


		Level 1		Level 2		Level 3		Total Fair Value Measurements			Level 1		Level 2		Level 3		Total Fair Value Measurements
March 31, 2022
June 30, 2022										June 30, 2022
Financial Assets	Financial Assets									Financial Assets
Investment securities:	Investment securities:									Investment securities:
U.S. Treasury securities	U.S. Treasury securities	$	18,538	$	—	$	—	$	18,538	U.S. Treasury securities	$	17,969	$	—	$	—	$	17,969

States and political subdivisions	States and political subdivisions	—		230,539		7,021		237,560		States and political subdivisions	—		227,272		6,255		233,527
GSE residential MBSs	GSE residential MBSs	—		59,229		—		59,229		GSE residential MBSs	—		61,558		—		61,558
GSE residential CMOs	GSE residential CMOs	—		71,027		—		71,027		GSE residential CMOs	—		69,691		—		69,691
Nonagency CMOs	Nonagency CMOs	—		15,390		11,613		27,003		Nonagency CMOs	—		20,698		—		20,698

Asset-backed	Asset-backed	—		115,970		—		115,970		Asset-backed	—		108,856		—		108,856
Other	Other	403		—		—		403		Other	399		—		—		399
Loans held for sale	Loans held for sale	—		7,403		—		7,403		Loans held for sale	—		7,824		—		7,824
Derivatives	Derivatives	—		3,067		300		3,367		Derivatives	—		5,882		186		6,068

Totals	Totals	$	18,941	$	502,625	$	18,934	$	540,500	Totals	$	18,368	$	501,781	$	6,441	$	526,590
Financial Liabilities	Financial Liabilities									Financial Liabilities
Derivatives	Derivatives	$	—	$	3,025	$	—	$	3,025	Derivatives	$	—	$	5,717	$	—	$	5,717

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

States and political subdivisions	States and political subdivisions	—		183,171		10,199		193,370		States and political subdivisions	—		183,171		10,199		193,370
GSE residential MBSs	GSE residential MBSs	—		40,726		—		40,726		GSE residential MBSs	—		40,726		—		40,726
GSE residential CMOs	GSE residential CMOs	—		65,922		—		65,922		GSE residential CMOs	—		65,922		—		65,922
Nonagency CMOs	Nonagency CMOs	—		16,750		12,948		29,698		Nonagency CMOs	—		16,750		12,948		29,698

Asset-backed	Asset-backed	—		122,621		—		122,621		Asset-backed	—		122,621		—		122,621
Other	Other	399		—		—		399		Other	399		—		—		399
Loans held for sale	Loans held for sale	—		8,868		—		8,868		Loans held for sale	—		8,868		—		8,868
Derivatives	Derivatives	—		764		353		1,117		Derivatives	—		764		353		1,117

Totals	Totals	$	20,101	$	438,822	$	23,500	$	482,423	Totals	$	20,101	$	438,822	$	23,500	$	482,423
Financial Liabilities	Financial Liabilities									Financial Liabilities
Derivatives	Derivatives	$	—	$	760	$	—	$	760	Derivatives	$	—	$	760	$	—	$	760

The Company hadhad 1 municipal bond ~~and 1 CMO measured~~measured at fair value on a recurring basis using significant unobservable inputs (Level 3) at ~~both March 31,~~June 30, 2022 and 1 municipal bond and 1 non-agency CMO measured at fair value on a recurring basis using significant unobservable inputs (Level 3) at December 31, 2021. During the three months ended June 30, 2022, the non-agency CMO security was called by the issuer. 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 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 LHFS, for which the fair value option has been elected, the aggregate fair value declined below the aggregate principal balance by ~~$195~~$565 thousand as of ~~March 31,~~June 30, 2022, and exceeded the aggregate principal balance by $150 thousand as of 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

Table of Contents

changes in this input could result in a significantly higher or lower fair value measurement. As the pull through percentage is a significant unobservable input, this is deemed a Level 3 valuation input. The average pull through percentage, which is based

~~Table of Contents~~

upon historical experience, was ~~93%~~92% as of ~~March 31,~~June 30, 2022. An increase or decrease of 5% in the pull through assumption would result in a positive or negative change of $6$10 thousand in the fair value of interest rate lock commitments at ~~March 31,~~June 30, 2022.

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

Investment securities:


		Three Months Ended March 31,			Three Months Ended June 30,						Six Months Ended June 30,
			2022			2021			2022		2021		2022		2021
Balance, beginning of period	Balance, beginning of period		$	23,147		$	31,503	Balance, beginning of period	$	18,634	$	25,564	$	23,147	$	31,503

Unrealized loss included in OCI			(1,360)			(665)
Unrealized losses included in OCI								Unrealized losses included in OCI	(220)		2,096		(1,580)		1,431

Net discount accretion			71			129
Net (premium amortization) discount accretion								Net (premium amortization) discount accretion	(5)		—		66		—
Principal payments and other	Principal payments and other		—			(1,858)		Principal payments and other	—		(2,735)		—		(4,464)
Sales	Sales		(3,053)			(3,545)		Sales	—		—		(3,053)		(3,545)
Calls								Calls	(12,154)		—		(12,154)		—

OTTI	OTTI		(171)			—		OTTI	—		—		(171)		—
Balance, end of period	Balance, end of period		$	18,634		$	25,564	Balance, end of period	$	6,255	$	24,925	$	6,255	$	24,925

Interest rate lock commitments on residential mortgages:


		Three Months Ended March 31,			Three Months Ended June 30,						Six Months Ended June 30,
			2022			2021			2022		2021		2022		2021
Balance, beginning of period	Balance, beginning of period		$	353		$	673	Balance, beginning of period	$	300	$	672	$	353	$	673
Total losses
Included in earnings			(53)			(1)

Total losses included in earnings								Total losses included in earnings	(114)		(216)		(167)		(217)

Balance, end of period	Balance, end of period		$	300		$	672	Balance, end of period	$	186	$	456	$	186	$	456

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 six months ended ~~March 31,~~June 30, 2022 and 2021.

3637

Table of Contents

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 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 ~~March 31,~~June 30, 2022 and December 31, 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. Fair value adjustments on the MSR only occur if there is impairment. At ~~March 31,~~June 30, 2022 and December 31, 2021, an impairment reserve of ~~$47 thousand~~zero and $79 thousand, respectively, existed on the MSR portfolio. For the three months ended ~~March 31,~~June 30, 2022 and 2021, impairment valuation allowance reversals of ~~$32~~$47 thousand and ~~$606~~$45 thousand were included, respectively, in mortgage banking activities on the unaudited condensed consolidated statements of income. For the six months ended June 30, 2022 and 2021, impairment valuation allowance reversals of $79 thousand and $651 thousand, respectively, were included in mortgage banking activities on the unaudited condensed consolidated statements of income. The reversals in the three and six months ended ~~March 31,~~June 30, 2022 and 2021 were due to ~~subsequent~~ increases in market ~~rates.~~rates, which increased the MSR fair value.

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


		Level 1		Level 2		Level 3		Total Fair Value Measurements			Level 1		Level 2		Level 3		Total Fair Value Measurements
March 31, 2022
June 30, 2022										June 30, 2022
Impaired Loans	Impaired Loans									Impaired Loans
Commercial real estate:	Commercial real estate:									Commercial real estate:
Owner occupied	Owner occupied	$	—	$	—	$	144	$	144	Owner occupied	$	—	$	—	$	130	$	130

Non-owner occupied residential	Non-owner occupied residential	—		—		18		18		Non-owner occupied residential	—		—		16		16

Residential mortgage:	Residential mortgage:									Residential mortgage:
First lien	First lien	—		—		491		491		First lien	—		—		328		328

Home equity - lines of credit	Home equity - lines of credit	—		—		69		69		Home equity - lines of credit	—		—		65		65

Total impaired loans	Total impaired loans	$	—	$	—	$	722	$	722	Total impaired loans	$	—	$	—	$	539	$	539

Mortgage servicing rights	Mortgage servicing rights	$	—	$	—	$	322	$	322	Mortgage servicing rights	$	—	$	—	$	—	$	—

December 31, 2021	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	$	—	$	—	$	751	$	751	Owner occupied	$	—	$	—	$	751	$	751

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

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

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

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

Mortgage servicing rights	Mortgage servicing rights	$	—	$	—	$	322	$	322	Mortgage servicing rights	$	—	$	—	$	322	$	322

3738

Table of Contents

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

March 31, 2022

June 30, 2022

Impaired loans

722

Appraisal of collateral

Management adjustments on appraisals for property type and recent activity

0% - 25% discount

Impaired loans

539

Appraisal of collateral

Management adjustments on appraisals for property type and recent activity

0% - 25% discount

- Management adjustments for liquidation expenses

4.73% - 17.93% discount

- Management adjustments for liquidation expenses

6.08% - 17.93% discount

Mortgage servicing rights

322

Discounted cash flows

Weighted average CPR

8.23%

- Weighted average discount rate

9.03%

December 31, 2021

Impaired loans

1,392

Appraisal of collateral

Management adjustments on appraisals for property type and recent activity

10% - 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

6.08% - 17.93% discount

- Management adjustments for liquidation expenses

6.08% - 17.93% discount

Mortgage servicing rights

322

Discounted cash flows

Weighted average CPR

12.60%

Mortgage servicing rights

322

Discounted cash flows

Weighted average CPR

12.60%

- Weighted average discount rate

9.03%

- Weighted average discount rate

9.03%

3839

Table of Contents

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 financial assets and liabilities at ~~March 31,~~June 30, 2022 and December 31, 2021:


		Carrying Amount		Fair Value		Level 1		Level 2		Level 3			Carrying Amount		Fair Value		Level 1		Level 2		Level 3
March 31, 2022
June 30, 2022												June 30, 2022
Financial Assets	Financial Assets											Financial Assets
Cash and due from banks	Cash and due from banks	$	26,446	$	26,446	$	26,446	$	—	$	—	Cash and due from banks	$	25,825	$	25,825	$	25,825	$	—	$	—
Interest-bearing deposits with banks	Interest-bearing deposits with banks	187,792		187,792		187,792		—		—		Interest-bearing deposits with banks	86,081		86,081		86,081		—		—

Restricted investments in bank stock	Restricted investments in bank stock	6,791		n/a		n/a		n/a		n/a		Restricted investments in bank stock	6,500		n/a		n/a		n/a		n/a
Investment securities	Investment securities	529,730		529,730		18,941		492,155		18,634		Investment securities	512,698		512,698		18,368		488,075		6,255
Loans held for sale	Loans held for sale	7,403		7,403		—		7,403		—		Loans held for sale	7,824		7,824		—		7,824		—
Loans, net of allowance for loan losses	Loans, net of allowance for loan losses	1,956,799		1,906,140		—		—		1,906,140		Loans, net of allowance for loan losses	1,994,350		1,904,407		—		—		1,904,407

Derivatives	Derivatives	3,367		3,367		—		3,067		300		Derivatives	6,068		6,068		—		5,882		186
Accrued interest receivable	Accrued interest receivable	8,642		8,642		—		2,940		5,702		Accrued interest receivable	8,425		8,425		—		3,490		4,935

Financial Liabilities	Financial Liabilities											Financial Liabilities
Deposits	Deposits	2,545,992		2,545,739		—		2,545,739		—		Deposits	2,478,616		2,477,314		—		2,477,314		—
Securities sold under agreements to repurchase	Securities sold under agreements to repurchase	24,624		24,624		—		24,624		—		Securities sold under agreements to repurchase	24,287		24,287		—		24,287		—
FHLB advances and other borrowings	FHLB advances and other borrowings	1,788		1,865		—		1,865		—		FHLB advances and other borrowings	1,678		1,724		—		1,724		—
Subordinated notes	Subordinated notes	31,978		33,094		—		33,094		—		Subordinated notes	31,994		32,092		—		32,092		—
Derivatives	Derivatives	3,025		3,025		—		3,025		—		Derivatives	5,717		5,717		—		5,717		—
Accrued interest payable	Accrued interest payable	661		661		—		661		—		Accrued interest payable	203		203		—		203		—
Off-balance sheet instruments	Off-balance sheet instruments	—		—		—		—		—		Off-balance sheet instruments	—		—		—		—		—

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

Restricted investments in bank stock	Restricted investments in bank stock	7,252		n/a		n/a		n/a		n/a		Restricted investments in bank stock	7,252		n/a		n/a		n/a		n/a
Investment securities	Investment securities	472,438		472,438		20,101		429,190		23,147		Investment securities	472,438		472,438		20,101		429,190		23,147
Loans held for sale	Loans held for sale	8,868		8,868		—		8,868		—		Loans held for sale	8,868		8,868		—		8,868		—
Loans, net of allowance for loan losses	Loans, net of allowance for loan losses	1,958,806		1,946,365		—		—		1,946,365		Loans, net of allowance for loan losses	1,958,806		1,946,365		—		—		1,946,365

Derivatives	Derivatives	1,117		1,117		—		764		353		Derivatives	1,117		1,117		—		764		353
Accrued interest receivable	Accrued interest receivable	8,234		8,235		—		2,203		6,032		Accrued interest receivable	8,234		8,235		—		2,203		6,032

Financial Liabilities	Financial Liabilities											Financial Liabilities
Deposits	Deposits	2,464,929		2,466,191		—		2,466,191		—		Deposits	2,464,929		2,466,191		—		2,466,191		—
Securities sold under agreements to repurchase	Securities sold under agreements to repurchase	23,301		23,301		—		23,301		—		Securities sold under agreements to repurchase	23,301		23,301		—		23,301		—
FHLB advances and other borrowings	FHLB advances and other borrowings	1,896		2,035		—		2,035		—		FHLB advances and other borrowings	1,896		2,035		—		2,035		—
Subordinated notes	Subordinated notes	31,963		31,815		—		31,815		—		Subordinated notes	31,963		31,815		—		31,815		—
Derivatives	Derivatives	760		760		—		760		—		Derivatives	760		760		—		760		—
Accrued interest payable	Accrued interest payable	154		154		—		154		—		Accrued interest payable	154		154		—		154		—
Off-balance sheet instruments	Off-balance sheet instruments	—		—		—		—		—		Off-balance sheet instruments	—		—		—		—		—

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 ~~March 31,~~June 30, 2022 and December 31, 2021 represent an approximation of exit price; however, an actual exit price may differ.

3940

Table of Contents

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 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.~~Act. 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 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

~~Table of Contents~~

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.

Table of Contents

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 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. The Company filed a preliminary objection to the complaint on May 16, 2022. The plaintiff filed a brief in opposition to the Company's preliminary objection on June 16, 2022, and the Company filed its reply brief on June 30, 2022. The Bank believes that the allegations and claims against the Bank are without merit, and intends to defend itself vigorously against those claims. 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.~~

4142

Table of Contents

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, 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 ~~March 31,~~June 30, 2022, the Company had total assets of ~~$2.9~~$2.8 billion, total liabilities of $2.6 billion and total shareholders’ equity of ~~$254.8~~$237.5 million.

Cautionary Note About Forward-Looking Statements

Certain statements appearing herein, which are not historical in nature, are forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act, 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 reflect the current views of the Company's management with respect to, among other things, future events and the Company's financial performance. These statements are often, but not always, made through the use of words or phrases such as “may,” “will,” “expect,” “estimate,” “anticipate” or similar 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, 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. 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 may prove to be materially different from the results expressed or implied by the forward-looking statements and there can be no assurances that the 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) 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, 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 Interest Rates

Preliminary real GDP for the ~~first~~second quarter of 2022 reflected an annualized decrease of ~~1.4%. This~~0.9%, which is a ~~decrease~~modest improvement from the ~~fourth quarter 2021 growth rate of 6.9% and annualized growth of 6.3% for~~1.6% decline during the first quarter of ~~2021.~~2022. The annualized growth for the second quarter of 2021 was 6.7%. The decrease in the ~~first~~second quarter of 2022 ~~was driven~~continued to be caused by decreases in private inventory investment, which ~~includes wholesale and retail trade on motor~~

4243

Table of Contents

includes retail trade on motor vehicles ~~exports of nondurable goods,~~and general merchandise stores, and government spending, ~~as several federal programs have expired or tapered off~~ partially offset by increases in personal consumption, primarily within healthcare, travel, food services and residential and 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 the Omicron variant throughout the country.accommodations. The personal consumption expenditures ("PCE") price index increased to 7.1% in the second quarter of 2022, compared to an increase of 7.0% in the first quarter of ~~2022, compared with an increase of 6.4% in the fourth quarter of 2021.~~2022. The national unemployment rate ~~declined to~~remained at 3.6% in June 2022 from March 2022, down from ~~3.9%~~6.0% in ~~December~~June 2021. Within the Company's geographic footprint, the unemployment rate has decreased in Pennsylvania by 2.6% from 6.6% at May 2021 to 4.0% at May 2022, and decreased in Maryland by 2.3% from ~~6.1%~~6.0% at May 2021 to 3.7% in ~~April 2021.~~May 2022. These decreases in unemployment rates are consistent to the counties in which the Company operates branches and other corporate offices. There continued to be notable job gains in healthcare, leisure and hospitality and professional and business services ~~retail trade and manufacturing~~ during the ~~first~~second quarter of 2022. Although there was strong economic recovery in 2021 from the pandemic, the decrease in GDP during the first ~~quarter~~half of 2022 is indicative of ~~the~~inflation, supply chain challenges, and labor shortages ~~and inflation.~~compared to levels pre-pandemic in February 2020.

Due to the COVID-19 pandemic, market interest rates had declined significantly, with the 10-year Treasury bond falling for the first time below 1.00% on March 3, 2020, but recovering to 1.51% as of December 31, 2021. At ~~March 31,~~June 30, 2022, the 10-year Treasury bond reached 2.98%, an increase of 0.64% from 2.34% at March 31, 2022, as it continued to rise due to stock market volatility and inflationary pressures. In ~~2020, in reaction to the increase in market uncertainty, the FRB cut the Fed Funds rates by 150 basis points to 0.25%. In~~ March 2022, the Federal Reserve Open Markets Committee ("FOMC") approved an increase to the Fed Funds rate 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 conclude its asset purchase program, which tapering occurred during~~During the ~~first~~second quarter of 2022, the FOMC approved additional increases to ~~maintain~~ the ~~size~~Fed Funds rate of ~~the balance sheet. The Federal Reserve Open Markets Committee will meet next~~50 basis points on May 3,5, 2022 and 75 basis points on June 16, 2022. On July 27, 2022, the FOMC further increased the Fed Fund rate by another 75 basis points as the FRB continues to attempt to combat the impact of inflation and evaluate the economic state based on unemployment, a rising consumer price index and geopolitical tensions that could cause supply chain disruptions.

The majority of the assets and 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 the Company, particularly with respect to the 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 interest rate environment, and 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, 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, 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."

4344

Table of Contents

RESULTS OF OPERATIONS

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

Summary

Net income totaled ~~$8.4~~$8.9 million for the threemonths ended ~~March 31,~~June 30, 2022 compared with net income of ~~$10.2~~$8.8 million for the same period in 2021. Diluted earnings per share for the three months ended ~~March 31,~~June 30, 2022 totaled ~~$0.76,~~$0.83 compared ~~with $0.92~~to $0.79 for the three months ended ~~March 31,~~June 30, 2021. Net interest income positively influenced results of operations, and totaled ~~$22.6~~$24.1 million for the three months ended ~~March 31,~~June 30, 2022 compared to $21.9 ~~million in the three months ended March 31, 2021. Noninterest income totaled 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 ~~March 31, 2022 compared to $17.8~~June 30, 2021. Noninterest income totaled approximately $7.2 million and $6.7 million for the three months ended ~~March 31,~~June 30, 2022 and 2021, respectively. Noninterest expenses totaled $18.8 million for the three months ended June 30, 2022 compared to $17.0 million for the three months ended June 30, 2021.

The comparison of operating results for 2022 with 2021 reflects the impact of the investment of cash in higher yielding commercial ~~loan growth~~loans and investment securities, rising interest rates and reductions in the cost of funds, partially offset by increases in the provision for loan ~~loss expense~~losses and salaries and employee benefits expense.

Table of Contents

Net Interest Income

Net interest income increased by $2.2 million from $21.9 million to $24.1 million from the three months ended June 30, 2021 to the three months ended June 30, 2022. Total interest expense decreased from $1.8 million for the three months ended June 30, 2021 to $1.2 million for the three months ended June 30, 2022. Interest income on loans increased by $704 thousand, from $21.3 million to $22.0 million, and interest income on investment securities increased by $836 thousand, from $2.3 million to $3.1 million, for the three months ended June 30, 2022 compared to the same period in the prior year.

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


	Three Months Ended June 30, 2022						Three Months Ended June 30, 2021
	Average Balance		Taxable- Equivalent Interest		Taxable- Equivalent Rate		Average Balance		Taxable- Equivalent Interest		Taxable- Equivalent Rate
Assets
Federal funds sold & interest-bearing bank balances	$	131,449	$	235	0.72	%	$	290,039	$	81	0.11	%


Investment securities (1)	523,940		3,388		2.59		438,110		2,421		2.22


Loans (1)(2)(3)	2,008,283		22,090		4.41		2,014,600		21,375		4.26
Total interest-earning assets	2,663,672		25,713		3.87		2,742,749		23,877		3.49


Other assets	192,561						188,810

Total	$	2,856,233					$	2,931,559
Liabilities and Shareholders’ Equity
Interest-bearing demand deposits	$	1,420,051	301		0.09		$	1,394,384	292		0.08
Savings deposits	236,916		63		0.11		200,439		50		0.10
Time deposits	275,408		337		0.49		382,467		739		0.78
Total interest-bearing deposits	1,932,375		701		0.15		1,977,290		1,081		0.22
Securities sold under agreements to repurchase	24,045		7		0.11		22,417		8		0.14
FHLB advances and other borrowings	1,741		21		4.74		57,896		164		1.14
Subordinated notes	31,985		503		6.29		31,924		502		6.29
Total interest-bearing liabilities	1,990,146		1,232		0.25		2,089,527		1,755		0.34
Noninterest-bearing demand deposits	572,171						545,617
Other	47,190						37,561
Total liabilities	2,609,507						2,672,705
Shareholders’ equity	246,726						258,854
Total	$	2,856,233					$	2,931,559
Taxable-equivalent net interest income /net interest spread			24,481		3.62	%			22,122		3.15	%
Taxable-equivalent net interest margin					3.68	%					3.24	%
Taxable-equivalent adjustment			(363)						(221)
Net interest income			$	24,118					$	21,901


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, where applicable.

Net interest income on a taxable-equivalent basis increased by $2.4 million to $24.5 million for the three months ended June 30, 2022 from $22.1 million for the three months ended June 30, 2021. The Company's net interest spread increased by 47 basis points to 3.62% for the three months ended June 30, 2022 compared to 3.15% for the three months ended June 30, 2021.

Table of Contents

Taxable-equivalent net interest margin increased 44 basis points to 3.68% for the three months ended June 30, 2022 from 3.24% for the three months ended June 30, 2021. The taxable-equivalent yield on interest-earning assets increased 38 basis points from the three months ended June 30, 2021 to the three months ended June 30, 2022 reflecting the deployment of cash into higher yielding commercial loans and investment securities and home equity loans. The decrease in the cost of interest-bearing liabilities from the three months ended June 30, 2021 to the three months ended June 30, 2022 also benefited the tax-equivalent net interest margin, reflecting the decrease in time deposit balances and repayment of overnight borrowings. Average loans remained approximately $2.0 billion, during both the three months ended June 30, 2022 and 2021, as the commercial and home equity loan growth in three months ended June 30, 2022 was partially offset by the impact of SBA PPP loan forgiveness. Average investment securities increased by $85.8 million from $438.1 million for the three months ended June 30, 2021 to $523.9 million for the same period in 2022 due to investment purchases. Average interest-bearing liabilities declined by $99.4 million to $2.0 billion for the 2022 period from $2.1 billion for the 2021 period due primarily to decreased average balances in time deposits and overnight borrowings.

The yield on loans increased by 15 basis points to 4.41% for the three months ended June 30, 2022 compared to 4.26% for the three months ended June 30, 2021. Taxable-equivalent interest income earned on loans increased by $715 thousand year-over-year primarily due to an increase in the average balances of commercial loans excluding SBA PPP loans, and the impact of the rising interest rate environment. The increase in interest income on loans due to loan growth, excluding SBA PPP loans, was partially offset by a decrease in interest income from SBA PPP loans. This decrease in SBA PPP interest income is due to a lower average balance of SBA PPP loans forgiven during the three months ended June 30, 2022 compared to the three months ended June 30, 2021.

SBA PPP loans, net of deferred fees and costs, averaged $72.5 million during the three months ended June 30, 2022 compared to $471.2 million during the three months ended June 30, 2021. This decrease was due to the forgiveness of SBA PPP loans. The average balance of commercial loans, excluding SBA PPP loans, increased by $400.9 million from $1.1 billion during the three months ended June 30, 2021 to $1.5 billion during the three months ended June 30, 2022. Average home equity loans increased by $17.4 million from $154.0 million for the three months ended June 30, 2021 to $171.4 million for the three months ended June 30, 2022. Average installment and other consumer loans decreased by $14.3 million from $41.3 million for the three months ended June 30, 2021 to $27.0 million for the three months ended June 30, 2022. Average residential mortgage loans decreased by $11.6 million from $215.4 million during the three months ended June 30, 2021 to $203.8 million during the three months ended June 30, 2022 due to lower housing inventory and runoff.

For the three months ended June 30, 2022, interest income on loans included $1.9 million of interest and net deferred fee income recognized associated with the SBA PPP loans compared to $5.2 million of such interest and fee income for the three months ended June 30, 2021. Prepayment fee income on commercial loans increased by $266 thousand from $132 thousand for the three months ended June 30, 2021 to $398 thousand for the same period in 2022. Accretion of purchase accounting adjustments included in interest income was $429 thousand and $508 thousand for the three months ended June 30, 2022 and 2021, respectively. The three months ended June 30, 2022 and 2021 included $323 thousand and $349 thousand, respectively, of accelerated accretion related to the payoff of acquired loans.

Interest income on investment securities on a tax-equivalent basis increased by $967 thousand to $3.4 million for the three months ended June 30, 2022 from $2.4 million for the three months ended June 30, 2021, with the taxable equivalent yield increasing from 2.22% for the three months ended June 30, 2021 to 2.59% for the three months ended June 30, 2022. This 37 basis point increase reflected the higher interest rate environment in 2022 and certain repositioning within the portfolio under the Company's asset/liability management strategies.

Although the average balance of federal funds sold and interest-bearing bank balances decreased by $158.6 million from $290.0 million for the three months ended June 30, 2021 to $131.4 million for the same period in 2022 due primarily to the deployment of cash into loans and investment securities, the related interest income on a tax-equivalent basis increased by $154 thousand to $235 thousand for the three months ended June 30, 2022 from $81 thousand for the three months ended June 30, 2021. This increase was caused by the increase in the interest rate at the FRB as a result of multiple Fed Funds rate increases by the FOMC during 2022.

Interest expense on deposits and borrowings decreased by $523 thousand year-over-year, reflecting a decrease in the average balance of interest-bearing deposits of $44.9 million due primarily to continued runoff of certificates of deposit. The cost of interest-bearing liabilities declined by nine basis points from 0.34% for the three months ended June 30, 2021 to 0.25% for the three months ended June 30, 2022 due to the timing of deposit rate reductions in 2021 combined with the continued maturity of higher yielding certificates of deposits and the repayment of overnight borrowings in the third quarter of 2021.

Table of Contents

Provision for Loan Losses

The Company recorded a provision for loan losses of $1.8 million for the three months ended June 30, 2022 compared to $625 thousand for the same period in 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 June 30, 2022 and 2021, the provision for loan losses was driven primarily by an increase in commercial loans; however, the increase for the three months ended June 30, 2021 was partially offset by the release of a portion of the Company's COVID-19 related reserve of $790 thousand. Net charge-offs in the three months ended June 30, 2022 totaled $4 thousand, compared to net charge-offs of $211 thousand in the comparable prior year period. Nonaccrual loans were 0.27% of gross loans at June 30, 2022, compared with 0.51% of gross loans at June 30, 2021. Nonaccrual loans decreased by $4.5 million from June 30, 2021 to June 30, 2022 and classified loans decreased by $9.0 million from $28.7 million to $19.7 million from June 30, 2021 to June 30, 2022, respectively. The decrease in non-accrual loans includes the payoff of one loan of $2.6 million, loans returning to accrual status of $652 thousand, and charge-offs of $189 thousand, with the remaining decrease due to paydowns. The decrease in classified loans reflects upgrades to commercial loan ratings, including loans that were previously downgraded due to the impact of the COVID-19 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 June 30, 2022 and 2021:


	Three Months Ended June 30,				$ Change		% Change
	2022		2021		2022-2021		2022-2021
Service charges on deposit accounts	$	964	$	698	$	266	38.1	%
Interchange income	1,064		1,064		—		—	%
Other service charges and fees	230		182		48		26.4	%
Swap fee income	785		15		770		5133.3	%
Trust and investment management income	1,905		2,020		(115)		(5.7)	%
Brokerage income	989		910		79		8.7	%
Mortgage banking activities	498		1,162		(664)		(57.1)	%

Income from life insurance	593		564		29		5.1	%
Other income	169		38		131		344.7	%

Investment securities (losses) gains	(3)		11		(14)		(127.3)	%
Total noninterest income	$	7,194	$	6,664	$	530	8.0	%

The following factors contributed to the more significant changes in noninterest income between the three months ended June 30, 2022 and 2021:

•Service charges on deposit accounts increased by $266 thousand due to higher customer transaction activity as the economy continued to recover from the COVID-19 pandemic and changes to the deposit fee structure that took effect in April 2022.

•Swap fee income increased by $770 thousand due to increased client interest in locking in interest rates on commercial loans in the rising interest rate environment.

•Trust and investment management income decreased by $115 thousand due to the negative impact of the stock and bond market conditions on clients' investment portfolios.

•Mortgage banking income decreased by $664 thousand due to current market conditions, including low housing inventory and a rising interest rate environment, which caused declines in residential mortgage loan production, the residential mortgage loan pipeline and secondary market sales during the second quarter of 2022, compared to the same period in 2021. These changes resulted in a decrease in the gains on sales of residential mortgage loans of $600 thousand for the three months ended June 30, 2022 compared to the second quarter of 2021. Mortgage loans sold totaled $22.6 million in the second quarter of 2022 compared with $51.8 million in the second quarter of 2021.

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

Table of Contents

Noninterest Expenses

The following table compares noninterest expenses for the three months ended June 30, 2022 and 2021:


	Three Months Ended June 30,				$ Change		% Change
	2022		2021		2022-2021		2022-2021
Salaries and employee benefits	$	11,312	$	10,212	$	1,100	10.8	%
Occupancy	1,132		1,098		34		3.1	%
Furniture and equipment	1,291		1,302		(11)		(0.8)	%
Data processing	1,165		1,032		133		12.9	%

Automated teller machine and interchange fees	318		319		(1)		(0.3)	%
Advertising and bank promotions	881		274		607		221.5	%
FDIC insurance	190		158		32		20.3	%

Professional services	722		579		143		24.7	%
Directors' compensation	230		235		(5)		(2.1)	%


Taxes other than income	108		462		(354)		(76.6)	%
Intangible asset amortization	281		324		(43)		(13.3)	%



Other operating expenses	1,164		1,038		126		12.1	%
Total noninterest expenses	$	18,794	$	17,033	$	1,761	10.3	%

The following factors contributed to the more significant changes in noninterest expenses between the three months ended June 30, 2022 and 2021:

•Salaries and employee benefits expense increased by $1.1 million due primarily to increases in wages and additions to staff that filled vacancies and drive and support a strong growth trajectory, which also resulted in an increase in employee benefit costs.

•Data processing increased by $133 thousand due to an increase in core system costs and investments in technology.

•Advertising and bank promotions increased by $607 thousand due to an increase in contributions, which included $500 thousand in the Pennsylvania ("PA") EITC, with the remaining increase primarily due to promotional expenses and bank events.

•Professional services increased by $143 thousand due to an increase in compliance and technology consulting services, partially offset by lower legal expenses incurred in connection with the SEPTA litigation.

•Taxes other than income decreased by $354 thousand due to $450 thousand of eligible tax credits associated with the contributions made to the PA EITC. This decrease was partially offset by an increase in PA Bank Shares Tax expense as the Bank's total equity balance grew from the prior period.

•Other operating expenses increased by $126 thousand. The reserve for unfunded commitments was reduced by $434 thousand during the three months ended June 30, 2021 compared to no change in the reserve during the same period in 2022. This increase was partially offset by a decrease in loan-related costs of $256 thousand and a decrease in expense of $77 thousand related to income from derivative fair value adjustments compared to the same period in 2021.

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

Table of Contents

Income Tax Expense

Income tax expense totaled $1.9 million, an effective tax rate of 17.4%, for the three months ended June 30, 2022 compared with $2.1 million, an effective tax rate of 19.5%, for the three months ended June 30, 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 decrease in the effective tax rate from the three months ended June 30, 2021 to the three months ended June 30, 2022 was due primarily to an increase in projected income from tax-free investment securities and loans for the 2022 fiscal year compared to the prior year.

Six months ended June 30, 2022 compared with six months ended June 30, 2021

Summary

Net income totaled $17.2 million for the six months ended June 30, 2022 compared with net income of $19.0 million for the same period in 2021. Diluted earnings per share for the six months ended June 30, 2022 totaled $1.59, compared with $1.71 for the six months ended June 30, 2021. Net interest income positively influenced results of operations, and totaled $46.7 million for the six months ended June 30, 2022, compared to $43.8 million for the six months ended June 30, 2021. Noninterest income totaled $14.7 million and $14.2 million for the six months ended June 30, 2022 and 2021, respectively. Noninterest expenses totaled $38.2 million for the six months ended June 30, 2022 compared to $34.8 million for the six months ended June 30, 2021.

The comparison of operating results for 2022 with 2021 reflects increases in the provision for loan losses and salaries and employee benefits expense, partially offset by the increase in net interest income from the investment of cash into higher yielding commercial loans and investment securities and reduction in the cost of funds.

Table of Contents

Net Interest Income

Net interest income increased by ~~$718 thousand,~~$2.9 million from ~~$21.9 million to $22.6~~$43.8 million for the ~~three~~six months ended ~~March 31, 2022 compared with~~June 30, 2021 to $46.7 million for the ~~three~~six months ended ~~March 31, 2021.~~June 30, 2022. Total interest expense decreased from ~~$2.1~~$3.8 million ~~to $1.2 million, in comparing~~for the ~~three~~six months ended ~~March 31, 2022 with~~June 30, 2021 to $2.4 million for the ~~three~~six months ended ~~March 31, 2021.~~June 30, 2022. Interest income on loans ~~decreased~~increased by ~~$142~~$562 thousand, from ~~$21.5~~$42.8 million to ~~$21.4~~$43.4 million, and investment securities interest income increased by $777 thousand, from $4.6 million to $5.4 million, compared to the same period in the prior year. Interest expense on deposits decreased by ~~$59 thousand,~~$1.1 million, from ~~$2.4 million to $2.3~~$2.5 million for the ~~same period.~~six months ended June 30, 2021 to $1.4 million for the six months ended June 30, 2022.

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


		Three Months Ended March 31, 2022						Three Months Ended March 31, 2021							Six Months Ended June 30, 2022						Six Months Ended June 30, 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	$	199,788	$	101	0.20	%	$	145,595	$	39	0.11	%	Federal funds sold & interest-bearing bank balances	$	165,430	$	336	0.41	%	$	218,216	$	120	0.11	%

Investment securities (1)	Investment securities (1)	472,195		2,512		2.13		468,273		2,512		2.18		Investment securities (1)	498,210		5,900		2.37		453,108		4,933		2.20

Loans (1)(2)(3)	Loans (1)(2)(3)	1,974,804		21,429		4.39		2,033,219		21,574		4.30		Loans (1)(2)(3)	1,991,636		43,519		4.40		2,023,858		42,949		4.28
Total interest-earning assets	Total interest-earning assets	2,646,787		24,042		3.67		2,647,087		24,125		3.70		Total interest-earning assets	2,655,276		49,755		3.77		2,695,182		48,002		3.59

Other assets	Other assets	184,300						182,737						Other assets	188,454						185,791

Total	Total	$	2,831,087					$	2,829,824					Total	$	2,843,730					$	2,880,973
Liabilities and Shareholders’ Equity	Liabilities and Shareholders’ Equity													Liabilities and Shareholders’ Equity
Interest-bearing demand deposits	Interest-bearing demand deposits	$	1,398,182	256		0.07		$	1,334,219	438		0.13		Interest-bearing demand deposits	$	1,409,177	557		0.08		$	1,364,483	728		0.11
Savings deposits	Savings deposits	227,676		57		0.10		183,576		45		0.10		Savings deposits	232,322		120		0.10		192,039		96		0.10
Time deposits	Time deposits	298,618		372		0.51		397,271		909		0.93		Time deposits	286,949		709		0.50		389,828		1,649		0.85
Total interest-bearing deposits	Total interest-bearing deposits	1,924,476		685		0.14		1,915,066		1,392		0.29		Total interest-bearing deposits	1,928,448		1,386		0.14		1,946,350		2,473		0.26
Securities sold under agreements to repurchase	Securities sold under agreements to repurchase	23,530		7		0.12		21,452		9		0.17		Securities sold under agreements to repurchase	23,789		14		0.12		21,937		17		0.16
FHLB Advances and other borrowings	FHLB Advances and other borrowings	1,850		22		4.74		58,000		171		1.20		FHLB Advances and other borrowings	1,795		43		4.74		57,948		335		1.17
Subordinated notes	Subordinated notes	31,969		503		6.29		31,909		502		6.29		Subordinated notes	31,977		1,006		6.29		31,916		1,004		6.29
Total interest-bearing liabilities	Total interest-bearing liabilities	1,981,825		1,217		0.25		2,026,427		2,074		0.42		Total interest-bearing liabilities	1,986,009		2,448		0.25		2,058,151		3,829		0.38
Noninterest-bearing demand deposits	Noninterest-bearing demand deposits	540,139						516,849						Noninterest-bearing demand deposits	556,243						531,313
Other	Other	40,919						36,244						Other	44,072						36,906
Total liabilities	Total liabilities	2,562,883						2,579,520						Total liabilities	2,586,324						2,626,370
Shareholders’ equity	Shareholders’ equity	268,204						250,304						Shareholders’ equity	257,406						254,603
Total	Total	$	2,831,087					$	2,829,824					Total	$	2,843,730					$	2,880,973
Taxable-equivalent net interest income /net interest spread	Taxable-equivalent net interest income /net interest spread			22,825		3.42	%			22,051		3.28	%	Taxable-equivalent net interest income /net interest spread			47,307		3.52	%			44,173		3.22	%
Taxable-equivalent net interest margin	Taxable-equivalent net interest margin					3.49	%					3.38	%	Taxable-equivalent net interest margin					3.59	%					3.31	%
Taxable-equivalent adjustment	Taxable-equivalent adjustment			(252)						(196)				Taxable-equivalent adjustment			(615)						(417)
Net interest income	Net interest income			$	22,573					$	21,855			Net interest income			$	46,692					$	43,756


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, where applicable.

4551

Table of Contents

~~For the three months ended March 31, 2022, net~~Net interest income on a taxable-equivalent basis increased by ~~$774 thousand~~$3.1 million to ~~$22.8 million from $22.1~~$47.3 million for the ~~three~~six months ended ~~March 31,~~June 30, 2022 from $44.2 million for the six months ended June 30, 2021. The Company's net interest spread increased by 1430 basis points to ~~3.42%~~3.52% for the ~~three~~six months ended ~~March 31,~~June 30, 2022 compared to 3.22% for the ~~three~~six months ended ~~March 31,~~June 30, 2021.

Taxable-equivalent net interest margin ~~was 3.49%~~increased by 28 basis points to 3.59% for the ~~three~~six months ended ~~March 31,~~June 30, 2022 ~~which was 11 basis points higher than 3.38%~~from 3.31% for the ~~three~~six months ended ~~March 31,~~June 30, 2021. The taxable-equivalent yield on interest-earning assets increased by 18 basis points from the six months ended June 30, 2021 to the six months ended June 30, 2022 reflecting the deployment of cash into higher yielding commercial loans and investment securities. The decrease in the cost of interest-bearing liabilities ~~both decreased~~ from the ~~three~~six months ended ~~March 31,~~June 30, 2021 to the ~~three~~six months ended ~~March 31,~~June 30, 2022 ~~reflecting a lower~~also benefited the tax-equivalent net interest ~~rate environment and~~margin, which reflected the decrease in time deposit ~~balances.~~balances and repayment of overnight borrowings. Average loans remained approximately $2.0 billion, during both the ~~three~~six months ended ~~March 31,~~June 30, 2022 and 2021, as ~~the impact of~~ commercial and home equity loan growth ~~in three~~for the six months ended ~~March 31,~~June 30, 2022 was offset primarily by the impact of SBA PPP loan forgiveness. Average investment securities increased by $45.1 million from $453.1 million for the six months ended June 30, 2021 to $498.2 million for the same period in 2022 due to investment purchases. Average interest-bearing liabilities declined ~~slightly below~~$72.1 million to $2.0 billion for the 2022 period from $2.1 billion for the 2021 period due to decreased average balances in time deposits and overnight borrowings.

The yield on loans ~~was 4.39%~~increased by 12 basis points to 4.40% for the ~~three~~six months ended ~~March 31,~~June 30, 2022 compared to ~~4.30%~~4.28% for the ~~three~~six months ended ~~March 31,~~June 30, 2021. Taxable-equivalent interest income earned on loans ~~decreased~~increased by ~~$145~~$570 thousand year-over-year ~~partially~~ due to ~~a decrease~~an increase in the average balance of ~~loans.~~commercial loans, excluding SBA PPP loans, and from the impact of the rising interest rate environment. The increase in interest income was partially offset by the ~~yield on total loans primarily reflects~~decrease in interest income from SBA PPP loans. This ~~increase~~decrease is due to ~~accretion and forgiveness~~a lower average balance of SBA PPP loans ~~recognized as a percent of the lower average balance~~resulting from loans forgiven during the ~~three~~six months ended ~~March 31,~~June 30, 2022 compared to the ~~three~~six months ended ~~March 31,~~June 30, 2021.

SBA PPP loans, net of deferred fees and costs, averaged ~~$155.3~~$113.6 million during the ~~three~~six months ended ~~March 31,~~June 30, 2022 compared to ~~$463.9~~$467.5 million during the ~~three~~six months ended ~~March 31,~~June 30, 2021. This decrease was ~~primarily~~ due to the forgiveness of SBA PPP ~~loans and was partially offset by commercial loan production.~~loans. The average balance of commercial loans, excluding SBA PPP loans, increased by ~~$295.8~~$348.7 million from $1.1 billion in the ~~three~~six months ended ~~March 31,~~June 30, 2021 to ~~$1.4~~$1.5 billion during the ~~three~~six months ended ~~March 31,~~June 30, 2022. Average home equity loans increased by $12.9 million from $155.0 million for the six months ended June 30, 2021 to $167.9 million for the six months ended June 30, 2022. Average installment and other consumer loans decreased by ~~$17.2~~$15.7 million from ~~$46.5~~$43.8 million for the ~~three~~six months ended ~~March 31,~~June 30, 2021 to ~~$29.3~~$28.1 million for the ~~three~~six months ended ~~March 31,~~June 30, 2022. Average residential mortgage loans decreased by $24.1 million from ~~$232.6~~$223.9 million during the ~~three~~six months ended ~~March 31,~~June 30, 2021 to ~~$195.7~~$199.8 million during the ~~three~~six months ended ~~March 31,~~June 30, 2022 due to lower housing inventory and runoff.

For the ~~three~~six months ended ~~March 31,~~June 30, 2022, interest income on loans includes ~~$3.5~~$5.4 million of interest and net deferred fee income recognized associated with the SBA PPP loans compared to ~~$4.5~~$9.7 million of such interest and fee income for the ~~three~~six months ended ~~March 31,~~June 30, 2021. ~~Net deferred fees on SBA PPP loans were $2.4 million at March 31, 2022, which will be recognized over the remaining life of the loans.~~ Accretion of purchase accounting adjustments included in interest income was ~~$598~~$810 thousand and ~~$926 thousand~~$1.1 million for the ~~three~~six months ended ~~March 31,~~June 30, 2022 and 2021, respectively. The ~~three~~six months ended ~~March 31,~~June 30, 2022 and 2021 included ~~$260~~$583 thousand and ~~$416~~$764 thousand, respectively, of accelerated accretion related to the payoff of acquired loans.

Interest income on investment securities on a tax-equivalent basis ~~remained at approximately $2.5~~increased by $967 thousand to $5.9 million ~~year-over-year,~~for the six months ended June 30, 2022 from $4.9 million for the six months ended June 30, 2021, with the taxable equivalent yield ~~decreasing~~increasing from ~~2.18%~~2.20% for the ~~three~~six months ended ~~March 31,~~June 30, 2021 to ~~2.13%~~2.37% for the ~~three~~six months ended ~~March 31,~~June 30, 2022. The ~~five~~17 basis point ~~decrease~~increase reflected the ~~increased~~higher interest rate environment ~~between years impacting our fixed rate securities~~in 2022 and certain repositioning within the portfolio under the Company's asset/liability management strategies.

Although the average balance of federal funds sold and interest-bearing bank balances decreased by $52.8 million from $218.2 million for the six months ended June 30, 2021, to $165.4 million for the same period in 2022 due primarily to the deployment of cash into loans and investment securities, the related interest income on a tax-equivalent basis increased by $216 thousand to $336 thousand for the six months ended June 30, 2022, from $120 thousand for the six months ended June 30, 2021. This increase was caused by the increase in the interest rate at the FRB as a result of multiple Fed Funds rate increases by the FOMC during 2022.

Interest expense on deposits and borrowings decreased by ~~$857 thousand~~$1.4 million year-over-year, ~~despite an increase~~reflecting a decrease in the average balance of interest-bearing deposits of ~~$9.4~~$17.9 million due primarily to continued ~~high levels~~runoff of ~~excess liquidity in the system, as well as seasonal increases from public fund clients.~~certificates of deposit. The cost of interest-bearing liabilities declined 1713 basis points from ~~0.42%~~0.38% for the ~~three~~six months ended ~~March 31,~~June 30, 2021 to 0.25% for the ~~three~~six months ended ~~March 31,~~June 30, 2022 due to the timing of deposit rate reductions in 2021 combined with the continued maturity of higher yielding certificates of deposits and the repayment and maturities of overnight borrowings in the third quarter of 2021.

Table of Contents

Provision for Loan Losses

The Company recorded a provision for loan losses of ~~$300 thousand~~$2.1 million for the ~~three~~six months ended ~~March 31,~~June 30, 2022 compared to negative provision ~~expense~~for loan losses of ~~$1.0 million~~$375 thousand for the same period in 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~~The provision for loan losses for the six months ended June 30, 2022 was driven primarily by an increase in commercial ~~loan production, but was~~loans, partially offset by the impact of a reduction in qualitative factors to unwind ana $726 thousand increase ~~from 2020~~ applied to the commercial real estate loan portfolio ~~due to concerns about~~in 2020 associated with the economic impact of the COVID-19 pandemic. The negative provision ~~expense~~for loan losses recorded in the ~~three~~six months ended ~~March 31,~~June 30, 2021 was due to the release of a portion of the Company's remaining COVID-19 related reserve ~~and a reduction in outstanding loan balances on non-guaranteed loans.~~of $1.7 million. Net recoveries in the ~~three~~six months ended ~~March 31,~~June 30, 2022 totaled ~~$28~~$24 thousand, compared to net charge-offs of ~~$184~~$395 thousand in the comparable prior year period. Nonaccrual loans were ~~0.28%~~0.27% of gross loans at ~~March 31,~~June 30, 2022,

~~Table of Contents~~

compared with ~~0.48%~~0.51% of gross loans at ~~March 31,~~June 30, 2021. Nonaccrual loans decreased by ~~$4.4~~$4.5 million from ~~March 31,~~June 30, 2021 to ~~March 31,~~June 30, 2022 and classified loans decreased by $9.0 million to ~~$23.4~~$19.7 million from ~~March 31,~~June 30, 2021 to ~~March 31,~~June 30, 2022. The decrease in non-accrual loans includes the payoff of one loan of $2.6 million, ~~and~~ loans returning to accrual status of ~~$591~~$652 thousand and charge-offs of $189 thousand, with the remaining decrease due to paydowns. The decrease in classified loans reflects upgrades to commercial loan ratings, including loans that were previously downgraded due to the impact of the COVID-19 pandemic.

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

Noninterest Income

The following table compares noninterest income for the ~~three~~six months ended ~~March 31,~~June 30, 2022 and 2021:
Three Months Ended March 31, $ Change % Change
2022 2021 2022-2021 2022-2021
Service charges on deposit accounts $ 920 $ 737 $ 183 25 %
Interchange income 981 955 26 3 %
Other service charges and fees 153 148 5 3 %
Swap fee income 953 53 900 1,698 %
Trust and investment management income 1,941 1,912 29 2 %
Brokerage income 928 811 117 14 %
Mortgage banking activities 721 2,189 (1,468) (67) %
Income from life insurance 566 557 9 2 %
Other income 457 37 420 1,135 %
Investment securities (losses) gains (146) 145 (291) (201) %
Total noninterest income $ 7,474 $ 7,544 $ (70) (1) %


	Six Months Ended June 30,				$ Change		% Change
	2022		2021		2022-2021		2022-2021
Service charges on deposit accounts	$	1,884	$	1,435	$	449	31	%
Interchange income	2,045		2,019		26		1	%
Other service charges and fees	383		330		53		16	%
Swap fee income	1,738		68		1,670		2,456	%
Trust and investment management income	3,846		3,932		(86)		(2)	%
Brokerage income	1,917		1,721		196		11	%
Mortgage banking activities	1,219		3,351		(2,132)		(64)	%

Income from life insurance	1,159		1,121		38		3	%
Other income	626		75		551		735	%

Investment securities (losses) gains	(149)		156		(305)		(196)	%
Total noninterest income	$	14,668	$	14,208	$	460	3	%

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

•Service charges on deposit accounts increased by ~~$183~~$449 thousand due to increased ~~deposit account~~customer transaction activity as the economy continued to recover from the COVID-19 ~~pandemic.~~pandemic and changes to the deposit fee structure that took effect in April 2022.

•Swap fee income increased by ~~$900 thousand~~$1.7 million due to increased client interest in locking in interest rates on commercial loans in the rising interest rate environment.

•Brokerage income increased by $196 thousand year-over-year due to fluctuations in market conditions and client investment trade volume.

•Mortgage banking income decreased by ~~$1.5~~$2.1 million due to current market conditions, including low housing inventory and a rising interest rate environment, which caused declines in residential mortgage loan production, the residential mortgage loan pipeline and secondary market sales during the first ~~quarter~~half of 2022, compared to strong refinancing activity in the same period in ~~2021 that resulted in an increase in the gain on sale margin.~~2021. These changes resulted in a decrease in the gain on sale of residential mortgage loans of ~~$1.1~~$1.4 million for the ~~three~~six months ended ~~March 31,~~June 30, 2022 compared to the first quarter of 2021. In addition, the Company recorded an MSR valuation reserve reversal of ~~$47~~$79 thousand in the ~~three~~six months ended ~~March 31,~~June 30, 2022 compared to ~~$460~~an MSR valuation reserve reversal of $651 thousand in the ~~three~~six months ended ~~March 31,~~June 30, 2021, which was driven by significant market interest rate reductions caused by the COVID-19 pandemic

Table of Contents

earlier in 2021. Mortgage loans sold totaled ~~$31.9~~$54.5 million in the first ~~quarter~~half of 2022 compared with ~~$57.3~~$109.9 million in the first ~~quarter~~half of 2021.

•Other income increased by ~~$420~~$551 thousand due primarily to gains on the ~~gain on sale~~sales of antwo SBA ~~loan of $271 thousand during the three months ended March 31, 2022.~~loans totaling $306 thousand.

•During the ~~three~~six months ended ~~March 31,~~June 30, 2022, the Company recorded net investment securities losses of ~~$146~~$149 thousand due to ~~an OTTI charge~~a loss of $171 thousand on one non-agency CMO security that ~~is expected to be~~was called by the issuer in the second quarter of ~~2022 due to an anticipated default caused by increased prepayment speeds on underlying collateral.~~2022. The ~~impairment charge~~loss was partially offset by a gain of ~~$25~~$22 thousand ~~primarily~~ from the partial sale of $3.1 million of one municipal security. During the ~~three~~six months ended ~~March 31,~~June 30, 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 2022 and 2021 attributable to normal business operations.

~~Table of Contents~~

Noninterest Expenses

The following table compares noninterest expenses for the ~~three~~six months ended ~~March 31,~~June 30, 2022 and 2021:


		Three Months Ended March 31,				$ Change		% Change			Six Months Ended June 30,				$ Change		% Change
		2022		2021		2022-2021		2022-2021			2022		2021		2022-2021		2022-2021
Salaries and employee benefits	Salaries and employee benefits	$	11,337	$	10,197	$	1,140	11.2	%	Salaries and employee benefits	$	22,649	$	20,409	$	2,240	11.0	%
Occupancy	Occupancy	1,288		1,240		48		3.9	%	Occupancy	2,420		2,338		82		3.5	%
Furniture and equipment	Furniture and equipment	1,279		1,278		1		0.1	%	Furniture and equipment	2,570		2,580		(10)		(0.4)	%
Data processing	Data processing	1,053		1,019		34		3.3	%	Data processing	2,218		2,051		167		8.1	%

Automated teller machine and interchange fees	Automated teller machine and interchange fees	305		249		56		22.5	%	Automated teller machine and interchange fees	623		568		55		9.7	%
Advertising and bank promotions	Advertising and bank promotions	355		425		(70)		(16.5)	%	Advertising and bank promotions	1,236		699		537		76.8	%
FDIC insurance	FDIC insurance	283		194		89		45.9	%	FDIC insurance	473		352		121		34.4	%

Professional services	Professional services	808		721		87		12.1	%	Professional services	1,530		1,300		230		17.7	%
Directors' compensation	Directors' compensation	231		234		(3)		(1.3)	%	Directors' compensation	461		469		(8)		(1.7)	%

Taxes other than income	Taxes other than income	564		451		113		25.1	%	Taxes other than income	672		913		(241)		(26.4)	%
Intangible asset amortization	Intangible asset amortization	292		334		(42)		(12.6)	%	Intangible asset amortization	573		658		(85)		(12.9)	%

Other operating expenses	Other operating expenses	1,569		1,441		128		8.9	%	Other operating expenses	2,733		2,479		254		10.2	%
Total noninterest expenses	Total noninterest expenses	$	19,364	$	17,783	$	1,581	8.9	%	Total noninterest expenses	$	38,158	$	34,816	$	3,342	9.6	%

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

•Salaries and employee benefits expense increased by ~~$1.1~~$2.2 million due primarily to increases in wages and additions to staff that filled vacancies and to ~~maintain~~drive and support a strong growth ~~trajectory.~~trajectory, which also resulted in an increase in employee benefit costs.

•~~Automated teller machine~~Advertising and ~~interchange fees~~bank promotions increased by ~~$56~~$537 thousand due to primarily to an increase in ~~card processing rates from a third party vendor.~~contributions of $500 thousand to the PA EITC, with the remaining increase due to promotions expenses and bank events.

•FDIC insurance expense increased by ~~$89~~$121 thousand due to an increase in the assessment rate driven by commercial loan ~~growth.~~growth and a lower deduction in the FDIC assessment rate calculation from SBA PPP loans due to forgiveness.

•Professional services increased by ~~$87~~$230 thousand due to an increase in compliance and technology consulting ~~during the first quarter of 2022 compared to the same period of 2021,~~services, partially offset by ~~increased~~lower legal costs incurred ~~in the three months ended March 31, 2021~~ in connection with the SEPTA litigation.

•Taxes other than income ~~increased~~decreased by ~~$113~~$241 thousand due to $450 thousand of eligible tax credits associated with the contributions made to the PA EITC during the six months ended June 30, 2022, partially offset by an increase year-over year in the Pennsylvania Bank Shares Tax expense, ~~which is based on~~as the Bank's total equity balance ~~and an increase in state personal property taxes for the three months ended March 31, 2022 compared to the three months ended March 31, 2021.~~grew.

•Other operating expenses increased by ~~$128~~$254 thousand ~~primarily due~~as the reserve for unfunded commitments increased by $196 thousand during the six months ended June 30, 2022, compared to ~~an increase~~the same period in ~~loan-related~~the prior year. In addition, employee related costs, ~~of $186~~which includes travel, meals and seminars, increased by $177 thousand ~~from commercial loan production, increases of $83 thousand in employee-related costs and $53 thousand in postage, printing and supplies~~during the same comparative periods as employees have returned from the work-from-home environment ~~resulting from~~caused by the COVID-19 pandemic, and travel increased as the economy and businesses ~~recover.~~recovered. These increases were partially offset by ~~a reduction~~an increase of $124 thousand in income from fair value adjustments to derivatives between the ~~reserve for unfunded commitments of $238 thousand from $266 thousand during the three~~six months ended March 31, 2021 to $28 thousand for the three months ended March 31, 2022. The reserve for unfunded commitments during the three months ended March 31, 2021 was elevated due to the COVID-19 pandemic.June 30, 2022 and 2021.

Table of Contents

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

~~Table of Contents~~

Income Tax Expense

Income tax expense totaled ~~$2.0~~$3.9 million, an effective tax rate of ~~19.4%~~18.4%, for the ~~three~~six months ended ~~March 31,~~June 30, 2022 compared with ~~$2.4~~$4.5 million, an effective tax rate of ~~19.1%~~19.3%, for the ~~three~~six months ended ~~March 31,~~June 30, 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 ~~increase~~decrease in the effective tax rate from the ~~three~~six months ended ~~March 31,~~June 30, 2021 to the ~~three~~six months ended ~~March 31,~~June 30, 2022 was ~~due partially~~primarily due to ~~lower estimated federal tax credits~~an increase in projected income from tax-free investment securities and loans for the 2022 fiscal year ~~and a lower pre-tax income projection in~~compared to the ~~2021.~~prior 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 ~~March 31,~~June 30, 2022, AFS securities totaled ~~$529.7~~$512.7 million, an increase of ~~$57.3~~$40.3 million, from $472.4 million at December 31, 2021. During the ~~three~~six months ended ~~March 31,~~June 30, 2022, the Company purchased ~~$62.9 million and $32.0~~$73.7 million of municipal securities, ~~and~~$41.2 million of agency MBS and CMO, and $6.6 million of non-agency CMO, partially ~~sold~~offset by the sale of $3.1 million of a municipal security for a gain of $22 thousand. During the first quarter of 2022, the Company recorded ~~an OTTI charge~~a loss of $171 thousand on one $14.7 million par value non-agency CMO, which ~~is expected to be~~was called by the issuer in the second quarter of ~~2022 due to an anticipated default.~~2022. There was no OTTI recorded during the second quarter of 2022. The balance of investment securities included net unrealized losses of ~~$18.6~~$37.2 million at ~~March 31,~~June 30, 2022 compared to net unrealized gains of $5.6 million at December 31, ~~2021~~2021. This change was due to market interest rate increases.

4955

Table of Contents

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


Sector	Sector	Portfolio Mix		Amortized Book		Fair Value		Credit Enhancement		AAA		AA		A		BBB		NR		Collateral Type	Sector	Portfolio Mix		Amortized Book Value		Fair Value		Credit Enhancement		AAA		AA		A		BBB		NR		Collateral Type
Unsecured ABS	Unsecured ABS	1	%	$	6,548	$	6,549	33	%	—	%	—	%	—	%	—	%	100	%	Unsecured Consumer Debt	Unsecured ABS	1	%	$	5,684	$	5,664	32	%	—	%	—	%	—	%	—	%	100	%	Unsecured Consumer Debt
Student Loan ABS	Student Loan ABS	1		8,228		8,124		26		—		—		—		—		100		Seasoned Student Loans	Student Loan ABS	2		7,717		7,558		26		—		—		—		—		100		Seasoned Student Loans
Federal Family Education Loan ABS	Federal Family Education Loan ABS	18		97,140		95,572		6		85		15		—		—		—		Federal Family Education Loan (1)	Federal Family Education Loan ABS	17		94,462		90,719		7		86		14		—		—		—		Federal Family Education Loan (1)
PACE Loan ABS	PACE Loan ABS	1		3,350		3,267		5		100		—		—		—		—		PACE Loans	PACE Loan ABS	1		3,153		3,025		6		100		—		—		—		—		PACE Loans

Non-Agency RMBS	Non-Agency RMBS	5		25,135		22,303		31		44		—		—		—		56		Reverse Mortgages (2)	Non-Agency RMBS	3		17,520		16,221		11		61		—		—		—		39		Reverse Mortgages (2)
Municipal - General Obligation	Municipal - General Obligation	20		112,387		109,100				6		88		6		—		—			Municipal - General Obligation	22		122,863		114,009				5		90		5		—		—
Municipal - Revenue	Municipal - Revenue	24		132,534		128,460				—		83		12		—		5			Municipal - Revenue	24		132,281		119,518				—		83		12		—		5
SBA ReRemic	SBA ReRemic	1		7,237		7,157				—		100		—		—		—		SBA Guarantee (3)	SBA ReRemic	1		6,469		6,367				—		100		—		—		—		SBA Guarantee (3)
Agency MBS	Agency MBS	25		135,262		130,257				—		100		—		—		—		Residential Mortgages (3)	Agency MBS	25		139,251		131,249				—		100		—		—		—		Residential Mortgages (3)
U.S. Treasury securities	U.S. Treasury securities	4		20,081		18,538				—		100		—		—		—			U.S. Treasury securities	4		20,077		17,969				—		100		—		—		—
Bank CDs	Bank CDs	—		249		249				—		—		—		—		100		FDIC Insured CD	Bank CDs	—		249		249				—		—		—		—		100		FDIC Insured CD
		100	%	$	548,151	$	529,576			19	%	70	%	4	%	—	%	7	%			100	%	$	549,726	$	512,548			18	%	73	%	4	%	—	%	5	%

(1) Minimum of 18% guaranteed by U.S. government
(1) Minimum of 17% guaranteed by U.S. government																					(1) Minimum of 17% 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) 74% guaranteed by U.S. government agencies
(3) 77% guaranteed by U.S. government agencies																					(3) 77% 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, retail 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.

5056

Table of Contents

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


		March 31, 2022		December 31, 2021			June 30, 2022		December 31, 2021
Commercial real estate:	Commercial real estate:					Commercial real estate:
Owner occupied	Owner occupied	$	256,526	$	238,668	Owner occupied	$	287,825	$	238,668
Non-owner occupied	Non-owner occupied	558,999		551,783		Non-owner occupied	559,309		551,783
Multi-family	Multi-family	93,158		93,255		Multi-family	116,110		93,255
Non-owner occupied residential	Non-owner occupied residential	102,269		106,112		Non-owner occupied residential	109,141		106,112
Acquisition and development:	Acquisition and development:					Acquisition and development:
1-4 family residential construction	1-4 family residential construction	15,115		12,279		1-4 family residential construction	22,650		12,279
Commercial and land development	Commercial and land development	105,204		93,925		Commercial and land development	134,947		93,925
Commercial and industrial (1)	Commercial and industrial (1)	443,170		485,728		Commercial and industrial (1)	379,729		485,728
Municipal	Municipal	14,626		14,989		Municipal	12,957		14,989
Residential mortgage:	Residential mortgage:					Residential mortgage:
First lien	First lien	203,231		198,831		First lien	202,787		198,831
Home equity - term	Home equity - term	5,820		6,081		Home equity - term	5,996		6,081
Home equity - lines of credit	Home equity - lines of credit	164,818		160,705		Home equity - lines of credit	171,269		160,705
Installment and other loans	Installment and other loans	15,371		17,630		Installment and other loans	14,909		17,630
		$	1,978,307	$	1,979,986		$	2,017,629	$	1,979,986

(1) This balance includes ~~$122.5~~$30.2 million and $189.9 million of SBA PPP loans, net of deferred fees and costs, at ~~March 31,~~June 30, 2022 and December 31, 2021, respectively.

Total loans ~~declined~~increased by ~~$1.7~~$37.6 million from December 31, 2021 to ~~March 31,~~June 30, 2022. This ~~decrease~~increase is due to ~~SBA PPP loan forgiveness of $67.4 million and a decrease of $2.3 million~~growth in ~~installment and other loan portfolios due to payoffs, offset by~~ commercial ~~loan production,~~loans, excluding SBA PPP loans, of ~~$59.7~~$185.6 million, ~~and increases in residential mortgage loans and~~ home equity lines of credit of ~~$4.4~~$10.6 million and ~~$4.1~~first lien residential mortgages of $4.0 million, ~~respectively,~~partially offset by a decrease of $159.7 million in SBA PPP loans due to loan forgiveness during the ~~three~~six months ended ~~March 31,~~June 30, 2022. Overall loan growth, excluding SBA PPP loans, was 4%11.0% for the ~~three~~six months ended ~~March 31,~~June 30, 2022.

Asset Quality

Risk Elements

The Company’s loan portfolio is subject to varying degrees of credit risk. Credit risk is managed through 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 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

5157

Table of Contents

rates. If a modification occurs while the loan is on accruing status, it will continue to accrue interest under the modified terms. 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 assets, including the aggregate balances of nonaccrual loans, restructured loans still accruing, loans past due 90 days or more, and OREO as of ~~March 31,~~June 30, 2022 and December 31, 2021. Loans 30-89 days past due and relevant asset quality ratios as of ~~March 31,~~June 30, 2022 and December 31, 2021 are also presented.


		March 31, 2022			December 31, 2021				June 30, 2022			December 31, 2021
Nonaccrual loans	Nonaccrual loans	$	5,510		$	6,449		Nonaccrual loans	$	5,387		$	6,449
OREO	OREO	—			—			OREO	—			—
Total nonperforming assets	Total nonperforming assets	5,510			6,449			Total nonperforming assets	5,387			6,449
Restructured loans still accruing	Restructured loans still accruing	575			804			Restructured loans still accruing	568			804
Loans past due 90 days or more and still accruing	Loans past due 90 days or more and still accruing	238			1,201			Loans past due 90 days or more and still accruing	322			1,201
Total nonperforming and other risk assets (total risk assets)	Total nonperforming and other risk assets (total risk assets)	$	6,323		$	8,454		Total nonperforming and other risk assets (total risk assets)	$	6,277		$	8,454
Loans 30-89 days past due		$	4,953		$	5,925
Loans 30-89 days past due and still accruing								Loans 30-89 days past due and still accruing	$	2,925		$	5,925
Asset quality ratios:	Asset quality ratios:							Asset quality ratios:
Total nonperforming loans to total loans	Total nonperforming loans to total loans	0.28		%	0.33		%	Total nonperforming loans to total loans	0.27		%	0.33		%
Total nonperforming assets to total assets	Total nonperforming assets to total assets	0.19		%	0.23		%	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	0.28		%	0.33		%	Total nonperforming assets to total loans and OREO	0.27		%	0.33		%
Total risk assets to total loans and OREO	Total risk assets to total loans and OREO	0.32		%	0.43		%	Total risk assets to total loans and OREO	0.31		%	0.43		%
Total risk assets to total assets	Total risk assets to total assets	0.22		%	0.30		%	Total risk assets to total assets	0.22		%	0.30		%
ALL to total loans	ALL to total loans	1.09		%	1.07		%	ALL to total loans	1.15		%	1.07		%
ALL to nonperforming loans	ALL to nonperforming loans	390.34		%	328.42		%	ALL to nonperforming loans	432.13		%	328.42		%
ALL to nonperforming loans and restructured loans still accruing	ALL to nonperforming loans and restructured loans still accruing	353.46		%	292.02		%	ALL to nonperforming loans and restructured loans still accruing	390.92		%	292.02		%

Total nonperforming and other risk assets decreased by ~~$2.1~~$2.2 million, or ~~25%~~26%, from December 31, 2021 to ~~March 31,~~June 30, 2022. ~~There was a reduction of~~ ~~$939 thousand in non-accrual~~Non-accrual loans decreased by $1.1 million from December 31, 2021 to ~~March 31,~~June 30, 2022 due primarily to ~~$591~~$596 thousand of loans returning to accrual status and ~~payoffs~~payment activity of ~~$376~~$712 thousand, partially offset by additions in loans classified as non-accrual loans of $267 thousand. Loans past due 90 days and still accruing decreased by ~~$963~~$879 thousand from December 31, 2021 to ~~March 31,~~June 30, 2022 due to the collection on a loan guaranteed by the ~~SBA.~~SBA during the first quarter of 2022.

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


		March 31, 2022						December 31, 2021							June 30, 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	$	3,062	$	—	$	3,062	$	3,763	$	—	$	3,763	Owner occupied	$	2,910	$	—	$	2,910	$	3,763	$	—	$	3,763

Non-owner occupied residential	Non-owner occupied residential	100		—		100		122		—		122		Non-owner occupied residential	98		—		98		122		—		122

Commercial and industrial	Commercial and industrial	161		—		161		250		—		250		Commercial and industrial	62		—		62		250		—		250
Residential mortgage:	Residential mortgage:													Residential mortgage:
First lien	First lien	1,703		575		2,278		1,831		804		2,635		First lien	1,880		568		2,448		1,831		804		2,635
Home equity - term	Home equity - term	6		—		6		7		—		7		Home equity - term	6		—		6		7		—		7
Home equity - lines of credit	Home equity - lines of credit	426		—		426		436		—		436		Home equity - lines of credit	389		—		389		436		—		436
Installment and other loans	Installment and other loans	52		—		52		40		—		40		Installment and other loans	42		—		42		40		—		40
		$	5,510	$	575	$	6,085	$	6,449	$	804	$	7,253		$	5,387	$	568	$	5,955	$	6,449	$	804	$	7,253

5258

Table of Contents

The following table presents our exposure to relationships with an impaired balance, which excludes accruing PCI loans, and the partial charge-offs taken to date and specific reserves established on those relationships at ~~March 31,~~June 30, 2022 and December 31, 2021. Of the relationships deemed to be impaired at ~~March 31,~~June 30, 2022, one had a recorded balance in excess of $1.0 million, and 5958 relationships, which represents 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
March 31, 2022
June 30, 2022									June 30, 2022
Relationships greater than $1,000,000	Relationships greater than $1,000,000	1	$	2,492	$	—	$	—	Relationships greater than $1,000,000	1	$	2,449	$	—	$	—
Relationships greater than $500,000 but less than $1,000,000	Relationships greater than $500,000 but less than $1,000,000	—	—		—		—		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	595		—		—		Relationships greater than $250,000 but less than $500,000	2	587		—		—
Relationships less than $250,000	Relationships less than $250,000	59	2,998		280		29		Relationships less than $250,000	58	2,919		280		28
		62	$	6,085	$	280	$	29		61	$	5,955	$	280	$	28
December 31, 2021	December 31, 2021								December 31, 2021
Relationships greater than $1,000,000	Relationships greater than $1,000,000	1	$	2,535	$	—	$	—	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	1	602		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	601		—		—		Relationships greater than $250,000 but less than $500,000	2	601		—		—
Relationships less than $250,000	Relationships less than $250,000	63	3,515		303		28		Relationships less than $250,000	63	3,515		303		28
		67	$	7,253	$	320	$	28		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 ~~March 31,~~June 30, 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. In 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. At March 31, 2022 and December 31, 2021, the remaining loan deferral balances were inconsequential.

~~Table of Contents~~

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. On a quarterly basis, management assesses the adequacy of the ALL using a defined methodology which considers specific credit evaluation of impaired loans, historical loss 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."

5459

Table of Contents

The following table summarizes the Company’s internal risk ratings at ~~March 31,~~June 30, 2022 and December 31, 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
March 31, 2022
June 30, 2022																June 30, 2022
Commercial real estate:	Commercial real estate:															Commercial real estate:
Owner occupied	Owner occupied	$	242,529	$	6,360	$	2,277	$	3,062	$	—	$	2,298	$	256,526	Owner occupied	$	274,188	$	6,086	$	2,375	$	2,910	$	—	$	2,266	$	287,825
Non-owner occupied	Non-owner occupied	537,505		18,771		2,419		—		—		304		558,999		Non-owner occupied	547,382		9,221		2,409		—		—		297		559,309
Multi-family	Multi-family	84,541		8,158		459		—		—		—		93,158		Multi-family	107,779		8,082		249		—		—		—		116,110
Non-owner occupied residential	Non-owner occupied residential	99,545		1,005		1,014		100		—		605		102,269		Non-owner occupied residential	105,680		2,261		503		98		—		599		109,141
Acquisition and development:	Acquisition and development:															Acquisition and development:
1-4 family residential construction	1-4 family residential construction	15,115		—		—		—		—		—		15,115		1-4 family residential construction	22,650		—		—		—		—		—		22,650
Commercial and land development	Commercial and land development	103,486		1,236		482		—		—		—		105,204		Commercial and land development	133,264		1,683		—		—		—		—		134,947
Commercial and industrial	Commercial and industrial	424,425		7,642		8,792		161		—		2,150		443,170		Commercial and industrial	365,407		5,877		6,266		62		—		2,117		379,729
Municipal	Municipal	14,626		—		—		—		—		—		14,626		Municipal	12,957		—		—		—		—		—		12,957
Residential mortgage:	Residential mortgage:															Residential mortgage:
First lien	First lien	196,217		—		221		2,278		—		4,515		203,231		First lien	195,674		—		221		2,448		—		4,444		202,787
Home equity - term	Home equity - term	5,798		—		—		6		—		16		5,820		Home equity - term	5,974		—		—		6		—		16		5,996
Home equity - lines of credit	Home equity - lines of credit	164,327		19		46		426		—		—		164,818		Home equity - lines of credit	170,834		—		46		389		—		—		171,269
Installment and other loans	Installment and other loans	15,314		—		—		52		—		5		15,371		Installment and other loans	14,861		—		—		42		—		6		14,909
		$	1,903,428	$	43,191	$	15,710	$	6,085	$	—	$	9,893	$	1,978,307		$	1,956,650	$	33,210	$	12,069	$	5,955	$	—	$	9,745	$	2,017,629
December 31, 2021	December 31, 2021															December 31, 2021
Commercial real estate:	Commercial real estate:															Commercial real estate:
Owner occupied	Owner occupied	$	219,250	$	7,239	$	6,087	$	3,763	$	—	$	2,329	$	238,668	Owner occupied	$	219,250	$	7,239	$	6,087	$	3,763	$	—	$	2,329	$	238,668
Non-owner occupied	Non-owner occupied	528,010		23,297		166		—		—		310		551,783		Non-owner occupied	528,010		23,297		166		—		—		310		551,783
Multi-family	Multi-family	84,414		8,238		603		—		—		—		93,255		Multi-family	84,414		8,238		603		—		—		—		93,255
Non-owner occupied residential	Non-owner occupied residential	102,588		1,065��		1,153		122		—		1,184		106,112		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	12,279		—		—		—		—		—		12,279		1-4 family residential construction	12,279		—		—		—		—		—		12,279
Commercial and land development	Commercial and land development	92,049		1,385		491		—		—		—		93,925		Commercial and land development	92,049		1,385		491		—		—		—		93,925
Commercial and industrial	Commercial and industrial	470,579		7,917		4,720		250		—		2,262		485,728		Commercial and industrial	470,579		7,917		4,720		250		—		2,262		485,728
Municipal	Municipal	14,989		—		—		—		—		—		14,989		Municipal	14,989		—		—		—		—		—		14,989
Residential mortgage:	Residential mortgage:															Residential mortgage:
First lien	First lien	191,386		—		225		2,635		—		4,585		198,831		First lien	191,386		—		225		2,635		—		4,585		198,831
Home equity - term	Home equity - term	6,058		—		—		7		—		16		6,081		Home equity - term	6,058		—		—		7		—		16		6,081
Home equity - lines of credit	Home equity - lines of credit	160,203		20		46		436		—		—		160,705		Home equity - lines of credit	160,203		20		46		436		—		—		160,705
Installment and other loans	Installment and other loans	17,584		—		—		40		—		6		17,630		Installment and other loans	17,584		—		—		40		—		6		17,630
		$	1,899,389	$	49,161	$	13,491	$	7,253	$	—	$	10,692	$	1,979,986		$	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

5560

Table of Contents

considered impaired result in some doubt as to the borrower’s ability to continue to perform under the terms of the loan, and represent potential problem loans. Non-impaired Substandard loans totaled ~~$15.7~~$12.1 million at ~~March 31,~~June 30, 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 ~~$6.0~~$16.0 million from December 31, 2021 to ~~March 31,~~June 30, 2022 due to continued improvements in economic conditions resulting in upgrades to commercial loans, including those that were previously downgraded due to the impact of the COVID-19 pandemic.

The following table summarizes activity in the ALL for the three and six months ended ~~March 31,~~June 30, 2022 and 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
March 31, 2022
June 30, 2022																						June 30, 2022
Balance, beginning of period	Balance, beginning of period	$	12,037	$	2,062	$	3,814	$	30	$	17,943	$	2,785	$	215	$	3,000	$	237	$	21,180	Balance, beginning of period	$	11,546	$	2,321	$	4,301	$	29	$	18,197	$	2,873	$	201	$	3,074	$	237	$	21,508
Provision for loan losses	Provision for loan losses	(523)		258		500		(1)		234		72		(6)		66		—		300		Provision for loan losses	748		695		184		(3)		1,624		127		24		151		—		1,775

Charge-offs	Charge-offs	—		—		(61)		—		(61)		(10)		(13)		(23)		—		(84)		Charge-offs	—		—		(54)		—		(54)		—		(5)		(5)		—		(59)
Recoveries	Recoveries	32		1		48		—		81		26		5		31		—		112		Recoveries	—		8		40		—		48		4		3		7		—		55
Balance, end of period	Balance, end of period	$	11,546	$	2,321	$	4,301	$	29	$	18,197	$	2,873	$	201	$	3,074	$	237	$	21,508	Balance, end of period	$	12,294	$	3,024	$	4,471	$	26	$	19,815	$	3,004	$	223	$	3,227	$	237	$	23,279
March 31, 2021
June 30, 2021																						June 30, 2021
Balance, beginning of period	Balance, beginning of period	$	11,151	$	1,114	$	3,942	$	40	$	16,247	$	3,362	$	324	$	3,686	$	218	$	20,151	Balance, beginning of period	$	10,671	$	1,046	$	3,714	$	38	$	15,469	$	3,058	$	208	$	3,266	$	232	$	18,967
Provision for loan losses	Provision for loan losses	(494)		(69)		(54)		(2)		(619)		(289)		(106)		(395)		14		(1,000)		Provision for loan losses	806		197		(223)		(9)		771		(142)		19		(123)		(23)		625
Charge-offs	Charge-offs	—		—		(454)		—		(454)		(21)		(20)		(41)		—		(495)		Charge-offs	(181)		—		(112)		—		(293)		(71)		(9)		(80)		—		(373)
Recoveries	Recoveries	14		1		280		—		295		6		10		16		—		311		Recoveries	19		—		116		—		135		18		9		27		—		162
Balance, end of period	Balance, end of period	$	10,671	$	1,046	$	3,714	$	38	$	15,469	$	3,058	$	208	$	3,266	$	232	$	18,967	Balance, end of period	$	11,315	$	1,243	$	3,495	$	29	$	16,082	$	2,863	$	227	$	3,090	$	209	$	19,381
Six Months Ended																						Six Months Ended
June 30, 2022																						June 30, 2022
Balance, beginning of period																						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	225		953		684		(4)		1,858		199		18		217		—		2,075

Charge-offs																						Charge-offs	—		—		(115)		—		(115)		(10)		(18)		(28)		—		(143)
Recoveries																						Recoveries	32		9		88		—		129		30		8		38		—		167
Balance, end of period																						Balance, end of period	$	12,294	$	3,024	$	4,471	$	26	$	19,815	$	3,004	$	223	$	3,227	$	237	$	23,279
June 30, 2021																						June 30, 2021
Balance, beginning of period																						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	312		128		(277)		(11)		152		(431)		(87)		(518)		(9)		(375)
Charge-offs																						Charge-offs	(181)		—		(566)		—		(747)		(92)		(29)		(121)		—		(868)
Recoveries																						Recoveries	33		1		396		—		430		24		19		43		—		473
Balance, end of period																						Balance, end of period	$	11,315	$	1,243	$	3,495	$	29	$	16,082	$	2,863	$	227	$	3,090	$	209	$	19,381

The ALL totaled ~~$21.5~~$23.3 million at ~~March 31,~~June 30, 2022, an increase of ~~$328 thousand~~$2.1 million from December 31, 2021, resulting from a provision for loan losses of ~~$300 thousand and~~$2.1 million, which was inclusive of net recoveries of ~~$28~~$24 thousand during the ~~three~~six months ended ~~March 31,~~June 30, 2022. At ~~March 31,~~June 30, 2022, the ALL is higher as a percentage of the total loan portfolio at ~~1.09%~~1.15% compared to 1.07% at ~~March 31,~~June 30, 2021. The ALL increased in the ~~three~~six months ended ~~March 31,~~June 30, 2022 primarily as a result of commercial loan ~~production;~~growth; however, this 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~~associated with the COVID-19 pandemic. Excluding SBA loans, which are 100% guaranteed, the ALL to total loans remained at 1.2% at both ~~March 31,~~June 30, 2022 and December 31, 2021. Despite generally favorable historical charge-off data, the impact of current economic conditions may result in the need for additional provisions for loan losses in future quarters.

Classified loans totaled ~~$23.4~~$19.7 million at ~~March 31,~~June 30, 2022, or ~~1.2%~~1.0% of total loans outstanding, reflecting ~~an increase~~a decrease from $23.1 million, or ~~also~~ 1.2% of loans outstanding, at December 31, 2021. The asset quality ratios previously noted are indicative of

Table of Contents

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.

~~Table of Contents~~

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 ~~March 31,~~June 30, 2022 and December 31, 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
March 31, 2022
June 30, 2022																						June 30, 2022
Loans allocated by:	Loans allocated by:																					Loans allocated by:
Individually evaluated for impairment	Individually evaluated for impairment	$	3,162	$	—	$	161	$	—	$	3,323	$	2,710	$	52	$	2,762	$	—	$	6,085	Individually evaluated for impairment	$	3,008	$	—	$	62	$	—	$	3,070	$	2,843	$	42	$	2,885	$	—	$	5,955
Collectively evaluated for impairment	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		Collectively evaluated for impairment	1,069,377		157,597		379,667		12,957		1,619,598		377,209		14,867		392,076		—		2,011,674

		$	1,010,952	$	120,319	$	443,170	$	14,626	$	1,589,067	$	373,869	$	15,371	$	389,240	$	—	$	1,978,307		$	1,072,385	$	157,597	$	379,729	$	12,957	$	1,622,668	$	380,052	$	14,909	$	394,961	$	—	$	2,017,629
ALL allocated by:	ALL allocated by:																					ALL allocated by:
Individually evaluated for impairment	Individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—	$	29	$	—	$	29	$	—	$	29	Individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—	$	28	$	—	$	28	$	—	$	28
Collectively evaluated for impairment	Collectively evaluated for impairment	11,546		2,321		4,301		29		18,197		2,844		201		3,045		237		21,479		Collectively evaluated for impairment	12,294		3,024		4,471		26		19,815		2,976		223		3,199		237		23,251

		$	11,546	$	2,321	$	4,301	$	29	$	18,197	$	2,873	$	201	$	3,074	$	237	$	21,508		$	12,294	$	3,024	$	4,471	$	26	$	19,815	$	3,004	$	223	$	3,227	$	237	$	23,279
December 31, 2021	December 31, 2021																					December 31, 2021
Loans allocated by:	Loans allocated by:																					Loans allocated by:
Individually evaluated for impairment	Individually evaluated for impairment	$	3,885	$	—	$	250	$	—	$	4,135	$	3,078	$	40	$	3,118	$	—	$	7,253	Individually evaluated for impairment	$	3,885	$	—	$	250	$	—	$	4,135	$	3,078	$	40	$	3,118	$	—	$	7,253
Collectively evaluated for impairment	Collectively evaluated for impairment	985,933		106,204		485,478		14,989		1,592,604		362,539		17,590		380,129		—		1,972,733		Collectively evaluated for impairment	985,933		106,204		485,478		14,989		1,592,604		362,539		17,590		380,129		—		1,972,733
		$	989,818	$	106,204	$	485,728	$	14,989	$	1,596,739	$	365,617	$	17,630	$	383,247	$	—	$	1,979,986		$	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	$	—	$	—	$	—	$	—	$	—	$	28	$	—	$	28	$	—	$	28	Individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—	$	28	$	—	$	28	$	—	$	28
Collectively evaluated for impairment	Collectively evaluated for impairment	12,037		2,062		3,814		30		17,943		2,757		215		2,972		237		21,152		Collectively evaluated for impairment	12,037		2,062		3,814		30		17,943		2,757		215		2,972		237		21,152
		$	12,037	$	2,062	$	3,814	$	30	$	17,943	$	2,785	$	215	$	3,000	$	237	$	21,180		$	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, eight loans, with aggregate outstanding principal balances of ~~$413~~$387 thousand, have had cumulative partial charge-offs to the ALL totaling $280 thousand at ~~March 31,~~June 30, 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 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 management’s assessment of national and local economic conditions and other factors management believes appropriate at the time. The unallocated portion of the ALL was 1.0% and 1.1% of the ALL balance at ~~both March 31,~~June 30, 2022 and December 31, ~~2021.~~2021, respectively. The Company monitors the unallocated portion of the ALL and, by policy, has determined it should not exceed

Table of Contents

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.

~~Table of Contents~~

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 grew by ~~$81.1~~$13.7 million, or 3%1%, ~~but remained~~remaining at approximately $2.5 billion at both ~~March 31,~~June 30, 2022 and December 31, 2021.

Noninterest-bearing deposits increased by ~~$4.5~~$16.0 million, or 1%3%, to ~~$557.8~~$569.2 million, from December 31, 2021 to ~~March 31,~~June 30, 2022. Interest-bearing deposits totaled ~~$2.0~~$1.9 billion at ~~March 31,~~June 30, 2022, an ~~increase~~decrease of ~~$76.5~~$2.3 million, or 4%less than 1%, from the $1.9 billion balance at December 31, 2021, despite a decrease in time deposits, due to maturities, of ~~$14.6~~$36.0 million, or 5%12%.

Deposit growth in the first ~~three~~six months of 2022 was principally due to continued high levels of excess liquidity in the system as well as ~~seasonal increases~~seasonality from public fund 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 ~~$254.8~~$237.5 million at ~~March 31,~~June 30, 2022, a decrease of ~~$16.9~~$34.1 million, or 6%13%, from $271.7 million at December 31, 2021. The decrease was primarily attributable to other comprehensive losses of ~~$19.1~~$33.8 million due to an increase in unrealized losses on ~~available-for-sale~~AFS securities caused by a substantial increase in market interest rates, as well as dividends paid of ~~$2.1~~$4.2 million and shared-based compensation costs ~~inclusive~~ of ~~common share repurchases, of $4.0~~$13.3 million, partially offset by net income of ~~$8.4~~$17.2 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 ~~March 31,~~June 30, 2022 and December 31, 2021, the Bank was considered well capitalized under applicable banking regulations. The decrease of 1.5% from 15.0% at December 31, 2021 to 13.5% at June 30, 2022 was due primarily to an increase in risk-weighted assets from the deployment of cash into commercial loans, a decrease in capital from share repurchases and an increase in deferred tax assets resulting from the increase in unrealized losses on AFS securities. 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 ~~March 31,~~June 30, 2022 and December 31, 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, 2021, Item 1 - Business, under the topic Basel III Capital Rules. At ~~March 31,~~June 30, 2022, the Bank's capital conservation buffer, based on the most restrictive Total Capital to risk weighted assets capital ratio, was ~~5.8%~~5.3%, which is greater than the 2.5% requirement.

5863

Table of Contents

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 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. 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~~influenced by general interest rates, economic conditions and ~~competition.~~competition. The Company's maximum borrowing capacity from the FHLB is ~~$914.0~~$933.1 million at ~~March 31,~~June 30, 2022.

The Company regularly 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 ~~$238.8~~$170.7 million at ~~March 31,~~June 30, 2022. At ~~March 31,~~June 30, 2022, the Company had ~~$18.0~~$26.6 million of investment ~~securities~~securities pledged at the FRB Discount Window, with no associated borrowings outstanding.

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 ~~$22.6~~$22.3 million and $22.9 million at ~~March 31,~~June 30, 2022 and December 31, 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 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 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,~~June 30, 2022 is primarily due to an increase in other comprehensive losses, net of taxes, of ~~$19.1~~$33.8 million due to higher unrealized losses on available-for-sale ~~securities.~~securities and share repurchases.

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


		March 31, 2022		December 31, 2021			June 30, 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	$	254,804	$	271,656	Shareholders' equity	$	237,527	$	271,656
Less: Goodwill	Less: Goodwill	18,724		18,724		Less: Goodwill	18,724		18,724
Other intangible assets	Other intangible assets	3,891		4,183		Other intangible assets	3,610		4,183
Related tax effect	Related tax effect	(817)		(878)		Related tax effect	(758)		(878)
Tangible common equity (non-GAAP)	Tangible common equity (non-GAAP)	$	233,006	$	249,627	Tangible common equity (non-GAAP)	$	215,951	$	249,627

Common shares outstanding	Common shares outstanding	11,079		11,183		Common shares outstanding	10,676		11,183

Book value per share (most directly comparable GAAP based measure)	Book value per share (most directly comparable GAAP based measure)	$	23.00	$	24.29	Book value per share (most directly comparable GAAP based measure)	$	22.25	$	24.29
Intangible assets per share	Intangible assets per share	1.97		1.97		Intangible assets per share	2.02		1.97
Tangible book value per share (non-GAAP)	Tangible book value per share (non-GAAP)	$	21.03	$	22.32	Tangible book value per share (non-GAAP)	$	20.23	$	22.32

5964

Table of Contents


		March 31, 2022			December 31, 2021				June 30, 2022			December 31, 2021
Allowance for Loan Losses 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	$	21,508		$	21,180		Allowance for loan losses	$	23,279		$	21,180
Gross loans	Gross loans	$	1,978,307		$	1,979,986		Gross loans	$	2,017,629		$	1,979,986
less: SBA guaranteed loans	less: SBA guaranteed loans	(124,545)			(195,585)			less: SBA guaranteed loans	(32,599)			(195,585)
Non-SBA guaranteed loans	Non-SBA guaranteed loans	$	1,853,762		$	1,784,401		Non-SBA guaranteed loans	$	1,985,030		$	1,784,401

Allowance for loan losses to non-SBA guaranteed loans	Allowance for loan losses to non-SBA guaranteed loans	1.2		%	1.2		%	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. FRB monetary control efforts, 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

~~Table of Contents~~

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 ~~March 31,~~June 30, 2022 and December 31, 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. The Company has become more asset sensitive 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.

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 ~~March 31,~~June 30, 2022, similar to December 31, 2021, the results indicate the Company is asset sensitive and would benefit in a rising interest rate environment more than it would be if interest rates decreased. The results at ~~March 31,~~June 30, 2022 ~~are still driven by~~reflect the impact of the ~~low~~FOMC's interest rate ~~environment,~~increases to date. As the ~~composition~~federal funds rate increases further, the increase in asset yields is countered by the model's acceleration in the cost of ~~the balance sheet and the duration of assets.~~liabilities as compared to a slower realized pace so far in this rate cycle. To improve the comparability across periods, the Company ~~follows~~strives to follow 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 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)	March 31, 2022		December 31, 2021		Change in Market Interest Rates (basis points)	March 31, 2022		December 31, 2021		Change in Market Interest Rates (basis points)	June 30, 2022		December 31, 2021		Change in Market Interest Rates (basis points)	June 30, 2022		December 31, 2021
(100)	(100)	(6.0)	%	(1.4)	%	(100)	(24.3)	%	(43.8)	%	(100)	(7.3)	%	(1.4)	%	(100)	(16.8)	%	(43.8)	%
100	100	3.3	%	3.7	%	100	14.4	%	25.8	%	100	1.9	%	3.7	%	100	7.5	%	25.8	%
200	200	4.9	%	6.7	%	200	21.3	%	41.2	%	200	1.5	%	6.7	%	200	9.8	%	41.2	%
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 ~~March 31,~~June 30, 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 ~~March 31,~~June 30, 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 ~~three~~six months ended ~~March 31,~~June 30, 2022.

6166

Table of Contents

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, 2021,. and our Quarterly Report on Form 10-Q for the period ended March 31, 2022.

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
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


	(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
April 1, 2022 to April 30, 2022	38,676	$	24.30	38,676	523,519
May 1, 2022 to May 31, 2022	226,229	23.90		226,229	297,290
June 1, 2022 to June 30, 2022	142,919	24.80		142,919	154,371
Total	407,824	$	24.25	407,824

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. 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 ~~March 31,~~June 30, 2022, the Company repurchased ~~181,635~~407,824 shares of its common stock at an average price of ~~$24.27~~$24.25 per share. At ~~March 31,~~June 30, 2022, ~~415,805~~823,629 shares had been repurchased under the program at a total cost of ~~$8.9~~$18.8 million, or ~~$21.35~~$22.79 per share. Common stock available for future repurchase totals approximately ~~562,195~~154,371 shares, or 5%1% of the Company's outstanding common stock at ~~March 31,~~June 30, 2022.

Item 3 – Defaults Upon Senior Securities

Not applicable.

Item 4 – Mine Safety Disclosures

Not applicable.

Item 5 – Other Information

None.

6267

Table of Contents

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.

6368

Table of Contents

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: ~~May 5,~~August 4, 2022

6469


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



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